NY Times Article On GOP Business Tax Plan Leaves Us In La La Land

The headline in the NY Times Arts section today reads “La La Land Leads The Race For The Globes”, referencing the current favorite to win the Golden Globes. But “La La Land” might also best describe the article on the front page of the Times’ Business section about the destination-based consumption tax. The premise of the tax is that it would only be collected where the product or good was consumed as opposed to where they were produced. In theory, this would mean that exports would not be taxed and imports would only be taxed when they were consumed. The idea is that this would spur exports and that would somehow encourage American businesses to maintain production and jobs in the US. The idea has been incorporated into a corporate tax overhaul proposed by the current Chairman of the House Ways and Means Committee, Kevin Brady. Brady’s proposal includes some other important features such as the reduction of the corporate tax rate to 20% from the current 35%, immediate deduction of capital investments as opposed to depreciation, ineligibility of interest costs for deduction, and a provision to allow companies to deduct domestic wages from taxation.

Let’s just go through this proposal in detail. First, there is no doubt that a consumption tax like this will raise prices for consumers. Just think of every imported good that you buy having an additional value-added tax tacked on. Incredibly, the article barely even mentions this effect at all, relying on a statement from Koch Industries, of all companies, saying that the plan would lead to less free trade and higher consumer prices. There is a reason that people who go to Europe complain about the higher prices there and that is primarily due to the value added tax. But at least that tax usually goes toward providing a stronger safety net. The National Retail Federation, which represent the heavily import-dependent retail industry, expressed concern about the “practical effect of this on profits, jobs, and operations”, making their disdain for the consumer pretty plain by omission. According to Brady and the supporters of this plan, a rise in exports and a fall in imports would raise the value of the dollar, allowing the retailers to “make up in a stronger dollar what they lose in higher tax payments”. Again, it is unclear how this would directly help the consumer as opposed to business. They also claim this would remove all incentives “to move jobs, research, and headquarters overseas”. Again, the article and perhaps the proposal itself is unclear on just exactly how that might work. I find it hard to believe that Carrier would be paying such a steep tax on imports that it would offset the nearly $20/hour wage differential that moving to Mexico offered, especially considering the tax rate is dropping to 20%. And, even if you admit for the sake of argument that the plan might keep jobs and businesses here in the United States, there would seem to be no incentives for those same businesses to either pass along the additional savings or not pass along the additional costs to consumers. After all, as we keep on hearing incessantly, they are all in the business to make profits, so keeping the savings for themselves or passing the costs onto consumers will just add to their bottom line.

The other proposals on capital investment and deducting wages are probably total non-starters. Eliminating the interest deduction will hurt highly leveraged businesses like Wall Street and real estate investors. Taking a look at the President-elect and his proposed cabinet, it just doesn’t seem likely that this part of the proposal will fly. The deduction of wages probably violates WTO rules, which means it’s going nowhere unless Trump really does want to start a global trade war. So, the package that looks like it could emerge from Congress would essentially be an enormous tax cut for businesses which will flow primarily to the rich investor class while increasing prices for consumers. It sounds like a perfect Republican policy.

Despite all that we hear about how difficult things are for business, the reality is that American businesses are now more profitable than ever. As a percentage of GDP, corporate profits are at an all time high while the tax contributions of corporate profits are at an all time low.  If profits dropped to their historical norm, it is estimated that consumers prices could drop by about 2%. Even worse, through various schemes of tax avoidance, much of these profits do not get taxed. For multinational companies, much of the profits gets stashed offshore, waiting to get repatriated when the corporate tax rate gets reduced, as Brady is proposing. In fact, part of the drive to reduce the corporate income tax is to facilitate the repatriation of these profits, which is a unique way to solve the problem. Most people, especially a great deal-maker like Trump, would not take 60 cents on the dollar to get what they’re owed. (Instead, that sounds more like what Trump does to the people he owes.) Rather they would focus on collecting every penny. But when it comes to corporate profits, we seem to believe that actually collecting on what we are owed is not a valid strategy.

American businesses, in addition to being remarkably profitable these days, also seem to be immune from competition. It is estimated that there has been serious consolidation in two thirds of America’s myriad of industries in the last 20 years. And the financial crisis added to that trend with a $10 trillion worth of mergers since 2008. These days, a profitable firm has an 80% chance of still being profitable ten years later. That percentage was around 50% in the 1990s. The primary reason for this is that most of our industries have become oligopolies where the barriers to entry are enormous and the handful of companies that dominate have little incentive to actually compete or even invest. Economists have been decrying the declining share of labor in the US economy for years. The assumption was that the share that labor was losing was going to capital. But a recent study from the University of Chicago surprisingly shows that the capital’s share of the economy is also declining at an even faster rate then labor’s. And what labor and capital are losing is going instead to, you guessed it, profits. Nick Bunker summarizes the report as follows. “From 1984 to 2014, the labor share of income in the United States declined 6.7 percentage points and the capital share declined by 7.2 points. Because the capital share is smaller than the labor share, the percentage decline is much larger for capital (30 percent) than for labor (10 percent). The result is an increasing share of income going to profits. Over the 30-year period studied, the profit share of income increased by 13.54 percentage points. The proposed culprit behind this increasing profit share is higher markups on goods and services over the cost of production…This increase in markups from firms facing less competition in the marketplace has empirical support from other research.” In essence, then, the rich, in the form of corporate CEOs and the investor class, are not only taking from workers but also from needed capital investments and lining their already full pockets.

Of course, if you simply just read the Times article, you would still be in “La La Land”, as it mentions none of these salient points. The fact of the matter is that corporations are already making too much profit and they certainly do not need a tax cut or another method to pass on costs to consumers. If we are truly interested in boosting wages and jobs, then we need to break up the monopolies and oligopolies, introduce real competition for American business, and prevent the offshoring of jobs through penalties. Providing yet another tax cut for business just doesn’t cut it.