Starve the Beast: Trump's Tax Cut Better for Businesses, Worse For Everyone Else

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Corporate America is doing far better than most expected under Trump's tax cuts. But the cuts didn't pay for themselves.

I am a firm believer the ideal corporate tax rate is zero. Yet I was against Trump's tax cut.

Why? I also believe in balanced budgets and I was certain the Tax cut would take us the opposite direction.

As a pass-through corporation, I believe I benefited from the cut. Most didn't or at least won't in the long haul.

Bloomberg writer Stephen Gandel explains Tax Cut Is Better (for Companies) and Worse (for Everyone Else).

President Donald Trump and the Republicans’ tax cut is proving to be vastly more generous for corporate America, and vastly more expensive for taxpayers, than expected. Worse, the Trump Slump is erasing the bump the stock market received from the tax cuts. And evidence is mounting that the promised economic boost isn’t materializing. The administration’s signature political achievement is being eclipsed by disarray over trade, immigration and a government shutdown.

First, the headline number: $600 billion, at least. That’s how much more than expected I estimate the companies in the S&P 500 are on pace to save. It is also how much more the tax cut is likely to add to the national debt if it runs as planned for 10 years. The total savings for all of corporate America will be well into the 13 figures.

In late 2017, soon before Congress passed the tax cut — which reduced the U.S. corporate rate to a flat 21 percent from a previous marginal rate that topped out at 35 percent — the Joint Committee on Taxation estimated it would cost $1.4 trillion over 10 years. White House officials criticized that estimate as being too high. In fact, it wasn’t nearly high enough. My current estimate, now that companies have completed 2018, is nearly $2 trillion, and that’s just for the S&P 500. That’s nearly $400 billion more than I calculated in May. And the actual bill could rise even more while the lasting benefits are still pretty questionable.

Questionable Numbers

The number 1 rule is don't believe any government estimate on what something will cost. Had there been an accurate assessment at the time, the cut would have exceeded budget rules.

Effectively, the administration had to lie to get this passed.

Again, I am in favor of tax cuts. But I am not in favor of tax cuts based on lies even if I personally benefit.

Biggest Winners

Where's the Benefit?

It is quite interesting that some of the most reviled companies like Facebook were the biggest winners. So where's the benefit?

The more difficult question is whether the tax cut has provided an economic boost. In October 2016, analysts estimated that the companies in the S&P 500 would earn a collective $146.80 a share in 2018. Those earnings are now looking as if they will come in a good deal higher at $159.20 a share. That includes the tax cut, which lifted earnings by nearly $15.70 a share. Exclude the tax impact, and S&P 500 companies actually earned less last year, $143.50 a share, than they were expected to before Trump was elected president. That suggests that the tax cut hasn’t provided much income growth outside the actual tax savings. It is possible earnings missed expectations because companies paid raises or spent some of their tax savings in other ways. But even in the unlikely event that full $3.30 a share ended up in employees’ paychecks — an average raise of $10,000 per worker — that would still be a 20-80 split of the tax gains between workers and corporate America.

We can entertain the notion that a 20-80 split is better than nothing. But I studied the plan and found most of the 20% went to the very bottom end. In other words, this was a middle class tax hike, especially in later years.

Rise of the Socialists

It is studies like these that explain the rise of socialists like Democrat Alexandria Ocasio-Cortez who at age 29 became the youngest woman elected to Congress.

She has economically unsound ideas like "Free College" and "Medicare For All" and a "New Green Deal" that hide the cost of debt.

Estimate vs Reality

Her cost estimate to "save the planet" is $1 trillion. The reality is something like $40 trillion. Yet the Green New Deal has garnered significant attention and support from some members of the media, Congress, and even prominent senators considering 2020 presidential runs: Cory Booker, D-N.J.; Bernie Sanders, I-Vt.; and Elizabeth Warren, D-Mass.

This is precisely the kind of too good to be true nonsense that people want to believe. The message is powerful. We need to "save the planet".

The idea is so absurd that even Pelosi can't stand it. She put it on the back burner. But there is really only one reason Pelosi did so.

The plan is so idiotic that any Democrat running for president on that platform would lose.

Yellow Vest Movement

The same thing is happening in France right now with the Yellow Vest Movement now in its 10th Week of Violence.

The Complaint?

“How can we continue to live with so little?” said Bernard Grignan, a 65-year old retired manager who took part in the Paris demonstrations.

Meanwhile, back in the US, please note that Democrat Presidential Hopeful Wants to Give Everyone $1,000 a Month Free Money.

Democrat Presidential Hopeful Wants to Give Everyone $1,000 a Month Free Money

Wrong Hands

Also note that New York Mayor Says "Wealth in Wrong Hands", So, We'll Take It

Starve the Beast

Proponents of the "Starve the Beat" theory believe we can cut social benefits, keep spending away, and keep deflating the dollar while spending trillions we no not have on illegal and insane military excursions that last forever.

It won't last because it can't. The system is broken.

If and When

If and when the middle class unites with the lower class against wealth and corporatism, we are going to see asset confiscation. It will not be pretty and it will not work.

Venezuela, Zimbabwe, and other examples explain why. But a global revolution is simmering.

Trump a Symptom of the Problem

Trump is not the problem. Nor is Marine Le Pen in France, nor Brexit in the UK, nor Lega in Italy.

All are symptoms of the problems: Global debasement of currency, central bank inflation tactics, bank bailouts, and government policies in general that favor the wealthy are the problems.

A revolt is coming. Don't blame capitalism or Libertarianism. We have neither.

Instead, blame Fed and Government-sponsored monetary madness.

Mike "Mish" Shedlock

Comments (14)
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Schaap60
Schaap60

I concur 100% that Trump is a symptom. I also believe identity politics is often employed cynically to keep people from similar economic classes divided to the benefit of those at the top. How long will the manipulation work? Is it possible to effectively address the needs of the lower and middle classes without descending into Venezuelan chaos? I hope so, but suspect that addressing extreme income inequality will be part of any solution that does not devolve into chaos.

Carl_R
Carl_R

I have a question on the data. According to the data, Corporations are saving Billions, or perhaps Trillions. Now, as we saw, not all of them have good investment uses for all these billions/trillions. Therefore, in some cases they gave employees raises or bonuses, but in many cases they initiated stock buybacks or issued one-time dividends. All three of these (raises, stock buybacks, dividends) create income for employees and/or owners, and all three are taxable events.

Therefore, if follows that one result of tax cut should have been a significant increase in taxes paid by employees and stock owners. Has this happened? If not, why not? If it has, how much additional tax revenue is it producing?

Mish
Mish

Editor

"Therefore, if follows that one result of tax cut should have been a significant increase in taxes paid by employees and stock owners. Has this happened? If not, why not? If it has, how much additional tax revenue is it producing?"

Interesting question. Stock owners only pay taxes when they sell. Dividends largely go to pension plans, institutions, and the wealthy.

So, it is hard to ascertain what you ask, directly other than to say wages did not go up much.

JonSellers
JonSellers

I'm not opposed to deficits on an economic basis, but I am on a moral basis. By running massive deficits and exploding corporate income and military spending, conservatives have shown the left that there is no cost for income and job guarantee schemes or Medicare for all. You can't scream deficits anymore. The genie is out of the bottle.

douglascarey
douglascarey

Speaking of lies, this is one gigantic lie, "I believe I benefited from the cut. Most didn't or at least won't in the long haul." Most taxpayers DID see a tax cut. Whatever one believes about the tax changes, it cannot be disputed that the vast majority of taxpayers will see their taxes decline. I have no idea what Mish's problem is with this. Also way underreported is the major simplification of the tax code by doubling the standard deduction. This was a brilliant, simple move that took away so many tax games by millions of people. No more writing off mortgage interest, charity, etc. It was probably the single best thing about the tax code changes.