Republican tax cuts are being sold as economic stimulus. How does that differ from Obama’s stimulus?
Republican tax cuts are being sold as economic stimulus. How does that differ from Obama’s stimulus?
WASHINGTON – The tax bill Congress might pass assumes that if corporations keep more of their profits by paying lower income taxes, the money will find its way back into a bigger, stronger economy.
Companies will invest, Republican lawmakers insist. Wages will grow. Hiring will pick up. Tax cuts, say supporters, are the ultimate economic stimulus.
It so happens that the country had a stimulus program not long ago. Republicans loathed it while Democrats said it prevented a depression.
So what’s different now?
What does the Republicans’ tax package have to do with stimulus?
Republicans and Democrats hold fundamentally different views on taxing, spending and the behaviors they incentivize. Republicans say private enterprise generally works so well that the government should get out of the way and let businesses use their ingenuity – and money -- to lead. Corporate tax cuts are simple in that way: Let companies keep more of the money they’ve already earned and watch them make wise choices in a competitive, growing economy.
Counting tax cuts for families, the latest version of the Senate tax package would cut taxes by about $1.4 trillion over a decade. But business tax cuts would account for 59 percent of that, according to the latest figures from the congressional Joint Committee on Taxation.
The biggest single beneficiary, when measured in terms of which group accounts most for those dollars, would be corporations, whose statutory tax rate would drop from 35 percent to 20 percent. Another would cut taxes for small businesses and sole proprietorships whose owners file those business taxes at an individual rate. And a third feature would make it easier for companies to bring already-taxed foreign earnings back to the United States without facing this country’s substantially higher rates.
How does that differ from what the Democrats did?
The American Recovery and Reinvestment Act of 2009, passed soon after President Barack Obama took office, went well beyond taxes, although it provided a tax rebate up to $400 for individuals and $800 for families, with the money showing up slowly in paychecks through a cut in tax withholdings. It gave small businesses tax breaks for equipment depreciation and for hiring new workers. But it also funneled tax money to states and communities for specific purposes connected with keeping or creating jobs.
Some went to help schools and police departments keep personnel, because their local budgets suffered as local tax revenues fell when the economy teetered. The Obama stimulus provided money for states to pay expanded unemployment benefits.
It gave homeowners a tax credit if they improved their homes’ heating and energy efficiency. It provided money for road construction, helping pay for hundreds of Ohio improvements. It even had money to accelerate high-speed rail projects. (Ohio Gov. John Kasich famously turned down rail money after his predecessor, Ted Strickland, said he wanted it.)
Kasich: ‘The project won’t work and I don’t want the money.’
The stimulus cost an estimated $833 billion.
Are you saying the Republican tax cuts are kind of the same thing?
Republicans in Congress say they can be viewed that way.
“I think that’s a good way to look at it,” Sen Rob Portman of Ohio said. “When President Obama put his stimulus package out, a lot of us expressed concern that there was not going to be the incentive to invest – in other words, to have businesses small and large be able to put money into the companies, which leads to higher productivity, which leads to better economic growth, which leads to better wages.
“Sadly, that is not what happened with that stimulus. A lot of the shovel-ready stuff just was not ready.
“Now we have the opportunity on the tax side to say, ’What would be the best thing you could do to actually create more economic opportunity here by increasing investment, by increasing productivity?”
But wasn’t the economy in dire straits then, unlike now?
It was the worst downturn since the Great Depression. In February 2009, when the recovery act passed, the national jobless rate was 8.3 percent, a sharp rise from what it had been just two years earlier, 4.5 percent. It would continue to shoot up, hitting 10 percent that October.
Home foreclosures were hitting crisis proportions. Consider that in 2007, there had been 404,849 completed foreclosures in the country, according to Attom Data Solutions, which closely tracks real estate data. The next year the number more than doubled and grew to the point that in 2010, 1.05 million homes were foreclosed on.
Stock prices fell dramatically, with the Standard & Poors 500 plunging 56.8 percent at one point between 2007 and 2009.
And the economy is much better now, right?
It is. It took three years for the total number of jobs to return, but unemployment now is 4.1 percent. That’s the lowest it’s been since the year 2000, according to the Bureau of Labor Statistics.
Corporate earnings are strong. The stock market has recovered and then some, reaching new and unexpected heights, although skeptics wonder how long that can keep up.
Total completed foreclosures – those in which the banks took back the house – numbered 225,117 for the first nine months of this year, indicating the year will end with a recent low. New housing construction meantime has grown fairly steadily since the recession.
So what exactly is this problem that Republicans say they are solving?
The recovery occurred, they agree. But they say the economy still isn’t strong enough, with too much uncertainty clouding business decisions.
Productivity, a measure of workers’ output, has been weak, although the most recent quarter showed gains. Wage growth, linked to productivity, has been low. And the labor participation rate – the share of working-age people who either have jobs or are actively looking for one – is at its lowest in 40 years.
This started falling during the recession, BLS data show, but it hasn’t abated. There are competing theories on this.
One is that discouraged workers gave up looking. The stimulus-infused recovery, goes this view, was jobless. A number of Republicans take this view.
Randy Olsen, an emeritus professor of economics at Ohio State University, says data backs this up, showing that young adult workers are far under-represented in the workplace compared with their share of the population. The recovery did little to hasten their hiring, Olsen said.
“They voted for hope and change and got despair and stagnation,” he said.
He added in an interview that this was compounded by Obama-era government regulations, particularly on health care, that made employers reluctant to hire. That view is noteworthy because congressional Republicans, like President Donald Trump, say for the economy to truly boom, tax cuts and fewer regulations are both necessary.
What’s the other view?
Demographics, not economics, are responsible for fewer people in the workforce, say several studies. The Congressional Budget Office expects this trend to continue for the next 30 years, “principally because of the growing number of retirees from the baby boom generation.”
The Federal Reserve Bank of St. Louis agrees that demographics explain the lower worker-participation rate better than the theory of disappointed workers simply dropping out.
People age 55 and older make up a big share of the workforce but they have started to retire. While that will require workers to replace them, the workforce is better educated and the workplace is more automated -- which means younger people who otherwise might be working have chosen to be in school instead, the Federal Reserve concluded.
Olsen doesn’t buy this. Not enough 24-year-olds are in school to make that big a difference, he said.
C’mon, are people really suggesting the Obama stimulus didn’t work?
Views vary, and they often take on political overtones. But there is a general consensus that the Obama stimulus aided the recovery – and supporters say it stopped the country from going off an economic cliff. Other factors played a role, however, such as the Federal Reserve Bank’s monetary policy, which reduced interest rates and freed up money for borrowing.
In a 2012 survey of top academic economists, 51 percent told the University of Chicago that thanks to the recovery act, unemployment was lower at the end of 2010 than it would have been otherwise – and another 29 percent said they strongly agreed.
Yet they were more ambivalent when asked if the benefits would outweigh the costs, with only 46 percent saying they agreed or strongly agreed and 26 percent saying they were uncertain.
In a study for the National Bureau of Economic Research, two Dartmouth College economists concluded in 2011 that the stimulus was effective, although somewhat less so than predicted by Obama.
They said money sent to states to support education and law enforcement “appear to have little effect,” because states may have merely used the money “to lower borrowing or limit tax increases.”
But the stimulus’s support for low income households appeared to “have been extremely effective,” they found. Almost as beneficial was spending on highway projects, they said.
The Washington Post in 2012 examined 15 studies on the question. Twelve of the 15 said the recovery act worked, two said it didn’t and one said it might have worked but the effects on economic growth were mild.
Never mind comparing yesterday with today. What’s wrong with trying corporate tax cuts, as proponents want, to see if they’ll stimulate things?
Senate Democrats said this week they might be willing to try – that is, if they can get an agreement that if economic growth fails to follow, corporations must go back to their old tax rates.
Republicans aren’t about to agree.
Sen. Sherrod Brown of Ohio and other Democrats say companies have hoarded cash while crying out for tax cuts. They don’t seem to need money, these Democrats say, especially if providing it through tax cuts will push up the deficit and probably prompt Republicans to demand spending cuts in social safety net programs.
The Congressional Budget Office on Tuesday warned that unless Congress finds a work-around, such a tradeoff may be necessary anyway under federal budget rules, with cuts to Medicare and other programs to offset the lost revenue from lower taxes.
BREAKING: CBO: Tax bill will automatically cut Medicare by $25 billion per year almost immediately. pic.twitter.com/8NKZd5tPt0— Topher Spiro (@TopherSpiro) November 14, 2017
In 2004, Congress approved a temporary “tax holiday” on overseas earnings, letting U.S.-based multinational corporations bring back foreign profits without getting hit by the 35 percent tax rate. Companies promised to create 500,000 jobs with their $299 billion tax break, Brown said.
“Instead, that money went straight into the pockets of corporate executives, corporate board members, and shareholders,” Brown reminded Senate Finance Committee colleagues when debate kicked off this week.
“In fact, according to the Senate’s own report, the same corporations that took advantage of the tax holiday actually laid off American workers – the top 15 alone cut 20,931 American jobs,” Brown said. “And at the same time, they increased annual compensation for their top five executives by 27 percent.”
Brown was referring to a Congressional Research Service review of how well that tax holiday worked. This was admittedly a much smaller form of corporate tax cuts and not an apples-to-apples comparison with today.
But as a form of stimulus, the Congressional Research Service said, it was “an ineffective means of increasing economic growth.”