by Henry Oliner
The drop in corporate taxes is huge, even though it only makes us competitive with other nations, but what happens to this savings?
If it is paid in dividends, it is taxed. If it is used to increase salaries, it is taxed. Corporate taxes are an expense that increases the cost of goods like any other business expense. Competition will not allow corporations to keep that higher margin. It will be used to lower prices of consumer goods, benefitting consumers as much as the tax cuts.
With an unemployment rate that is already low, competition for competent workers will already drive up wages, but this extra pool of money will likely facilitate it more. Some corporations wasted no time sharing the tax cuts with their employees. AT&T, Comcast, Wells Fargo promise bonuses or pay hikes once tax cut bill passes.
Normal competition will thus lower consumer goods prices and increase wages.
The data on wage stagnation is a bit distorted. Those who have remained employed have seen decent wage increases. The lower averages are driven by those unemployed who have re-entered the workforce and those entering for the first time.
The Democrats must be in a catch 22 with this bill; the limitation of state income and property taxes will more than offset the lower STATUTORY rates and many of the wealthiest will see an EFFECTIVE tax increase. Most of the benefits go to the middle and lower tax brackets.
Will this cause an exodus of the wealthy from the high tax states? Clearly it includes an incentive to flee, but even states with lower income taxes still have higher property taxes. New York has both. Perhaps the foreign wealth will keep real estate prices in NYC high. It is hard to predict the outcome in the high tax states, but you may want to avoid muni bonds in those states.
I have little faith in the ability of the OMB to accurately predict the impact of these tax cuts. There is just too much to consider, and their record is not encouraging.
If the stimulus is greater than expected, it may give needed cover for the Federal Reserve to raise interest rates without any adverse impact on the economy.
It is questionable how much this will stimulate the economy to increase tax revenues and claw back the deficit. We would never be able to balance the budget with higher taxes and the government spending multiplier is clearly limited. Fiscal health will require higher economic growth and spending, especially entitlements, restraint.
Comparatively, tax cuts are easy, spending cuts are hard. The demagoguery will be hard to overcome.