home Commentary, Economy, North America, Politics The Republicans are lying about the effects of their tax cut

The Republicans are lying about the effects of their tax cut

Some proponents of the recently passed tax cut bill argue that cutting the corporate tax rate caused major corporations to provide bonuses, raise hourly wages, add to 401k and other retirement plans, and “re-invest” in the U.S. They point to such companies as AT&T, Wells Fargo, Target, and Walmart, along with several foreign automakers. These proponents, what I call “ceteris paribus abusers,” neglect the fact that there are other factors to explain why major corporations are boosting the wages and benefits of their employees and investing in the U.S.

The term “ceteris paribus” means “other things being equal.” In economics, we use it to understand whether, and to what extent, one variable impacts some aspect of the economy, such as economic growth, consumer spending, or changes in unemployment. We do so by setting the other variables constant, i.e., “equal.” But, economists recognize that this exercise is describing a world that is not realistic. This is because any economic outcome is the result of several variables, each having an influence on the outcome.

Thus, when one hears examples of a diverse mix of corporations taking similar actions, one should look to a range of factors to help explain the result. While there is no doubt that lowering the top corporate marginal tax rate helped spur activities of some corporations, one should be wary to attribute too much to simply a change in these tax rates.

Every Company Has Its Own “Issues”

Take Wells Fargo’s announcement that was raising the wages of its employees, due to the cut in corporate taxes. We could easily explain Wells’ move by the fact that it wanted to boost morale, as well as assure the remaining employees that another wave of layoffs was not going to occur. The company laid off thousands of employees due to the employees’ aggressive marketing and alleged improper activities with customer accounts. Finally, Wells Fargo operates in a heavily regulated industry. Maybe, it took this action to try and avoid further regulations being imposed by Congress, whose majority supported the tax cut bill?

Target has also been highlighted. And yet, the company announced in September it would raise the wages of its hourly employees to $11 going into the Christmas season, continuing to raise them to $15 per hour through 2020. While lower tax rates are certainly a “gift” for the retail giant, some of the wage increase can be explained by the fact that hiring in traditional retail is getting tougher. Many job seekers are turning away from traditional retailers due to an “Amazon effect.” In a tight labor market, they can afford to do so. Fellow retailer Walmart offered both a $1,000 bonus to its employees, “accelerating” the rollout of some of its “investment plans,” according to its CEO. But, Walmart has been steadily increasing the hourly wages of its employees, along with providing more promotions and training opportunities, and offering maternity leave and bonuses for employees who want to adopt a child. Besides, Walmart – like Target – operates in a highly competitive environment where it is getting harder to find and keep workers.

As for companies like AT&T, a lower future tax rate is an incentive for them to bonus their employees. The labor market is tight, which means marginal labor is becoming more expensive. Lower corporate tax rates help offset that. However, it is also the case that AT&T is operating in an extremely competitive market space. There are few people without a mobile device anymore, so any gain in customers must be taken from a competitor. That means cutthroat pricing, which we’re seeing. In fact, it is so low (and cellular being a significant portion of the economy) that it is helping to keep inflation low. Any employees that can be trained, need to be kept. Hence, provide them with a bonus.

Tightening Labor Market Boosts Pay for Workers

The labor market in the U.S. is tightening. Median weekly earnings have gone from roughly $777 at the end of 2007 — before the correction in housing — to $854 at the end of 2017, according to the Bureau of Labor Statistics. This correlates with the Bureau’s December 2017 unemployment rate of 4.1%, down from 5.0 in December of 2007. December’s unemployment rate rose to 9.9% in 2009, progressively working its way down to the 4.1% in subsequent. Moreover, the 2017 average was comparatively even with where it was in 2007, sitting at 4.35% compared to then at 4.25%.

Advisor Perspectives reported that seasonally adjusted unemployment claims for the second week of January 2018 were 220,000. This is down from the previous week of roughly 261,000. Moreover, the 220,000 unemployment claims is the lowest for initial claims since late February, 1973, when it was 218,000. The four-week moving average is 244,500, down 6,250, from the previous week’s moving average of 250,750.

Further, Advisor Perspectives shows that if we take the four-week moving average of unemployment claims and divide it by the Civilian Labor Force (16-64 years of age who are able to work) we get a historically low 15%; lower than at any time since the late 1960s. The last time we were this low was late 2007 just before the housing crisis and Great Recession hit. At that time, the Unemployment Claims / CLF ratio was 22%.

All this shows something reported by Bloomberg when it comes to hiring: U.S. employers “got used to abundant and cheap labor” after the 2007-9 recession. And while the article shows that wage increases haven’t fully bounced back, an ever shrinking pool of available talent will cause to have to boost wages.

Long-term benefits and the tax code also likely played a role. According to accountants, companies who fund 401k and other long-term retirement plans under the 2017 top marginal corporate tax rate of 35% can get a bigger deduction than the future top marginal corporate tax rate of 21%. In short, the deduction will be smaller under a 21% top marginal corporate tax rate than under a 35% top marginal corporate tax rate. This incentivizes companies to fund plans now, instead of doing so when the tax rates are lower.

Moreover, putting money into these plans now should bring greater Net Present Value outcomes from every marginal dollar under the pre-tax reform rules than under the post-tax reform rules. This is due to more known and better current market conditions than uncertain market conditions in the future. And, if companies act now, they can do so at lower costs.

Finally, trade and long-term investment is always a factor when it comes activity related to global corporations. Foreign companies like Fiat Chrysler, Mazda, Toyota, Volkswagen, and others — who recently announced they would be expanding their previous investments in the U.S. — are doing so for a variety of reasons, ranging from concerns over the future of NAFTA to adding to existing investments made years ago. Tax change or not, many of these foreign investment decisions were, as Fiat Chrysler CEO Sergio Marchionne said, “in the works … for a long period of time.”

Whether it’s the need to boost morale, keep good people in a competitive industry, hire and keep workers in a tightening labor market, or trade and investment, several factors explain why these companies chose to boost employee wages and benefits, along with increase their investments. Lower tax rates are one reason, but they’re not the only reason why these companies chose to do so. It is tempting to try to attribute these moves to a cut in corporate tax rates, especially given corporate taxes were such an important part of the tax bill. But in an economy as large and complex as ours, no one should try to explain too much with just one variable.

Photo: Pierre-Selim/Creative Commons

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