How Corporate Tax Cuts Have Failed to Enrich Working Americans

Let's start this posting with a question.  Which would you rather receive from your employer:

1.) a ten percent raise?

2.) a one-time fifteen percent bonus?

Bonuses are a one time item for an employer.  A ten percent raise will compound the next time that a raise is given whereas a one-time fifteen percent bonus will not.  Employers know this and would much prefer to grant their employees a one time bonus than a ten percent raise.  As for the employee's side of the equation, a ten percent raise will reach the same value as a fifteen percent bonus in 4.3 years, assuming that the raise is given only once.  If a raise is given every year, the period of time taken to reach the value of the one-time bonus is reduced.

Let's start by looking at a quote from Gary Cohn, the National Economic Council Director and former President and Chief Operating Officer of Goldman Sachs:

"One of the real impetuses for our tax reform and tax cut plan was to get real wages to grow in the United States, we haven't had real wage growth in a long time in the United States."

After Washington passed the most recent tax cuts for Corporate America, dropping the headline corporate tax rate from 35 percent to 21 percent, a there was a rapid flurry of employers (up to 500 employers covering more than 5.5 million workers) announcing that they were giving bonuses to their employees with the individual one-time bonuses ranging from $1000 to $2000 as shown on this list from CNBC.  As well, according to CNBC's Global CFO Council, 20 percent of companies in a recent survey stated that they were granting one-time bonuses only because of the 2017 Tax Cuts and Jobs Act (TCJA) as shown on this graphic:

Fortunately for those of us who sweat while we work, a blog posting by Lawrence Mishel at the Economic Policy Institute examines the veracity of the Trump Administration's claims that corporate tax cuts announced in the TCJA have led to widespread increases in employee compensation.  By examining data from the Bureau of Labor Statistics' Employer Costs for Employee Compensation for the first two quarters of 2018, we can see the trend in non-production bonuses in both absolute dollars and as a percentage of compensation.  The BLS data breaks quarterly compensation down into the following components:

1.) Wages and salaries

2.) Paid leave

3.) Vacation

4.) Holidays

5.) Sick leave

6.) Personal leave

7.) Supplemental pay

8.) Overtime and premium pay

9.) Shift differentials

10.) Non-production bonuses

11.) Insurance

12.) Life insurance

13.) Health insurance

14.) Short-term disability

15.) Long-term disability

16.) Retirement and savings

17.) Defined benefit pensions

18.) Defined contribution pensions

19.) Legally required benefits

20.) Social Security and Medicare

21.) Federal unemployment insurance

22.) State unemployment insurance

23.) Workers' Compensation

Over the period from the beginning of 2017 to the end of the second quarter of 2018, this is what happened to non-production bonuses in dollars per hour and as a percentage of total compensation for all private industry workers (see table 9):

Q1 2017  $0.85  2.6 percent

Q2 2017  $0.85  2.6 percent

Q3 2017  $0.86  2.6 percent

Q4 2017  $0.92  2.7 percent

Q1 2018  $0.96  2.8 percent

Q2 2018  $0.96  2.8 percent

Here is a graph showing what has happened to bonuses as a percentage of total compensation from 2008 to the second quarter of 2018:

The Tax Cuts and Jobs Act was signed into law on December 22, 2017.  In the last full quarter of 2017, non-production bonuses were $0.96 per hour or 2.7 percent of total compensation.  For both the first and second quarters of 2018 when Corporate America was announcing its employee bonus programs in response to the corporate tax cuts, non-production bonuses were $0.96 per hour or 2.8 percent of total compensation, an increase of $0.04 cents per hour or 0.1 percentage points.  By the time the bonuses are adjusted for inflation, the bonuses supposedly connected to the TCJA added a whopping $0.03 cents per hour to employees' pay. 

Here is a quote from the Economic Policy Institute's Lawrence Mishel:

"The White House contention that corporate tax cut-inspired widespread provision of bonuses that led to greater paychecks for workers is not supported by the BLS Employer Costs for Employee Compensation data. This is not surprising. Press releases—“a flurry of corporate announcements”—by a small group of administration-supporting firms do not create widespread bonuses or wage growth for workers. Neither do tax cuts, at least within the first six months."

Let's close with this graphic from CNBC showing how Corporate America really intended to spend its tax savings for the first half of 2018:

Given that one-time bonuses, particularly those of the thousand dollar variety, are a really inexpensive way for Corporate America to reward its workers, it is interesting to see that America's employers are still too cheap to help their workers make financial gains by bribing them with shiny baubles in light of the tax savings granted to them by Washington.

The Real Benefit of the Tax Cuts and Jobs Act to Corporate America

A recent study by Penn Wharton looks at the impact of the Tax Cuts and Jobs Act (TCJA) on federal corporate tax rates across 19 main industrial sectors over the next decade and compares them to current tax rates.  While the current administration in Washington is touting TCJA as the panacea to America's economic woes, the Penn Wharton study suggests otherwise.

I want to start this section with a definition that is used in the Penn Wharton study.  The effective tax rate is known as the effective tax rate (or ETR) which is calculated by dividing taxes paid by book income (i.e. pre-tax financial income as reported on company's income statements).   As you know, the current corporate statutory tax rate in the United States is 35 percent which will be reduced to 21 percent under the TCJA.  As you also know, most corporations pay taxes at a rate that is far lower than the headline tax rate thanks to various deductions, tax credits and tax deferral strategies; currently, the effective tax rate ranges from 18 percent (mining) to 33 percent (agriculture) and averages about 23 percent.  Under the TCJA, the effective tax rate average is projected to fall to 9 percent in 2018, however, it will double to 18 percent over the next decade as various tax provisions change. 

The authors of the Penn Wharton study calculated the effective federal corporate tax rate for various industries under both current law as well as under the TCJA's proposed amendments.  They note that there are several major provisions and phasing-out of provisions in the TCJA that will impact the calculation of ETR for each industry as follows:

1.) 2018 - corporate headline tax rate drops to 21 percent, increased equipment and software expensing, bonus depreciation is extended and expanded, net interest deceptions are limited, net operating loss deceptions are limited

2.) 2022 - Amortization of research and experimental expenditures, change in rules for the limitation of net interest deduction.

3.) 2023 - phasing out of extended and expanded bonus depreciation begins.

4.) 2026 - complete phasing out of extend and expanded bonus depreciation.

The Penn Wharton model shows that the effective tax rate average across all industries declines from 21.2 percent in 2017 to 9.2 percent in 2018.  Once the changes to various deductions begins in 2023, the decline in the effective tax rate is even smaller and is calculated at 17.33 percent.  By 2027, the decline in the average corporate effective tax is smaller yet again and is calculated at 18.27 percent, barely 3 percentage points better than it is currently and only 4.7 percentage points better than it would be under current tax law.  

Here is a table showing how widely variable the effective tax rates are for each of the 19 industries and how these tax rates will vary over time under the current law and under the Tax Cuts and Jobs Act:

As you can see, in a significant number of industries, a great deal of the tax savings under the TCJA evaporate over time.

Now, let's look at the details of the change in the dollar amounts of taxes (i.e. tax savings) each of the 19 industries will pay over the ten-year budget timeframe:

1.) Agriculture, forestry, fishing and hunting - $7.8 billion

2.) Mining - $38 billion

3.) Utilities - negative $15.6 billion

4.) Construction - $12.9 billion

5.) Manufacturing - $261.5 billion

6.) Wholesale trade - $146.5 billion

7.) Retail trade - $171.4 billion

8.) Transportation and warehousing - $62.7 billion

9.) Information - $99.2 billion

10.) Finance and Insurance - $249.4 billion

11.) Real estate, rental and leasing - $12.7 billion

12.) Professional, scientific and technical services - $22.7 billion

13.) Management of companies (holding companies) - $154.2 billion

14.) Administrative and support and waste management - $19.0 billion

15.) Educational services - $3.7 billion

16.) Health care and social assistance - $5.9 billion

17.) Arts, entertainment and recreation - negative $0.5 billion

18.) Accommodation and food services - $18.0 billion

19.) Other services - $4.6 billion

Notice that second biggest beneficiary of the proposed tax changes, thanks to the Tax Cuts and Jobs Act, is the finance and insurance sector which will benefit from about 19.5 percent of the total reduction in corporate taxes paid even though they pay only 17.8 percent of corporate taxes under current law.  No surprise there given this:

Despite Washington's touting of the Tax Cuts and Jobs Act as the ultimate answer to Making America Great Again, the Penn Wharton study shows that, while the TCJA reduces the effective corporate tax rate in 2018 to just 43 percent of its value under current tax laws, by 2027, most of that gain is lost as the effective tax rate rises to 80 percent of its value under current laws.  As well, with Corporate America's share of Washington's total revenue declining over the past decade as shown here:

...and with the mounting federal debt and rising interest rates, how long will it be before Washington is forced to raise personal taxes for those Americans who have no lobbying voice to speak on their behalf to Congress?