So, you go out for dinner with a wealthy acquaintance. “I’ll take care of everything,” he says, and orders you a hamburger. Then he orders himself an expensive steak and a bottle of wine, which he doesn’t share. And when the waiter comes with the check, he points at you and says, “Charge it to his credit card.”
Now you understand the essence of the Trump tax cut, signed into law a little more than two months ago.
The key thing you need to know is that right now the U.S. government has no business cutting taxes. We need more revenue, not less.
Why? The federal government, as an old line says, is a giant insurance company with an army. Most of its costs come from Social Security, Medicare and Medicaid — and all three programs are becoming more expensive as ever more baby boomers reach retirement age. This means that unless we cut back sharply on benefits that middle-class Americans count on, we will need to raise more revenue than in the past.
Yet even before the tax cut, federal tax receipts were looking weak for an economy with low unemployment and a rising stock market — for example, far lower as a percentage of GDP than the tax take during the Clinton boom of the 1990s, and even a bit lower than they were at the end of the Bush-era expansion. The tax cut will push them lower still. Something will have to give.
And we know what will give, if Republicans get their way: programs that benefit working Americans. In fact, the usual suspects like Paul Ryan were talking about the need for “entitlement reform” — meaning cuts in Medicare and Medicaid — to reduce deficits even as they were passing a huge tax cut that will make those deficits much worse.
Hence my analogy about the guy who “gives” you a hamburger, then bills it to your credit card. Ryan celebrated the tax cut with a tweet about a teacher saving $1.50 a week on her taxes; that’s like saying you should feel grateful for a “gift” that’s actually being charged to your own credit card. How’s that $75-a-year saving going to look when the teacher finds out that, partly because of that tax cut, her mother’s Medicare plan has been converted into an inadequate voucher system and Medicaid won’t pay for her father’s nursing home care?
Meanwhile, about your companion’s steak dinner: Most of the tax cut actually consisted of huge tax breaks for corporations, which is in effect a big tax cut for stockholders. And while many Americans own a bit of stock via their retirement accounts, even if you include these indirect holdings, more than 80 percent of stocks are owned by the wealthiest 10 percent of the population. So on the face of it, the wealthy are giving themselves a big gift, and sending the bill to the middle class.
Now, the tax cut’s defenders insist that it won’t really work that way, that the benefits of lower corporate taxes will trickle down to workers instead. How’s that supposed to happen?
Well, the theory is lower corporate taxes will draw in lots of money from overseas, which corporations will invest in new plants and equipment, which will drive up the demand for labor, which will raise wages. And to be fair, there’s probably something to this theory — something, but not very much.
First of all, even if the process were to work as advertised, it would take a long time — probably decades. Even the most optimistic analyses suggest that there would be little effect on wages for the first few years, which means that for now what looks like a tax break for the wealthy is, in fact, a tax break for the wealthy.
Second, the story relies on a long chain of events with multiple weak links. For example, corporations with monopoly power won’t see lower taxes as a reason to invest more; they’ll just take the money. Meanwhile, there’s growing evidence that big employers are using their power to suppress wages; cutting their taxes won’t change that fact. So even in the long run we shouldn’t expect a lot of trickle-down.
But wait — weren’t there a lot of stories about companies using the tax cut to give their workers bonuses? Yes, there were — but only because the news media let themselves get played. Most of those bonuses would have happened anyway: In an economy with low unemployment, there are always some companies deciding to pay a bit more to attract workers. But companies had every incentive to pretend that the tax cut was responsible, if only to curry favor with the Trump administration.
And in any case the bonus hype was out of all proportion to the reality. So far, we’ve seen about $6 billion in bonuses versus more than $170 billion in stock buybacks — that is, handing money to wealthy stockholders. And money spent on buybacks is money that isn’t being invested in plants and equipment, the supposed point of the tax cut.
So the message to middle-class taxpayers is, if you think you were helped by the tax cut, think again. Donald Trump and his allies pretended to give you a gift, but they gave themselves and their wealthy patrons much bigger gifts — and they’re going to stick you with the bill. You’ve been scammed.
Paul Krugman is a syndicated columnist who writes for the New York Times News Service.