Donald Trump spent a good portion of his Tuesday night State of the Union speech celebrating the American economy, and his tax cuts in particular—which he falsely called the “biggest in history.” It was a big cut, however, and also the most significant piece of legislation passed by the Republican-dominated Congress in 2017. Unsurprisingly, the largest beneficiaries of this bill were the wealthy and corporations. What’s unclear, however, a little more than a month after the bill has passed, is how exactly this new cash influx will be spent.
Trump and his Republican allies want people to think that the bill will be a boost to workers. The passage of the cuts was quickly followed by a slew of corporate press releases, more than 70 in all, announcing employee bonuses. Walmart gave “eligible associates” (meaning longtime workers) a cash bonus of “up to $1,000,” Apple gave employees $2,500 in restricted stock, and Disney gave $1,000 cash bonuses to 125,000 (out of 195,000) employees. In every case, corporations explicitly tied bonuses to the tax cut; Disney actually corrected a press release to emphasize the link.
That all added up to a massive PR campaign on behalf of the cuts that elided all of the bill’s negative consequences, like the decision by Kleenex maker Kimberly-Clark to use its tax windfall to fund a plan that included laying off 5,000 workers. And it’s not clear that the cut directly led to the bonuses or if the companies just credited Trump in order to garner goodwill from the administration. In AT&T’s case, the telecom giant said it had given out $1,000 bonuses because of the tax cuts when actually it was pushed into handing out money by a union representing its workers.
“I’d love to see how much companies paid out last year compared to this year,” said Richard Phillips, senior policy analyst at the Institute on Taxation and Economic Policy. “Or that would have been part of Christmas bonuses that would’ve been paid either way.”
And despite the hype, the bonuses didn’t make much of a blip in the context of the larger economy: A recent Reuters poll showed that only 2 percent of US adults reported a bonus, wage increase, or “another perk” due to the cut.
If the money isn’t going to workers, where’s it going?
One possibility is to eventual reinvestment in production. This is how the GOP bill was sold: The idea was that companies wanted to increase production by adding factories or workers, but couldn’t afford to do so. Ergo, give them more money and more jobs will be created. The problem with this is that there’s no evidence that lack of money was ever holding them back.
“Many firms were already satisfying the market demand,” said Eliezer Fich, a professor of finance at Drexel University. “Even if they have extra money, they don’t have additional capacity to manufacture and hire more people, because the demand for whatever good or service they were creating was already satisfied.”
It’s the basic problem of market saturation: If everyone has a car, then no one’s buying cars, so why would a car manufacturing company invest in a factory to make more of them? Instead, that company would steer investment in ways to make better cars, meaning increased spending in research and development.
According to those in favor of the tax cut, that would indeed be a way firms will use their tax breaks, and that could lead to more jobs. These won’t be the manufacturing jobs that Trump is so fond of, however. “That labor is skilled labor, people who can do research, people with doctoral degrees,” said Fich. “That means maybe a little uptick on employment, but not the blue-collar workers. It might not even be your four-year-college-educated individuals.”
More worrisome—at least if you’re hoping to hang on to your manufacturing job—is that R&D investment can often have devastating consequences to the existing workforce. R&D’s goal is to increase profits, and in that sector, that means one of two things: developing new consumer tech (the newest iPhone), or development new internal tech to allow tasks to become more cheaply automated, which means both cutting costs and shedding workers.
“There’s a sense that capital investment means more jobs, but in many cases, it means more layoffs,” said Phillips. “A lot of companies taking the most advantage [of the tax cut] are multinationals, who are also in the position to shift more jobs offshore. Having more money allows them to do the one-time cost of moving materials or buying a new factory somewhere.”
Another thing that money allows them to do is repurchase company stock from investors. A recent survey of market analysts predicted that most of the tax cut will be used on stock buybacks; one analysis found that 20 corporations have spent $100 billion on stock buybacks since December.
Buybacks are a way for corporations to capture a higher percentage of future profits, but the reason they have become so popular after the tax cut is a little complicated. To understand it, we should reexamine the effects of the US’s repatriation tax holiday in 2004. That bill (the “American Jobs Creation Act of 2004”) allowed corporations to bring money they’d been keeping offshore back into the US at a drastically discounted tax rate (5.25 percent instead of 35 percent) for a limited time. After the paperwork cleared, 845 firms brought back $312 billion. But the holiday had a few unforeseen effects.
The biggest one was that, ironically, more companies kept even more cash offshore following the holiday. The mindset was simple: We missed the first holiday, so might as well wait until the next. But another effect hinted at what companies would do with an influx of money. Just as they've done immediately after the Trump tax cut, rather than invest in creating jobs they bought back debt and shares. (One study found that 94 cents of every dollar brought back went to share buybacks and dividends.)
Why do one and not the other? Because it made more sense to do that than to create jobs.
“One of the underlying problems with this discussion is that people act like taxes drive investments, but they don’t. Profits do,” said Pavlina Tcherneva, director of the economics program at Bard College. “To build a factory, you need the factory to be profitable.”
If a company wants to raise wages or hire workers in order to improve profits, loans are often available. Companies stop hiring people because doing so no longer makes them money. “You hire people only if you are sure you have a strong demand,” said Tcherneva, “if your cash registers are ringing, if people are walking in the store.”
If the demand isn’t there, companies will spend their extra cash like they’re doing now: Reclaiming shares, finding ways to automate or move their workforces to cut their costs, and buying some good publicity with a few rounds of pocket-change bonuses.
“What they’re doing is saying this is the old trickle-down economics,” said Tcherneva. “I’m going to get a bonus, I’m going to go shopping, and that will provide a boost to the economy because shop owners will hire someone else. Even if that were the case, that’s going to be a very temporary effect.”
Ironically enough, that distribution is bad for business growth. In order to make money, you need other people to spend theirs.
“If the tax cut was distributed to the bottom, then I would say there’s something there, as those are the people who spend the vast majority of their income,” said Tcherneva. “But the long-term effect of the tax cut is that income distribution will move more to the top. If you’re a wealthy person, you need only so many Toyotas.”
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