The 2017 "Tax Cuts and Jobs Act" provided yet another data point supporting my theory that runaway corporatism now dictates economic decisions in the United States.
The “tax cuts” are the economic fallacy of cutting string from one end, tying it to the other, and claiming you have a longer piece of string. The scheme buys economic growth, and corporate profits, with public debt. And so ultimately, it will be the public who suffer the financial losses when the U.S. government defaults on that debt, making this a wealth transfer scheme.
In finance shifting cash flows along the timeline is a common maneuver (e.g. selling accounts receivable for cash now). In this case, the financial move takes from social insurance payouts due to the public in the future, and distributes to corporations now.
DRIVING ECONOMIC FORCES
The U.S. is now a mature economy and so economic growth naturally pulls toward zero (let’s say real GDP growth rates of 1-2%). Yet corporations are driven by a financial algorithm, and this algorithm involves a required return which must be met. This creates a financial conflict. In this case the conflict was resolved by corporations exercising their control over the captive federal government, and simply passing a law granting themselves government-subsidized profits.
At the same time, there was also a government motivation. The U.S. government saw a need to make their state-sponsored entities more competitive with overseas entities. Specifically China, who have their own state-sponsored entities (SOEs), as well as a much higher organic economic growth rate. The two nations are locked in an “economic arms race,” CN is just more straightforward about admitting their corporations are public/private hybrids, while the US hides behind the facade of “private businesses.” But the corporations in both nations receive generous special treatment from their governments.
It is also a desperate attempt by the government to keep their GDP growth rate higher than the interest rate paid on their debt, so the ratio of debt-to-gdp doesn’t spiral further out of control.
In summary, the purpose of the tax cuts is to 1) maximize corporate profits, 2) give domestic corporations an advantage over foreign corporations,and 3) hold the government’s financial house of cards together. And this is financed with public debt, which comes at a cost (growing interest payments).
The purpose of the tax cuts is obscured by a wall of, easily falsifiable, economic propaganda…
“IT’S A MIDDLE-CLASS TAX CUT”
False, it’s a corporate tax cut, with the promise of “trickle down” to the middle class. This is Friedmanism, or “voodoo economics,” promised since the 1980s, yet real wages have remained flat. If the purpose were a middle class tax cut, then why not simply cut the middle class tax rate to zero? There was a small cut to appease the public, but this was not the central purpose of the Act.
“THE TAX CUTS WILL TRIGGER ECONOMIC GROWTH”
The scheme buys economic growth and higher stock valuations with public debt, so yes you get synthetic growth, but it’s an unsustainable situation. Why? Because the financial reality includes growing interest expense on a growing debt balance. Yet the propaganda ignores this side of the equation.
“THE TAX CUTS WILL PAY FOR THEMSELVES”
There is no mathematical basis for thinking economic growth will lead increased to revenues, which will make up for the lost revenue from the lower tax rate. You can model the relationship easily: ABC Corp makes $100 profit, it used to pay $20 to the USG (35% statutory tax rate, but 20% effective rate). If it now pays a 10% effective rate, it would need to make $200 profit to pay the same $20 (but the tax cut is NOT going to double profits). It’s more complicated, but the point is; this is propaganda not serious financial analysis.
“THE MARKET IS BOOMING!”
When you drop the corporate tax rate, stocks instantly become more valuable, and so the market goes up. This gets into the Capital Asset Pricing Model (CAPM), which is an after-tax model. Once you understand this, you can view the “tax cuts” as essentially being quantitative easing round 4, but this time marketed to “free-market” conservatives. But again, this is synthetic growth, and ignores the growing interest expense on a growing debt balance…risks which are externalized to the public and government.
“SPENDING CUTS ARE COMING!”
No, actually they aren’t.
THE IMPACT ON THE GOVERNMENT
What is the forecasted impact on government cash flows? Remember, financial analysis doesn't care about opinions, feelings, politics, and propaganda - all it considers are the probable cash flows (i.e. math and probabilities).
In order to understand how this law alters the expected cash flows of the USG, you first have to understand their current financial situation. This is reviewed in the paper The Mathematical Certainty of U.S. Government Default. As you can tell from the title, the government's financial situation is horrendously bad. In summary, they have a net present value (aka "fiscal gap") of approximately negative $200 trillion. Per their own 2017 Financial Report interest payments are expected to go hyperbolic and break their model (default) in the coming decades—driven by the debt required to fund baby boomer benefits.
In 2017 the USG had $3.4T in revenues from individuals and corporations, and spent $4.5T, for an operating loss of $1.2T (see p. 1 of their financial report). This tax cut is expected to decrease revenue, yet spending is expected to increase. So this takes a bad situation, and makes it worse.
How will the growing deficits be funded? The annual deficits are primarily financed though 1) issuing debt to the public (individuals, corporations, state governments, Federal Reserve Banks and foreign governments), and 2) printing money and buying their own debt. Since the government is financially past the point of no return, the long-term impact of this increased debt is simply an increase in the magnitude of the future default and/or hyperinflation.
IMPACT ON THE PUBLIC, AND CORPORATIONS
We can forecast the probable short-term, and long-term, impacts to the public and corporations…
Short-Term: announced tax cuts (monetary expansion) immediately inflate equity market valuations >> the USG borrows from China, Japan, corporations, state governments and individuals >> it subsidizes the profits of S&P500 corporations and pass-through entities >> the corporations invest x% of those subsidies back into operations and pay out the rest in dividends and buybacks >> cash goes to the 10% of citizens who own 80% of the stock >> the ultra-rich, and upper middle class, get richer due to increased cash payments and higher equity market valuations >> that wealth is mostly invested back into financial markets (limited “trickle down”).
Long-term: USG debt increases >> annual interest payments increase, and the size of the annual shortfall grows >> this deficit is financed with moredebt >> the government is unable to keep gdp growth rate greater than the interest rate on the debt into perpetuity >> debt/gdp ratio balloons >> eventually the public (specifically old people) end up paying the debt in the form of a default on their benefits (e.g. social security and medicare), or by hyperinflation from printing their benefits, or less likely by a default on treasury securities.
Those are the probable cashflows. In finance we don't get away with propaganda such as "corporations are keeping more of their money." That would only be true if the tax cuts were funded by budget cuts, which they are not. They are funded by public debt. And so the cash flows are effectively a movement from the general public, to the corporations and pass-throughs, and thus to the top 10% of asset holders. Government subsidizing the wealthy, or “corporate welfare” as it is sometimes called.
A CONTINUATION OF THE CORPORATOCRACY
The “tax cuts” look a lot like prior wealth transfer schemes authored by Goldman Sachs and friends (see subprime). And when the debt bubble pops, the corporations and ultra-wealthy will have already positioned themselves with the borrowed wealth and no liabilities. It's the general public who will be caught holding the liabilities (e.g. debt, social insurance default, etc).
Also note the absurd circularity of the USG’s debt Ponzi scheme—the government increases public debt and gives the proceeds to the corporations, but the corporations also loan money to the government by buying this debt (e.g. treasuries). The whole thing makes no financial sense, and certainly isn’t sustainable.
The historical pattern — no matter who the public have voted for (from Reagan to more recently Obama/Trump), the result has always been more power and profits to the corporate system, by way of shifting costs to the public. This is what corporatism does; it internalizes profits and externalizes costs.
(2018) Financial Report of the United States Government, 2017 FY. U.S. Department of the Treasury
(2016) Average Effective Federal Corporate Tax Rates, U.S. Department of the Treasury
(2014). Average Effective Federal Tax Rates by Filing Status; by Expanded Cash Income Percentile, 2014. Tax Policy Center.
Kotlikoff, L. (2006). Is the United States Bankrupt?. Federal Reserve Bank of St. Louis, Review.
Kotlikoff, L. (2017). The US is dead broke and the tax bill does nothing to help matters. The Hill.