Tax Cuts and Budget Consequences

It’s time to assess the impact of that tax cut that was heralded at the end of last year. The Republicans predicted that the tax cut would generate growth and trickle down to improve the living standards of the general population via renewed investments. They even said everybody would see the tax cuts in their paychecks. While the economic impact such as growth won’t really be visible for at least a year, I thought I would do a quick review of what the news articles have been reporting.

First, while some have seen a noticeable increase in their paycheck due to the tax cut, the majority of the Americans’ tax cut has been negligible, somewhere around the ballpark of $30 - $40 increase in bi-weekly paycheck. (Here’s the article that lays out some statistics.) That’s not enough to really excite people. You really can’t invest that increase into anything that will improve your long run odds, such as getting an education, funding a business, things of that nature. Those kind of pay increases are not going to move the needle in your living prospects.

Next, some companies crowed about giving out one time bonuses. Ummmm…most Americans realize that while they get a one-time bonus (and their miniscule tax cut will end in 10 years), companies and the wealthy got a permanent (and impressive) tax cut. Really, to balance things out and give a better optics, a permanent raise would have been better.

On the investment end, it’s been mostly share buybacks. This damning (and really good) article discusses that and it’s just one of the few that I’ve read. Fully 70% goes toward share buybacks, dividends, debt reduction, and mergers and acquisition, most of which benefits the shareholders. Thirty percent is allocated to the more investment side: capital expenditures and wages. Wages got a measly 13%, and an impermanent one at that. As a matter of fact, these buybacks are kind of grotesque that one of the Senators was sponsoring a bill called Workers Dividend Act that would stipulate an equal return of money to the workers if a buyback is done. Read the article here; it includes some interesting history such as share buybacks used to be illegal.

So tax cuts do not lead to increased hiring or increased wages, at least not so far, and historically has proven not to  do so. A tax cut will go straight to the bottom line of the shareholders. Really the only time companies will increase hiring is if demand for their goods and services are such that more people have to be hired in order to service the demand. Wage increases occur when no workers can be found and companies need those workers to service the demand. Companies rarely increase hiring or wages out of the goodness of their heart.

So what does the tax cuts portend for the future? Well, considering the spate of news articles (here and here as examples) on teachers in red states striking for better pay, we could be looking at the same situation but on a larger scale. The discontent began in Kansas where the Governor Brown’s tax experiment led to declining revenues which led further to cuts in the budget. Brown is no longer the governor due to deep discontent. Now we’re seeing West Virginia, Kentucky, Oklahoma, Arizona and Colorado state governments facing teacher strikes over pay. I believe all of these states are red states, and I read somewhere that red states predominantly has some of the worst teachers' pay due to the zeal of reducing government expenditures. All of these states apparently suffered deep cuts in the education budget because of steep tax cuts. It took a couple of years to play out but the situation is coming to a head now. It’ll probably be about 7 or 8 years on a national scale (maybe 2025 or 2026) before we see the similar kind of protests. Right now we have just cut the taxes. By the end of the year, if not sooner, we should be seeing declining revenues at the federal level at which point the Republicans will call for budget cuts. Those cuts will most likely to hit services that average Americans depend on as well as education. The beginnings of those budget cuts will probably start sometime in 2020 and play out over the next few years.

Buckle up, because if companies don’t start thinking beyond just shareholders, we’re heading into a blowing gail.