Monday, August 13, 2018

Who Benefitted From Trump Tax Cuts?

Trump gave the Republican Party what it really wanted after he was elected.  The GOP's priority has always been tax cuts for their wealthy donors.  Trump gave it to them in spades.  Corporations got huge tax cuts that they mostly used to buyback their own stocks.  That was great for corporate executives and large stock investors because it led to higher stock prices.  However, it was sold to the public as a way to increase corporate capital investment.  That would expand the economy and raise wages for ordinary Americans who don't own large amounts of corporate stock.  That did not happen.  Real wages, corrected for price inflation, have not grown as promised despite a fully employed labor market.

Republicans have also sold their party to the public as the fiscally responsible party.  They claim that Democrats are fiscally irresponsible because they tend to raise taxes in order to provide expensive social welfare benefits to "the wrong kind of citizens".  That discourages them from working and it also forces the government to borrow money to pay for the expensive social welfare programs.  However, it turns out that the Trump tax cuts were fiscally irresponsible.  Trump increased spending, primarily on defense, as the corporate contribution to federal tax revenue plummeted.  Not surprisingly, government borrowing has skyrocketed and federal budget deficits have risen dramatically.  Trump has responded by claiming that "debt is good".  He became a billionaire by borrowing millions to fund his business investments.  His government, however, has not borrowed money to fund investments.  It has been forced to borrow money in order to fund tax cuts for its wealthy donors.

The Trump administration has also deviated from Republican ideology in another way.  It has always supported free trade.  Trump has turned this around by using tariffs as a weapon to reduce US trade deficits.  We are still waiting to see the impact that this will have on the US and the global economy. The role of the dollar in international transactions plays a powerful role. The dollar has been increasing in value relative the foreign currencies.  That will make US exports more expensive and imports less expensive. Trump even argued that the revenue that we receive from tariffs will help to pay for his tax cuts.  No serious economist believes that will happen.  But he understands that his base not does include many voters who understand economics.  

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