Opinion

Trump's tax cuts and the ugly truth about the stock market

Is the very success of the market undermining the case for the tax plan?

The stock market is betting big on the Republican tax plan. All three U.S. stock indexes closed at record highs this past Friday — the 24th time they've done that this year — on the news that Republicans in Congress had successfully laid the procedural groundwork for their long-awaited tax reform package. Markets slipped back a hair on Monday, but overall they've been on a relentless climb since President Trump took office.

But there's something bitterly amusing about these ever-rising stocks: The very success of the market undermines the case for the tax plan it's betting on. In fact, you could go so far as to say it undermines the case for the stock market, period.

The core of the GOP tax plan is a cut in the federal tax rate that corporations pay on their profits, from 35 percent to 20 percent. This is why the stock market is so excited. Generally speaking, corporate profits go into dividend payments for stockholders. So the market figures a big corporate tax cut means bigger after-tax profits, which means bigger dividend payouts. That makes owning a stock more valuable and boosts the stock indexes.

For obvious reasons, however, this is not the story Republicans are telling. Instead, they're trying to sell corporate tax cuts as a boon for working Americans. Trump's Council of Economic Advisors (CEA) recently put out a report claiming the tax cut would boost average wages for Americans anywhere from $4,000 to $9,000 per year. It was a grotesque exaggeration, and one that was quickly savaged by former Obama CEA head Jason Furman and by former Clinton Treasury Secretary Larry Summers — neither of whom are exactly Bernie Sanders-style firebrands.

Even some conservatives thought the White House had gone too far. "The Trump administration has undermined its case for a corporate tax cut by exaggerating the benefits of its overall tax package," writes Michael R. Strain, director of economic policy studies at the American Enterprise Institute.

But if wonky conservatives disagree with the White House's outlandish analysis, they still support the cuts on the theory that they're a win-win for workers and shareholders. "[The Trump administration's] rhetorical excess shouldn't obscure the fact that cutting the corporate rate is worth doing," Strain writes. At an intellectual level, Republican support for a corporate tax cut rests on one of the bedrock principles of conservatism: That taxes actually suffocate the profit incentive for companies, thus squashing their investments, reducing job and wage growth, and generally holding the economy back.

These tax assumptions speak to a theoretical ideal of capitalism. The way markets are supposed to work is that companies have to continually invest in new innovations and efficiencies to stay ahead of rivals and keep their profit margins up. If they do it right, they grow richer and thus have even more money to reinvest back into workers, research, and equipment. In this way, the self-interested pursuit of profits creates jobs and raises wages, and taxes only interfere with the overall beneficence of the market.

But if this is really what's going on, there should be clear signs of it in the economy. Instead, while business investment is depressed and jobs and wage growth are unnaturally low, corporate profits are actually higher now than they've been at any time in the last 70 years.

This paints a picture of the economy much different from what the champions of the corporate tax cut theorize: It's one where worker bargaining power and competition have collapsed; where companies keep profits high through underpaid labor, high prices, and bad service.

This obviously blows up the rationale for corporate tax cuts.

If the Republican Congress really wanted to help workers through tax reform, it would limit itself to improving and expanding the investments that corporations can deduct from their tax liability. That would make sure the incentives of tax reform always push job and wage growth. Cutting the corporate tax rate, by comparison, is a horribly unfocused tool. Under these circumstances, it won't do anything for the economy; it will just further increase the money that corporations can bleed from workers and customers.

But the implications don't stop there.

The theory behind the stock market rests on the assumption that high profit margins are a very reliable indicator of the real-world value corporations create. But that assumption is wrong. There are lots of ways corporations can expand their profit margins, many of which have nothing to do with creating real good for human society. In fact, many are poisonous and destructive to most American workers.

And it makes no difference to the stock market whether corporate profits are produced in good ways or bad. All that matters is that the payouts keep coming. In fact, as my colleague Ryan Cooper recently pointed out, Wall Street investors will often punish companies for trying to compete the old-fashioned way, and force them to exploit workers and consumers. And since the upper management of most companies get a lot of their income from the stock markets themselves, they're quick to fall in line.

So yes, the Republican story for why we need a corporate tax cut has a big hole in it. But our society's story about why we need the stock market has a big hole in it, too.

More From...

Picture of Jeff SprossJeff Spross
Read All
Shouldn't Congress be considered essential?
The Capitol building.
Opinion

Shouldn't Congress be considered essential?

Republicans literally want to work Americans to death
A factory.
Opinion

Republicans literally want to work Americans to death

The Payroll Protection Program's problems were extremely avoidable
Money on a cliff.
Feature

The Payroll Protection Program's problems were extremely avoidable

Can coronavirus bring economics back down to reality?
An expensive steak.
Opinion

Can coronavirus bring economics back down to reality?

Recommended

Why social anxiety in young people may be on the rise
Person on computer alone.
take care of your mental health

Why social anxiety in young people may be on the rise

How a pending Hollywood strike involves you
A Hollywood strike.
Picture of Jeva LangeJeva Lange

How a pending Hollywood strike involves you

The 3 deadlines that made this Congress' 'week from hell'
Nancy Pelosi.
now or never

The 3 deadlines that made this Congress' 'week from hell'

Facebook pauses plan to develop Instagram for kids
Instagram
paused

Facebook pauses plan to develop Instagram for kids

Most Popular

Jimmy Fallon and Nicole Kidman almost make it through interview without awkwardness
Jimmy Fallon and Nicole Kidman
Last Night on Late Night

Jimmy Fallon and Nicole Kidman almost make it through interview without awkwardness

7 cartoons about America's vaccine fights
Editorial Cartoon.
Feature

7 cartoons about America's vaccine fights

Democrats are governing like Republicans
A donkey.
Picture of W. James Antle IIIW. James Antle III

Democrats are governing like Republicans