Bonuses Aside, Tax Law’s Trickle-Down Impact Not Yet Clear

The following article by Jim Tankersley was posted on the New York Times website January 22, 2018:

WASHINGTON — There are good ways to start measuring how much the Trump tax cuts might be helping American workers. Tracking the bonus announcements flowing from corporations is not one of them.

Those announcements, which include $2,500 in stock grants for Apple employees, up to $1,000 for certain workers at Walmart and $1,000 bonuses for Bank of America employees, are both real money and smart marketing. President Trump and top Republican lawmakers have praised many of the companies that are disclosing tax-cut-fueled bonuses and wage hikes.

For the most part, though, they are not indicative of the windfalls that companies are reaping from the $1.5 trillion tax law — and how much of that money that might trickle through to workers in the years to come.

Companies are acknowledging this in their fourth-quarter earnings reports and other financial disclosures, which earmark just a sliver of their future tax savings for direct and indirect investments in workers.

Bank of America’s bonuses will cost the bank $145 million in 2018, or about 5 percent of the nearly $2.7 billion in savings it is expected to reap in 2018 from a lower, 21 percent corporate tax rate. Apple’s bonuses will cost $300 million, a fraction of the $40 billion, at least, that the tech giant is saving from a single provision in the law, which allows it to return earnings held overseas at less than half the rate it would have paid under the old system.

And two days before Walmart snagged glowing headlines for handing out $400 million in bonuses and lifting its minimum wage at a cost of $300 million, the nation’s largest retailer by sales unveiled a plan to buy back company-issued debt. The cost of the buyback: $4 billion.

The gap between what companies are saving and how they are, so far, rewarding workers, doesn’t mean that the new law won’t eventually lead to substantial wage increases. Economists across the political spectrum agree it’s simply too soon to tell whether — and to what degree — that will happen.

The flurry of high-profile bonus announcements “are hard to interpret,” said Mihir Desai, an economist at Harvard Business School and Harvard Law School whose research supports the idea that corporate tax cuts lead to at least modest wage increases. “They may well be evidence for these gains, but just as well may be an example of savvy public relations. The reality is we’ll have to wait for a few years and good empirical work to really know the answer.”

Before Mr. Trump signed the tax bill in December, few companies had committed to rewarding workers if it passed. Since then, more than 200 have pledged bonuses, wage increases or other benefits for employees that are specifically tied to the new law, which includes deep cuts to business tax rates. The new law lowers the corporate rate to 21 percent, from a previous high of 35 percent, and it includes a 20 percent deduction for many owners of so-called pass-through companies, who pay taxes on their profits at individual income tax rates.

Republicans have celebrated the bonus announcements as part of a concerted party strategy to build public support for the new law. “Tax reform is working,” House Speaker Paul D. Ryan, Republican of Wisconsin, said on Thursday, before citing the Apple bonus announcement. “Workers are coming home and telling their families they got a bonus, or they got a raise, or they got better benefits.”

The bonus announcements are, in some ways, a relatively easy opportunity to generate positive headlines and, perhaps, curry favor with Mr. Trump.

“Certainly, a lot of what you’re seeing is bonuses, rather than wages. It’s a one-time thing — you don’t have to do it again. It’s political, obviously. It’s P.R.,” said Jim O’Sullivan, the chief United States economist at High Frequency Economics.

There is some evidence that messaging is working: Since the bonus announcements began, polls have shown rising support for the law, though it is still the case that more voters oppose the tax bill than favor it.

Liberals, though, have latched on to other details in recent corporate announcements — the ones that show companies plan to pass most of their initial tax savings to shareholders by raising dividends or buying back stock or debt.

An S&P Global report estimates that banks will return 75 percent of their windfall to shareholders. More than four in five Morgan Stanley analysts, across industries, said in a survey that the firms they track will use their tax gains to facilitate buybacks and dividends. Barely one in five said firms would pass even some of the tax gains on to workers.

Andrew Bates, deputy communications director for the liberal opposition research group American Bridge, said the Walmart buybacks, which dwarf the cost of what it is returning to workers, show “why Donald Trump is forced to hide most of the story when he tries selling this plan to the American people. It’s also why they aren’t buying it.”

Senator Elizabeth Warren of Massachusetts, a leading Democratic critic of Wall Street, said last week that tax-cut-linked share buybacks by companies such as Bank of America are “not a measure of the economic health of the American family.”

Republicans predicted the majority of the corporate tax cut would eventually trickle down to workers through investment, jobs and wage increases. At one point early in the tax debate, the chairman of the White House Council of Economic Advisers, Kevin Hassett, said that workers would enjoy the majority of the benefits from a corporate tax cut.

The theory is investment in structures, equipment and other initiatives, either by companies or their shareholders, boosts productivity in companies, and with it, wages. It is a bank-shot theory of wage growth, and one that many economists espouse, though often to a much lesser degree than Mr. Hassett, whose research suggested typical workers would see an increase of between $3,000 and $7,000 in take-home pay.

“The theory that tax cuts will increase wages is a theory based on investment, and the effect that increased investment will have on productivity,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “It is not a theory based on a pure transfer of excess profits into workers’ profits. That takes longer than two weeks to happen.”

Anecdotes of bonus payments, or even minimum wage increases, are the least-useful way to determine if a tax change is lifting workers, said Scott Greenberg, a senior analyst at the Tax Foundation in Washington. The best way is rigorous academic study, which Mr. Greenberg noted takes years to complete.

The middle ground between those two is watching economic indicators — the rate of investment growth in the economy, or of real wage growth.

But even that will prove tricky in the months to come, because the economy was strengthening even before the tax cut. Most economists believe the United States is now at or near so-called full employment, when employers are forced to compete for scarce workers, and employees are empowered to bargain for higher wages, whether their companies just received a tax break or not.

Mr. O’Sullivan said it will be difficult to initially tease out the impact of the tax bill from those overall trends. “It’s going to buried in with everything else,” he said.

Politicians will make no such distinctions, of course. But workers might be able to guess if wage gains are in their future, at least a little bit, by reading the fine print of corporate announcements. If companies announce new projects, initiatives or capital investments — anything that might boost worker productivity — wage increases could follow.

Not because companies are dying to share their tax spoils with workers. But because they have to, or those workers will take a job with another company that will.

Correction: January 22, 2018