Trump Whacks the Middle Class & US GDP 1st Qtr 2019 Analysis


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In 2016, Trump promised tax cuts for the middle class. Now it’s clear Trump’s 2018 tax cut is making the middle class pay for corporations, businesses, investors and the wealthiest 1% households historic tax cuts totaling no less than $4.5 trillion over the next decade. 

A massive redistribution of income favoring the capitalist class—at the expense of everyone else—is underway. Only with “tax day” did the dimensions become apparent. 

Polls show 80 percent of the 170 million taxpayers in the U.S. are saying they’re paying much more this year. 

And 17 percent indicate they used to get refunds in the past but are now writing the IRS checks for thousands more this year. That’s 17 percent of 170 million, or almost 30 million households no longer getting refunds. And 136 million saying they’re paying more. So that’s a middle class tax cut?

$4.5 Trillion to Capital Incomes

Conversely, capital incomes are getting a tax cut of no less than $4.5 trillion under the Trump 2018 tax cut. Their big payday is due largely to:

cuts in corporate tax rates, 

the new 20 percent off the top business pass through deduction, 

the elimination of the Alternative Minimum Tax (AMT) for corporations and reduction of the AMT for individuals, 

the halving of the Estate Tax, favorable changes in personal income tax brackets, levels and rates, 

more credits for private school tuition and child care costs, 

no upper limits on itemized deductions, and many other measures.

But the biggest tax break of all, more than $2 trillion over the next decade, goes to U.S. multinational corporations: the foreign profits tax and all territorial offshore taxation for U.S. multinational corporations are now eliminated altogether. And if they repatriate their $4 trillion in profits held offshore they can bring it back at a 10 percent one-time corporate tax rate instead of the prior 35 percent. The big beneficiaries of the $2 trillion tax cut for multinationals are the tech, banking, oil and energy, big pharmaceutical, and telecom companies. (See my blog, jackrasmus.com, postings during early 2018 where I previously documented these details of how much capital incomes will gain from the Trump tax cut.)

The Ideological Cover-Up of 2018

The corporate press and media throughout 2018 refused to accurately report the $4.5 trillion historic income transfer. Instead, they fed the public the phony calculation that the cost of the Trump 2018 tax cut was “only” $1.5 trillion over the coming decade. That calculation was made based on ignoring the $4.5 trillion in reporting, and the $1.5 trillion tax hike on the middle class, and estimating that the tax cuts would generate 3-4 percent economic growth annually for the next decade every year. And thus there would be no recession for another decade. The $4.5 trillion in this manner got reduced to the official, press reported $1.5 trillion. ($4.5 trillion for business and investors minus $1.5 trillion tax hike on middle class minus the phony growth assumption of $1.5 trillion more tax revenue = the phony $1.5 trillion hit to the U.S. budget deficit and claim the Trump tax cut was only $1.5 trillion.)

In true supply-side, phony economic ideology, by giving investors and corporations trillions of dollars more, academic hacks for business argued corporations would invest it in the U.S., creating more jobs and production from which more government tax revenue would follow. This neoliberal argument has been used to justify tax cuts for corporations and rich investors since Reagan. And it’s been wrong ever since. There’s no shred of empirical evidence showing a direct causal relationship between business-investor tax cuts and economic growth or jobs. For example, in 2018 real investment (in plant, structures, equipment, etc.) in the U.S. in 2018, after the introduction of the Trump tax cut in January, continued to decline over the course of 2018 by more than two-thirds, reaching a low point at the end of the year.

Instead of corporations investing in the U.S. and creating jobs after receiving the tax cuts, the Trump tax cuts produced a windfall profits gain to their bottom line. How much? 

The Trump tax cuts, it has been estimated, account for 22 percent of the 27 percent profits gain by Fortune 500 companies alone.

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The $1.5 Trillion Tax Hike on the Rest of Us

So where did the $4.5 trillion go in 2018? It didn’t go to the U.S. Treasury. Corporate tax revenues alone are off by several hundred billions of dollars so far. The hundreds of billions tax windfall for corporate America instead has been diverted into financial markets, into merger and acquisitions of other companies, into offshore expansion by U.S. multinational corporations and into speculation in foreign currencies, stocks, dollarized bonds, and derivatives markets. Or just hoarded on corporate balance sheets in anticipation of the next recession, now around the corner.

And how is the $1.5 trillion tax hike on the middle class occurring? Unlike the manner change in provisions benefiting capital incomes by hundreds of billions in 2018 (continuing to provide $4.5 trillion over the coming decade), middle class taxpayers are now seeing how much more taxes they are beginning to pay (to make up the $1.5 trillion over the decade).

The main changes and provisions that are now “whacking” the middle class include ending the personal exemptions ($16,200 for family of 4), eliminating more than a dozen deductions for those who itemize their taxes, changing the tax brackets and levels of the personal income tax, making singles pay more for the AMT, ending or phasing out at lower thresholds various tax credits, and so on. 

So the middle class now finds itself writing larger checks to the IRS than they had in the past, much larger. Meanwhile, corporations, businesses, investors, and the wealthiest households enjoy a massive reduction in their tax.

While the Trump government, Congress, and media focus on the “Great Distractions” (Trump on immigrants as cause of our problems; Democrat leaders on Russia intervention in U.S. elections—neither of which the average American gives a damn about), Trump continues to “pick their pockets”—big time. 

For more discussion on this topic, listen to my April 12, 2019 radio show, Alternative Visions, on the Progressive Radio Network, where I discuss the dimensions of the greatest single redistribution of income to the rich from the rest in American history. 

 

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US GDP 1st Qtr 2019 Analysis–The Facts Behind the Hype

U.S. GDP for the 1st quarter 2019 in its preliminary report (2 more revisions coming) registered a surprising 3.2 percent annual growth rate. It was forecast by all the major U.S. bank research departments and independent macroeconomic forecasters to come in well below 2 percent. Some banks forecast as low as 1.1 percent. So why the big difference?

One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. The first preliminary GDP stats are typically adjusted significantly in the second revision coming in future weeks. (The third revision, months later, often is little changed.)

There are many problems with GDP accuracy reflecting the real trends and real GDP, that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3 percent (and $500 billion a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2 percent “real” GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9 percent. If actual inflation were higher, which it is, the 3.2 percent would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the “rent” that 50 million homeowners with mortgages reputedly “pay to themselves.”

Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2 percent are some red flags revealing that the 3.2 percent is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end soon with the conclusion of the U.S.-China trade negotiations. How does the trade war boost GDP temporarily?

Two ways, at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade disputes initially result in lower imports. In U.S. GDP analysis, lower imports result in what’s called higher “net exports” (i.e. the difference between imports and exports). Net exports contribute to GDP. The U.S. economy could be slowing in terms of output and exports, but if imports decline faster it appears that “net exports” are rising and, therefore, so too is GDP from trade.

Looking behind the 1st quarter numbers it is clear that the 3.2 percent is largely due to excessive rising business inventories and rising net exports contributions to GDP.

Net exports contributed 1.03 percent to the 3.2 percent and inventories another 0.65 percent to the 3.2 percent. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), U.S. GDP in the quarter would have been only 1.3 percent. (And less if adjusted more accurately for inflation and if the 2013 phony redefinitions were also “backed out”). U.S. GDP in reality, probably grew around the 1.1 percent forecasted by the research departments of the big U.S. banks.

This analysis is supported by the fact that around 75 percent of the U.S. economy and GDP is due to business investment and household consumption typically. And both those primary sources of GDP (the rest from government spending and net exports).

Consumer spending (68 percent of GDP) rose only by 1.2 percent and thereby contributed only 0.82 percent of the 3.2 percent. That’s only one-fourth of the 3.2 percent, when consumption typically contributed 68 percent. 

Durable manufactured goods collapsed by 5.3 percent and auto sales are in free fall. And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act.)

Similarly, private business investment contributed only a tepid 0.27 percent of the 3.2 percent, well below its average for GDP share. 

Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined “intellectual property,” and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest. In the first quarter 2019, structures declined by 0.8 percent, housing by 2.8 percent and equipment investment rose only a statistically insignificant 0.2 percent. 

This poor contribution of business investment contributing only 2.7 percent to GDP, when the historical average is about 8-10 percent normally, is all the more interesting given that Trump projected a 30 percent boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7 percent is a long way off 30 percent. The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors.) And they compressed household consumer spending to boot. 

Sine Trump’s tax cuts there’s been virtually no increase in the rate of Gross private domestic investment in the U.S. It’s held steady at around 5 percent of GDP on average since mid-2017. Within that 5 percent, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising. 

In short, both consumer spending and core business investment contributions to U.S. GDP have been slowing, and that’s true within the 3.2 percent GDP. First quarter GDP rose 3.2 percent due to the short term, and temporary contributions to inventories and net exports—both driven artificially by Trump’s trade wars. 

The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1 percent in 1st quarter GDP. (Conversely, non defense spending was reduced 5.9 percent in the first quarter GDP.)

Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken.

Trump is betting on his 2020 re-election and preventing the next recession now knocking at the U.S. and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end. 

Meanwhile, beneath the surface of the U.S. economy, the major categories of U.S. GDP—business structures, housing, business equipment, and household consumer spending (especially on durables and autos)—will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.

Bottom line, however, the 3.2 percent GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.

Jack Rasmus is the author of the forthcoming book, The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, Clarity Press, Summer 2019, and Alexander Hamilton and the Origins of the Fed, Lexington Books, March 2019. He blogs at jackrasmus.com, tweets at @drjackrasmus, and hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network on Fridays, 2pm eastern time.

 (For those interested in a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).