Tag: Tax Cuts

Ep. 939 The Definitive Guide to Mueller’s Witch-Hunt

In this episode I address the deeply disturbing connections between Bob Mueller and the political hacks who tried to pull this scheme off. I address it because public support for Mueller’s witch-hunt is completely collapsing. I also discuss the liberal myths that middle wages are stagnant and that Australian gun control worked.

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Ep. 929 Fight Back, Make a Scene

In this episode I address the persistent attacks on Trump supporters by increasingly aggressive, and sometimes violent, liberals, and how we should fight back. I also address the explosive new revelations that Alexandria Ocasio-Cortez’s Chief of Staff may have inappropriately used donor money. Finally, I address, and debunk, liberal misinformation about tax cuts.

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Don’t Be Fooled – Wages Are Not Stagnating Under Trump

The stock market is booming after a year of turbulence, the economy is adding far more jobs than expected despite the lowest unemployment since WWII, and despite the booming economy, we’re told that workers aren’t sharing in the prosperity. Why? Because wages aren’t rising fast enough.

Indeed, wage stagnation has been the great argument against Trump’s tax plan, allowing liberals to make the same tired old arguments against so-called “trickle-down economics” that we’ve heard for the past five decades. As a few writers at the Center for American Progress put it last year; “On measures that determine whether workers’ wages are keeping up with the cost of living, there has been little improvement and even some regression since the start of 2017, when President Donald Trump took office.” Forbes’ Chuck Jones wrote half-way into last year that “While GDP hit 4.1% for the June quarter… the unemployment rate is hovering at all-time lows, inflation continues to increase, real wages are stagnant.”

Before completely tearing apart a claim, it’s worth explaining the basis for why people believe it to be so. Private sector wage growth in 2018 was about 3.2%, respectable at face value, but only a net 0.76% increase when you account for inflation being 2.44% that year. It’s on this basis that the Washington Post’s fact checker Glenn Kessler gave Trump’s claim that wages are finally rising once again after stagnating “four Pinocchios,” which are reserved for particularly-bogus claims.

Kessler isn’t an economist, so he can be forgiven for not realizing that his “fact check” isn’t as solid as he thinks. Rather than take isolated statistics at face value, it’s important to remember that all the figures we’re dealing with are averages and can be affected by external factors, such as:

  • An increase in the rate that people are retiring. Since those nearing retirement have decades of work experience, they far out-earn the average American. In fact, 55-64 year olds boast wages 28% higher than those age 25-34.  If my workspace consisted of me earning $10 an hour, Dan earning $15, an hour, and a prospective-retiree earning $30 an hour, the average wage would be $18.33. But suppose the prospective-retiree retires while Dan and I simultaneously see our pay hiked to $15 an hour (+50%!) and $20 an hour (+33%). While every worker saw their wages increase massively, the average wage at this hypothetical firm as decreased to $17.50 an hour.
  • The labor force participation rate has increased under Trump. Those who previously had given up looking for work are now re-entering the labor force. Those who’ve been out of the workforce for an extended period of time tend to have less skills in the first place – and those skills they do have atrophied over time. While they’re not dragging anyone’s individual wages down, their addition to the workforce does lower average wages on paper.

As the San Francisco Federal Reserve wrote regarding those two phenomena, “counterintuitively, this means that strong job growth can pull average wages in the economy down and slow the pace of wage growth.” The San Francisco Fed’s most recent calculations quantifying the effects of those variables were in the second quarter of 2018, and estimated a drag of about 1.5 percentage points. Assuming that remained constant for the year, it would imply nominal wage growth of 4.7% in 2018, or 2.26% post-inflation. 

While I chose to focus on 2018 in particular because it’s the first year to be impacted by the Trump tax cuts, wages in 2017 were also higher than advertised. Nominal private sector wages rose 2.5% in 2017 (about in line with inflation of 2.13%), but rose close to 4.5% (or over roughly 2% net of inflation) once accounting for retirees and those rejoining the workforce.

I’ve been using the consumer price index thus far in making all my inflation adjustments (because it’s the most commonly used inflation metric), but it does tend to overstate inflation relative to other inflation measurements. For example, if I instead measured inflation using the personal consumption expenditures index (PCE), inflation is roughly 0.5 percentage points lower than used in my prior calculations. In other words, real wage growth was an even higher 3% in 2017, and 2.76% in 2018, using the PCE.

By those figures, a household with an annual purchasing power of $50,000 when Trump took office should have the equivalent of roughly $53,000 today. They certainly haven’t noticed any wage stagnation.

Did the Kansas Tax Cuts Fail?

Authored by: Matt Palumbo

If you happened to read the Left’s reporting on the so-called “failed Kansas tax cuts experiment,” over the past couple of years, you couldn’t be faulted for concluding that on the issue of tax cuts, the science is settled. Just take a look at some headlines:

  • NPR: As Trump Proposes Tax Cuts, Kansas Deals With Aftermath Of Experiment
  • New York Times: Kansas Tried a Tax Plan Similar to Trump’s. It Failed
  • The Guardian: Kansas’s ravaged economy a cautionary tale as Trump plans huge tax cuts for rich
  • Mother Jones: Trickle-Down Economics Has Ruined the Kansas Economy
  • CNN: How the grand conservative experiment failed in Kansas

What do the Critics Allege?

The narrative is relatively simple. Kansas enacted tax cuts “for the rich,” had expected blockbuster economic growth that would help the tax cuts “pay for themselves,” when in reality the State’s economic situation worsened following the tax cuts, with dwindling revenues and no enhanced economic performance.

So What Actually Happened?

Kansas Gov. Sam Brownback promised tens of thousands of new jobs and an economic renaissance in Kansas. He was elected in 2011, pushed his legislative agenda through the Statehouse, and signed his tax cut bill in May 2012. It initially lowered the top personal income tax rate to 4.9 percent from 6.45 percent, and eliminated income tax on profits for owners of limited liability companies, sub-chapter S corporations and sole proprietorships.

State tax revenues dropped $700 million the first year of the scheme, but don’t blame the minuscule cut in the income tax for that. Blame the not-so-brilliant idea of making all profits from passthrough entities (and for the self-employed) tax exempt. According to Forbes, the passthrough provision was a last-minute addition that wasn’t properly researched, and it’s the achieves heal of the Kansas tax cuts.

Even the generally anti-tax Tax Foundation testified against the exemption, noting that it incentivizes corporations to restructure as LLCs without making any actual economic improvements. The Foundation cites this change alone as contributing $200-300 million towards Kansas’ State budget deficit. When the exemption was passed in 2012, it was projected that 191,000 entities would take advantage of the provision. By 2015, that number had grown to 393,814 – twice as much as expected. 

As they note, “It’s important to note here that while decreasing taxes is generally associated with greater economic growth, the pass-through carve out is primarily incentivizing tax avoidance, not job creation.” Indeed, the policy change incentivized tens of thousands of Kansans to claim their wages as business income, rather than from employment.

Kansas Economy Suffered Because Oil Prices, Not Tax Cuts

The Kansas economy grew 0.2 percent in 2015, which represented a decline from from 1.2 percent in 2014. Kansas ended 2015 with two quarters of economic growth, meaning they entered 2016 in a recession. By the end of 2016, Kansas ranked 45th in private-sector job growth for the prior 12 months. Colorado lead the region with the 10th highest rate of private-sector job growth, while Missouri and Nebraska rank 31st and 39th respectively. This is the basis for the claims the tax cuts failed to stimulate growth.

However, Kansas was in recession in 2016 for the same reason Canada also briefly fell into recession the same year: a collapse in oil prices. Kansas ranks 10th in crude oil production, and the price of a barrel of crude fell from around $100 in 2014, to an average of around half that in 2015 and 2016.

As one columnist at Investors Business Daily noted, “When these hard-hit sectors [oil and natural gas] are taken out of the equation, the remainder of the private sector workforce in Kansas outperformed its neighboring states of Missouri, Nebraska and Oklahoma.

 

Conclusion:

The Republican controlled Kansas legislature recently pulled the plug on these tax cuts, but it’s foolish to infer any national implications from them.

Poorly designed tax cuts don’t prove that tax cuts are bad, nor are the Kansas tax cuts even remotely comparable to the Trump tax cuts.