Is this the Means to the End we Desire?
There are so many articles, opinion pieces being shared on the tax reform proposals by the House and Senate and many friends and family are camped out, or more like entrenched, on both sides of the issue tossing hand grenades toward each other. So with my simplistic brain, I am trying to first understand what problem are we trying to fix and will the recommended solutions actually fix the problem we have identified. First I have to confess I am not a tax or finance expert. Also, I am very skeptical and suspicious of any “data” I read on the internet that I have not personally confirmed. I think many times we are provided “data” from groups with specific agendas to sway us either towards their way of thinking or against another’s way of thinking by issuing subjective interpretations of data or providing data out of context. I understand that is in most cases that is their job, so I am not necessarily disappointed in their approach I am just mindful of it. I am disappointed, however, with how easily we assume what we hear to be fact if it evidences our leaning or persuasion, rather than taking a step back and checking sources and doing our own homework. I am not a big fan of living on either end of the pendulum swing I tend to prefer to be grounded rather than flying high one way or the other. However, I do think everyone is entitled to their opinions and it doesn’t threaten me if it does not align with my thinking. I just want us all to be using accurate data when making or reinforcing our positions.
What is the problem? In my humble opinion, the United States is on this steady economic growth path but the message we are hearing from all our leaders is that things are not good. Specifically, job growth is stagnant.
What is the current situation? I looked at the revenue of the top 100 companies according to Forbes in 1985 versus 2014. Why 1985 and 2014? Those were the dates that straddled the financial crisis in 2009 and the dip in 2011 to get a true baseline. So the total revenue for the top 100 companies (according to Forbes) in 1985 was $1 trillion and the profits were $1 billion, the top 100 companies (according to Forbes) in 2014 was $7 trillion and profits were $755 billion. So we see a nice healthy 600% increase in revenue and an incredible 75000% increase in profits, so life is good for our top American companies. We want our companies to do well because we know that means we will all win in this scenario. So let’s look at other data what are the average private wages in 1985 according to the US Bureau of Labor Statistics the average hourly rate was $8.61 and in 2014 it was $20.73 so this is an increase of 240% and payroll taxes for Social Security and Medicare, commonly referred to as the entitlements, increased from 7.05% to 7.65%. an increase of 108%. The CEO compensation increase at the same time increased 937%. Further, during my randomly selected time frame, I looked into what is the difference between the earning ratio of worker to CEO, in 1985 the CEO to private worker compensation ratio was $30 to $1 and in 2014 it was $300 to $1.
Now for those who need to know what was the Republican versus Democrat leadership during this 29 years time span I selected, I have the following data; there was a Republic President for 17 years and a Democrat President for 12 years. Over this 29-year timeline, the House of Representatives had a Republican majority 12 years and Democrats 17 years, The Senate had a Republican majority 16 years and Democrats 13 years. Republicans controlled both the House and the Senate 10 of those years and the Democrats controlled both 19 years. So what does this tell us? In my opinion nothing really, I just wanted to state exactly what it was because I have a feeling some people who read this really need to know this in order to stay with me.
So the economy seems to be doing well, the top corporations seem to be doing well and are cash-flush, but it appears there are many Americans not benefiting from this economy. So again in my humble opinion, the real problem is the depressed labor market and this is a complex issue with many nuances, however, to keep things simple I am going to just leave it there. And my concern is that I believe we are trying to help the depressed labor market by providing corporate tax relief. I say concerned because I am not sure this fix solves our problem. Historically corporate tax relief doesn’t necessarily translate into more jobs or higher wages. I am not against corporate tax relief I am just not sure it will have the desired effect. A corporation’s mission is to increase returns for their shareholders and investors so the incentive is to actually pay down debt, or replace human labor whenever possible. They focus on reducing costs to be able to make things or provide services at less cost and boost the profit margins and returns. And many times that is done by reducing labor through automation or mechanization. To further illustrate this concern, recently Gary Cohen, the current administration’s Chief Economic Advisor, attended a gathering of CEO’s hosted by the Wall Street Journal. A moderator at the gathering asked the crowd through a show of hands if lower corporate taxes would increase their capital investments when only a few raised their hands. Cohen asked, “Why aren’t the other hands up?” Again Corporate profits, while fantastic for the shareholders, do not always manifest jobs and increased wages.
So what do I think the answer is I believe the real answer to increasing the job market and wages and provide the biggest near-term boost to gross domestic product comes from investing in our infrastructure. I sincerely wish Congress would have taken up infrastructure investment before tax reform, there seems to be more incentive for both sides of the pendulum to come together with infrastructure investment. Federal transportation infrastructure investment accounts for just 1.6 percent of gross domestic product (GDP), a reduction from peak investment levels of 2.2 percent in the 1960s., leaving more of the responsibility to state and local governments. The US ranks 15th in the world for infrastructure expenditures as a percent of GDP.
In its most recent report card on the condition of America’s infrastructure, the American Society of Civil Engineers (ASCE) gave U.S. infrastructure a D+ or “poor” rating. The engineers estimated the cost of bringing America’s infrastructure to a state of good repair (a grade of B) by 2025 at $4.6 trillion, of which only about 55 percent has been committed. Improving roads and bridges alone would require $1.1 trillion more than states, local governments, and the federal government has allocated. Schools need another $380 billion beyond what’s been invested. The Congressional Budget Office is projecting a $1.7 trillion increase in the federal budget deficit from the current House of Representatives tax reform bill. The Senates tax reform bill is projected to increase the federal budget deficit by $1 trillion. If we could instead invest the projected deficit and finance the new investment through new federal government debt rather than a progressive increase in taxation, a regressive increase in taxation, or cuts to government transfer programs we could have an impact on the labor market and wages as well as GDP. And the benefits of automation and innovation in infrastructure means the labor forces employed are more efficient and more improvements can be achieved. Jobs created would be disproportionately filled by workers without a four-year university degree. When the lower and middle class has disposable income they consume, which also benefits small business.
We need to modernize our infrastructure on a National basis through investment in driverless technologies, transit-oriented development, public schools, U.S. ports and inland waterways. Our infrastructure investments should focus on sustainable and resilient improvements. Properly executed infrastructure investment offers many ways we can put people to work with good wages and increase our economic engine while advancing our communities and benefiting the future generations of our country.
Men build too many walls and not enough bridges ~Joseph Fort Newton