Republicans are basking in a wave of good publicity for their giant tax cut.
WalMart, the nation’s largest private employer, just bumped up its minimum wage. Cash bonuses are flowing to employees from major employers including AT&T, Comcast and big banks due to the big corporate tax cut. Automakers and giant engineering companies are promising big new U.S. investments.
The result is a giddy sense of hope for President Donald Trump and congressional Republicans who pushed through their unpopular tax-cut plan over total opposition from every Democrat in Congress.
“Great news, as a result of our TAX CUTS & JOBS ACT!,” Trump tweeted following the announcement by WalMart that it would boost its minimum wage by a buck, to $11 per hour.
Treasury Secretary Steven Mnuchin showed up in the White House briefing room Thursday to discuss how paychecks would climb next month and take a victory lap. “We thought it would be great for the economy, and we’re thrilled with, already, the number of companies we see reacting accordingly,” he said.
But economists have a warning: Enjoy it while it lasts.
While the wage hikes and bonuses are undoubtedly positive, they may produce only a temporary economic boost that fades in later months. Gains could be undercut by rising deficits caused by slashing federal revenue by at least $1.5 trillion over ten years.
“It will come at a cost,” New York Fed President William Dudley said Thursday in remarks to bankers in lower Manhattan. “There is no such thing as a free lunch.”
A number of crosscurrents could slow any boost from lower tax rates. The Federal Reserve is already hiking interest rates and could be forced to move faster if the bill creates a spike in inflation. Oil prices are rising again, sending gas prices above $3 a gallon in some areas of the U.S. and potentially offsetting the benefit of bigger paychecks.
“The bottom line is when it all nets out down the road, productivity won’t be higher,” said Mark Zandi, chief economist at Moody’s Analytics.
At the heart of it all is a giant existential question: With unemployment at just 4.1 percent, pressure was already rising on WalMart and other big employers to boost pay to attract and retain workers. Some of the wage hikes may have happened anyway without a big tax cut, though it’s hard to say for sure.
“It’s impossible to say right now whether it will be a long-term impact or just a publicity stunt,” said Thea Lee, president of the left-leaning Economic Policy Institute. “We’re very skeptical that there is any theory or historical evidence that corporate tax cuts in today’s economy will raise wages.”
And economists note that while one-time bonuses are nice — and certainly good PR for corporations and Republicans — the real story of the tax bill will be told in very large numbers over years, not in happy headlines from a few good weeks.
To be truly successful, economists say, the GOP tax bill will have to broadly lift wage growth over its current 2.5 percent annual pace and do it while lifting worker productivity, which has stalled.
And Republicans are banking on their tax overhaul, which slashed the top corporate rate to 21 percent from 35 percent, to lure back disaffected workers and increase the size of an American labor force that remains stuck near 30-year lows. None of this will be reflected in a handful of January announcements.
“It’s unfortunate that some supporters have latched onto these increases, especially these one-time bonuses,” said Alan Viard, a tax scholar for the right-leaning American Enterprise Institute. “It undermines our understanding of what we should expect to see.”
Still, while the long-term impact of the GOP tax bill remains very much in question, the short-term news for Republicans is remarkably good. In addition to all the wage and bonus announcements, major utility companies are dropping rates. Big companies are preparing to bring trillions of dollars in profits held overseas back to the U.S. And most taxpayers should see their paychecks get a little bigger soon as the result of lower individual tax rates.
That’s led to widespread gloating by Republicans hoping the tax-cut plan, derided by Democrats as a giveaway to the rich and widely unpopular in public opinion polls, will wind up being a boost to their 2018 election hopes rather than a drag.
“In just 20 days, #TaxReform has given Americans: More than $1.5 billion in bonuses; Increased wages; Lower electricity bills; Better job opportunities,” House Speaker Paul Ryan tweeted this week.
Democrats, however, are not giving up on using the tax bill as a weapon against vulnerable Republicans, arguing the bonus announcements are about PR and that the bill won’t ultimately lead to much faster long-term growth or higher wages. And they say it will still blow up the deficit.
“You can put lipstick on a pig but at the end of the day it’s still a pig,” Sen. Tom Carper (D-Del.) said in an interview. “Let’s just wait and see to what extent this tax cut bill, which really benefits wealthier people more than the folks in the middle and at the bottom, really turns out to be an economic boon. Most economists don’t think it’s going to give us a huge bump.”
Naysaying aside, early good news from the tax bill is flowing in from across industries.
AT&T and Comcast were quick to dole out $1,000 bonuses to employees in the wake of the tax bill’s passage, an end-of-year gift that, in AT&T’s case, won praise directly from Trump himself.
Toyota and Mazda recently announced they would locate a new car plant in Hunstville, Ala., something Trump immediately attributed to the tax cut bill. Boeing recently announced an additional $300 million in new investments as a result of the legislation.
Many of the nation’s largest tech companies are among the big beneficiaries of tax reform, but have yet to disclose whether and how they will spend their financial windfall. Apple, Cisco, Microsoft, Alphabet and Oracle are among the companies with billions of dollars in overseas bank accounts that will now be taxed at significantly reduced rate.
The corporate tax cut enacted last month is forcing many power utilities to cut their electric rates, and is likely to lead to a wave of rate reduction filings for pipelines and transmission lines at FERC. Many utilities have federal taxes written in the formulas that calculate their rates for power or gas, which will create almost automatic reductions.
Still the new is not uniformly good across the economy.
The December jobs report came in softer than expected. The Atlanta Fed estimates fourth-quarter GDP growth will clock in at 2.8 percent, which would again deny the U.S. economy, and Trump, of three quarters in a row of growth above 3 percent.
Opponents of the tax bill also point out other trouble: AT&T announced layoffs around the same time it announced bonuses. And WalMart, amidst its big announcement of an increase in the minimum wage, also announced on Thursday it would abruptly shutter 63 Sam’s Club locations. Those workers won’t be getting any raises.
“The bottom line is that the corporate tax cut is likely to be shared among shareholders, customers, and workers over the long run,” said Matt Weinzierl, a professor at Harvard Business School. “The exact split is a hot topic of debate, and I think the honest answer is that we really can’t predict it.”
Steven Overly, Cristiano Lima and Eric Wolff contributed to this report.
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