Corporate America is beginning to frame any positive announcement in ways that Republicans say is evidence their tax bill is already boosting the economy. The truth, however, is that the economic trends at work long predate the passage of the tax bill — or even Donald Trump’s inauguration.
The real change is political.
Back in October 2016, for example, Apple announced plans to make $16 billion worth of capital expenditures in fiscal year 2017, up from $12.8 billion in the previous year. Apple is both the world’s biggest company and one of its most iconic and recognizable brands. These facts — duly reported in the company’s annual Form 10-K filed with the Securities and Exchange Commission — were widely noted in the business and technology press but weren’t considered to be a major political story.
By the same token, when Walmart announced a wage increase in February 2015 and then another one in January 2016, everyone got the basic story: The years-long process of economic recovery was underway, and a company forced to share a bit more money with its workforce wanted to milk the moment for whatever PR opportunity it was worth.
Apple’s announcement on Wednesday that it “expects to invest over $30 billion in capital expenditures in the US over the next five years” (not in any clear way an increase over its prior pace), by contrast, was immediately framed by the company itself as linked to the recent Tax Cuts and Jobs Act. It was then embraced by President Trump as a personal vindication of his policies.
I promised that my policies would allow companies like Apple to bring massive amounts of money back to the United States. Great to see Apple follow through as a result of TAX CUTS. Huge win for American workers and the USA! https://t.co/OwXVUyLOb1— Donald J. Trump (@realDonaldTrump) January 17, 2018
Similarly, Walmart’s 2018 wage announcement — unlike its 2016 or 2015 predecessors — was hailed by Senate Majority Leader Mitch McConnell as a partisan political victory.
The explicit linkages of these wage and investment moves to the recently passed tax cuts are ridiculous. But Democrats have a hard time punching back on them because the real truth — that for the first time in a long time, the underlying labor market is really healthy — is honestly not much of a burn on the GOP.
And corporate America is happy to play its appointed role in this partisan dance because rich business executives love GOP tax cuts and business-friendly regulation.
More broadly, the CEO class in America has decided that a steady dose of flattery is the best way to keep Trump focused on his current embrace of hard-right economic policy rather than following through on the populist impulses he voiced on the campaign trail. The result is that fairly banal aspects of the business world have gotten enmeshed in the political process.
While the results thus far seem mutually beneficial to the powers that be in both corporate America and Washington, it’s an incredibly unstable dynamic that could have unpredictable results when circumstances change. Democrats, understandably, are profoundly annoyed by big businesses’ decision to throw in so heavily on behalf of the Trump administration. This is radicalizing party leaders’ attitudes as they face heavy grassroots pressure to move to the left.
What’s actually going on with Apple
As Jordan Weissman writes at Slate, there’s something peculiar about conservatives attributing Apple’s capital expenditure and job creation plans to the GOP tax bill, something obscured in the company’s messaging.
Via @CNBC: “.@Apple said on Wednesday it will invest $350 billion in the U.S. economy over the next 5 years, touting the creation of 20,000 new jobs & a new campus thanks, in part, to the prospect of #taxreform.” https://t.co/m9dDZxD9H1— Dean Heller (@SenDeanHeller) January 17, 2018
The release mentioned the tax bill specifically only when it said that thanks to a large tax cut that Apple is getting, it is about to pay a ton of taxes to Uncle Sam.
That sounds a bit paradoxical, but here’s how it works: Apple, like a lot of big American multinational companies, engages in various accounting shenanigans to attribute as much of its worldwide profits as possible to subsidiaries located in low-tax jurisdictions — in Apple’s case, primarily Ireland.
A lot of money has piled up on the books of Apple Ireland, which is what people mean when they say Apple has billions in “overseas cash.” The funds actually aren’t physically located overseas (whatever that would mean in the context of a modern financial system) at all. They also mostly aren’t cash.
Instead, a bunch of bonds (some issued by the government, others by corporations) are legally owned by Apple Ireland. The significance of their Irish legal status is that they can’t be paid out to shareholders as bonds or dividends. To pay out the cash, the money would first have to be “repatriated” to Apple proper and taxed at a 35 percent rate.
The new tax law changes this in two ways. First, it delivers a big cut in the corporate tax rate that will be levied on Apple going forward. Second, it requires companies with big overseas holdings to “deem” their offshore money repatriated and pay a 15 percent tax on it.
That’s great news for Apple shareholders. Years’ worth of tax avoidance strategies are being rewarded with an enormous discount — Apple will pay 15 percent rather than the 35 percent it previously owed — but with the caveat that Apple actually has to pay the money.
That’s what Apple’s press release said about the tax bill: Thanks to its passage, Apple is going to pay a huge one-time discount tax charge and obtain a big stack of cash that can be paid out as dividends and buybacks.
It then tacked on a vague estimate of its preexisting capital expenditure plans, which Republican politicians ran around the country touting.
This kind of thing keeps happening
An earlier round of this came in late December, when AT&T announced it was paying out a $1,000 holiday bonus to its employees and attributed the decision to the GOP tax bill.
AT&T, like other telecommunications companies, has received some significant regulatory favors from the Trump administration in the form of new rules rescinding net neutrality regulation and allowing internet service providers to sell users’ web browsing data. They’re also struggling to gain regulatory approval for a proposed merger with Time Warner. Their framing of the bonus as a tax bill payoff was immediately hailed by GOP politicians, and they were swiftly followed by Comcast and two major banks.
Now, if you stop to think about it for a moment, it’s pretty clear that Donald Trump did not invent the practice of the corporate holiday bonus in December 2017. Indeed, according to the Bureau of Labor Statistics, about a quarter of private sector workers got a “holiday,” “year-end,” or “cash profit-sharing” bonus back in 2016:
It will take months for the data to become available to assess whether more bonuses were actually paid in 2017 than in 2016. And even if they were, there’d be no particular reason to think bonuses were paid because of the tax law. But the political upside to companies in regulated industries saying that whatever bonuses they are paying for whatever reason were due to the tax law is pretty clear.
By contrast, back in March 2016, when Comcast agreed to an across-the-board 2 to 3 percent pay raise with 10 months of retroactive back pay, it didn’t see any particular political upside in showering the Obama administration with praise.
The case for the tax bill has nothing to do with bonuses
The hurly-burly of partisan politics aside, obviously if your intended policy goal was to give people $1,000 bonus checks, then passing a complicated, expensive corporate tax cut would be a strange way to do it.
Back in 2008, House Democrats and then-President George W. Bush agreed on a plan to have the IRS simply mail “refund” checks to taxpayers as a form of economic stimulus. Paul Ryan, Mitch McConnell, and the Trump administration could have done something similar if they wanted to.
They didn’t, because the theory of the Republican tax plan is completely different, namely that cutting corporate tax rates will incentivize more business investment in capital goods, thus spurring higher productivity, more economic growth, and higher wages over the long run. Something less like the short-term bonuses that Comcast and AT&T attributed to the tax bill and more like the multi-year capital investment scheme that Republicans claimed Apple had attributed to the tax bill.
But while it’s certainly possible that theory will pan out, Apple, which has been investing at roughly that pace for years, certainly doesn’t prove the case. Both politicians and the media are impatient, but the sad truth is it will take a long time for us to have any sense of what the long-term impact of the new tax system is.
The not-so-damning truth: the economy is doing well
The problem for Democrats looking to shut down talk that the Trump tax cuts deserve credit for bonuses and pay increases isn’t so much that Trump is right about this. It’s that the actual truth also reflects well on Trump — the economy is in good shape overall.
Trump, of course, exaggerates this in his own rhetoric — he exaggerates everything. But it’s fundamentally true. After years of being very high, the unemployment rate was pretty low when Trump took over a year ago, and it’s only gotten lower since then. A full employment economy means that good things happen for workers. Companies looking to expand production find that they either need to raise pay to attract experienced workers or they have to be open to hiring nontraditional candidates like ex-convicts transitioning back into the workforce.
Consumer confidence numbers are reaching their highest levels of the 21st century as families feel more secure in their situations. And the stock market is doing extremely well, providing a very solid extra boost to affluent families.
Bloomberg consumer comfort index has risen to a new 17-year high. The data suggest a rebound in the Michigan index in tomorrow's report after a dip last month pic.twitter.com/bfq0KiggAC— Jim O'Sullivan (@osullivanEcon) January 18, 2018
Now, of course, Trump is not personally responsible for any of this. The trends in 2017 economic data are broadly similar to what we saw in 2016 and 2015 and in several previous years as well. After falling into a very big hole in 2008 and 2009, the labor market has been steadily strengthening for years. For the first several years’ worth of recovery, that took the form of relatively rapid job creation paired with very weak wage growth due to the large stock of unemployed workers.
Over time, job creation started to slow — fewer new positions were added in 2017 than in 2016, and fewer in 2016 than in 2015. But wage growth improved as the country started to run out of unemployed people.
But to give Trump his due, back during the election, Democrats were hardly saying that electing Trump would simply allow the Obama recovery to continue unimpeded. They warned that he was dangerous and unfit for office, and would likely crash the stock market and tank the economy. So far, nothing bad has happened. The economy has remained in Janet Yellen’s capable hands, and Trump’s selection to replace her next year, current Fed Board of Governors member Jerome Powell, is well-qualified and well-regarded. There’s no particular reason to expect any trouble.
Corporate America risks reaping the whirlwind
All that said, Trump is strikingly unpopular — less popular at this point in his term than Harry Truman, Dwight Eisenhower, John F. Kennedy, Lyndon Johnson, Richard Nixon, Gerald Ford, Jimmy Carter, Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, or Bill Clinton. Before Truman, of course, there was no public opinion polling, so we don’t know what people thought.
Trump is starting his second year with the lowest approval rating of any modern president. Under those circumstances, it’s not exactly obvious that it’s savvy politics for corporate America to go all-in on partisan politics in an unprecedented way.
Companies could choose to lobby quietly for Republican policies they like without overtly entering the fray in this way — executives loved Bush’s tax cuts too but didn’t spend the mid-aughts sending out an endless stream of press releases crediting the president with every new hire and every raise.
By engaging in this way, they are perhaps marginally increasing the likelihood of receiving favorable treatment from the White House. But they are also spurring the ongoing radicalization of Democratic Party elites. Under both Obama and Clinton, Democrats saw themselves as essentially performing a balancing act between a range of legitimate interests — including big business.
At the New Hampshire primary election in 2008, Obama delivered his famous “Yes, We Can” speech and explained his vision this way: “We can bring doctors and patients, workers and businesses, Democrats and Republicans together, and we can tell the drug and insurance industry that, while they get a seat at the table, they don’t get to buy every chair, not this time, not now.”
But that’s starting to change. Late last year, a Democratic senator who told me he thinks his caucus is getting pulled too far to the left also casually mentioned that a government takeover of the entire broadband and cable industry might be a good idea. And the Democrats who actually think of themselves as left-wing are thinking bigger than that.
A business-friendly attitude from Democrats was already under pressure from Bernie Sanders and his wing of the party. But corporate America’s willingness to delve head first into partisan politics on the Republican side is even changing the thinking of Democrats who never thrilled to Sanders’s call.