Arguing with Zombies by Paul Krugman

Author:Paul Krugman
Language: eng
Format: epub
Publisher: W. W. Norton & Company
Published: 2019-11-12T16:00:00+00:00

THE TRUMP TAX CUT: EVEN WORSE THAN YOU’VE HEARD

January 1, 2019

The 2017 tax cut has received pretty bad press, and rightly so. Its proponents made big promises about soaring investment and wages, and also assured everyone that it would pay for itself; none of that has happened.

Yet coverage actually hasn’t been negative enough. The story you mostly read runs something like this: the tax cut has caused corporations to bring some money home, but they’ve used it for stock buybacks rather than to raise wages, and the boost to growth has been modest. That doesn’t sound great, but it’s still better than the reality: no money has, in fact, been brought home, and the tax cut has probably reduced national income. Indeed, at least 90 percent of Americans will end up poorer thanks to that cut.

Let me explain each point in turn.

First, when people say that U.S. corporations have “brought money home” they’re referring to dividends overseas subsidiaries have paid to their parent corporations. These did indeed surge briefly in 2018, as the tax law made it advantageous to transfer some assets from the books of those subsidiaries to the home companies; these transactions also showed up as a reduction in the measured stake of the parents in the subsidiaries, i.e., as negative direct investment (Figure 1).

But these transactions are simply rearrangements of companies’ books for tax purposes; they don’t necessarily correspond to anything real. Suppose that Multinational Megacorp USA decides to have its subsidiary, Multinational Mega Ireland, transfer some assets to the home company. This will produce the kind of simultaneous and opposite movement in dividends and direct investment you see in Figure 1. But the company’s overall balance sheet—which always included the assets of MM Ireland—hasn’t changed at all. No real resources have been transferred; MM USA has neither gained nor lost the ability to invest here.

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