Bull Trap: The False Promise Of Tax Cuts

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, I did a fairly extensive analysis on the release of the 9-page “Trump Tax Cut” plan. 

The most important aspect of that discussion was the difference between 1982, the last time there was permanent tax reform, as compared to today.

Comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.  Consider the following table:‘”


The differences between today’s economic and market environment could not be starker. The tailwinds provided by initial deregulation, consumer leveraging and declining interest rates and inflation provided huge tailwinds for corporate profitability growth.

Most importantly, when tax cuts were implemented in the mid-80’s, the U.S. economy was just coming out of back-t0-back recession versus being in the third longest economic expansion on record to date.

However, besides the fact the economic backdrop is diametrically opposed to what is was during the “Reagan years,” we also need to look at the backdrop of who actually pays taxes to begin with.

Who Pays Taxes

While the current tax plan has not defined actual income levels as of yet, we can make some assumptions from previous iterations of proposals. The entire premise behind the tax cuts is that it will unleash economic growth, generate millions of jobs, bring back manufacturing to America and lead to higher wage growth.

However, given that roughly 70% of economy is driven by personal consumption, the tax cuts will need to increase the amount of disposable incomes available to individuals to expand consumption further, thereby increasing overall economic growth.

So, here is the issue of tax cuts for the middle class. The chart below shows “who pays what in Federal taxes.”

Look at that chart closely.

  • 50% of ALL taxes are paid by the top 10% of income earners.
  • The other 50% of ALL taxes are paid by remaining 90%.
  • The BOTTOM 80% only pay 36% of ALL taxes.

But it is even more glaring when we look at the taxes paid by just the top 20% of income earners.

Given that roughly 2/3rds of income taxes are paid by the top 20%, the reality is that tax cuts will have their greatest impact in reducing the tax burden of those individuals.

The picture gets worse when you look at just INDIVIDUAL tax liabilities. The bottom 80% currently pay only about 18% of individual taxes with top 20% paying the rest. Furthermore, the bottom 40% currently have a NEGATIVE tax liability, and with the new tax plan cutting many of the deductions currently available for those in the bottom 40%, it could be the difference between a tax refund and actually paying taxes. 

Of course, those in the top 20% of income earners are likely already consuming at a level with which they are satisfied. Therefore, a tax cut which delivers a few extra dollars to their bottom line, will likely have a negligible impact on their current levels of consumption.

The problem, as I have detailed previously, is that the vast majority of Americans are living paycheck to paycheck. According to CNN, almost six out of every ten Americans do not have enough money saved to even cover a $500 emergency expense. That lack of savings can be directly contributed to the lack of income growth as noted recently by Bloomberg:

“Newly released income and wealth data from the Federal Reserve Board’s triennial Survey of Consumer Finances show that America’s richest families enjoyed gains in income and net worth over the last decade. Not part of the top 10 percent? Then your income probably fell. The data show that families ranked in the highest percentile saw an income gain of $16,300 from 2007 to 2016. Those below are still making less money.”

So, with 80% of Americans living paycheck-to-paycheck, the need to supplant debt to maintain the standard of living has led to interest payments consuming a bulk of actual disposable income. The chart below shows that debt has exceeded personal consumption expenditures. Therefore, any tax relief will most likely evaporate into the maintaining the current cost of living and debt service which will have an extremely limited, if any, impact on fostering a higher level of consumption in the economy.

But again, there is a vast difference between the level of indebtedness (per household) for those in the bottom 80% versus those in the top 20%.

But Corporate Tax Cuts Are The Key, Right?

Yes, corporate tax cuts will immediately drop to the bottom lines of corporate income statements. When that earnings boost is combined with any repatriated dollars to buy back shares, there will be an earnings expansion for the first year. (You didn’t REALLY think they would use repatriated dollars to expand production and hire workers did you?)

Importantly, while there is a boost to bottom line earnings, there was NO increase in top-line revenues.

However, from an economic perspective, tax cuts for corporations will have only a minor impact in reality. The first chart below shows total federal tax revenue by source.

As you can see, corporate taxes are less than 10% of the total taxes collected by the Government.

But more importantly, it is the promise of cutting the corporate tax rate from 35% to 20% that has gotten the financial markets all excited.

There’s just one problem. Roughly 80% of all corporations already pay rates far lower than 20% and any reduction in deductions for corporations will actually lead to higher taxes being paid. As shown below, 90% of all corporations currently have a tax rate below 10%.

It is a myth that the U.S. has the highest corporate tax rate in the world. We simply don’t.

This was also an observation made by Dr. John Hussman this week:

“I’ll add that another feature of Wall Street’s blissful delusion is the notion that ‘U.S. corporate taxes are the highest in the world.’ It’s striking how disingenuous this claim is. The fact is that among all OECD countries, the U.S. is also the only country that does not levy any tax at all on corporate value-added in the production of goods and services.”

“The main point is this. The argument that U.S. taxes on corporate profits are somehow oppressive relative to other countries is an apples-to-oranges comparison. It wholly ignores that the U.S. levies no value-added tax on corporations at all, whereas the value-added tax is the principal revenue source for most other countries. The rhetoric on corporate taxes here is unfiltered effluvium.

The chart below presents a clearer picture of U.S. corporate profits taxation. Actual taxes paid by U.S. companies, as a share of pre-tax profits, have never been lower, outside of the depths of the global financial crisis.”

Again, as with individual taxes, today ain’t 1982 or 1986.

The effective outcome of tax cuts at this juncture will result in:

  • Only a minimal impact to economic growth, if any at all. 
  • An expansion of the debt of between $2-5 Trillion depending on next recessionary drag.
  • A ballooning of the budget deficit as entitlements rise with the expansion of child tax credits. 
  • A further divide in the “wealth gap” between those in the top 10% and the bottom 90%. 

This issue of whether tax cuts lead to economic growth was examined in a 2014 study by William Gale and Andrew Samwick:

“The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.


In addition, tax cuts as a stand-alone policy (that is, not accompanied by spending cuts) will typically raise the federal budget deficit. The increase in the deficit will reduce national saving — and with it, the capital stock owned by Americans and future national income — and raise interest rates, which will negatively affect investment. The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the structure of the tax cut itself and the timing and structure of its financing.”

Again, the timing is not advantageous, the economic dynamics are not supportive and the structure of the tax cut itself is not self-supporting.

As Hussman concludes:

“The potential effect of even a substantial percentage reduction in statutory rates for several years is quite small when the present value of the tax reduction is compared with existing equity market capitalization. The likely cumulative impact comes to just a few percent of stock market value.


Against that, consider that the most reliable market valuation measures we identify (as measured by their correlation with actual subsequent S&P 500 total returns in market cycles across history) are currently between 2.5 and 2.7 times their historical norms (that is, 150% to 170% above those norms).


Put simply, it seems misguided to imagine that ‘tax reform’ will somehow make the most obscene speculative bubble in U.S. history something other than the most obscene speculative bubble in U.S. history.”

Put simply, you can’t solve a debt-problem with tax cuts.


NickyGall Thu, 10/05/2017 - 08:08 Permalink

Here is an interesting look at where U.S. taxpayers' dollars end up going: https://viableopposition.blogspot.ca/2017/09/where-do-american-taxpayers-spent-their.html While we generally receive information on total government or total federal department spending, we rarely get a breakdown of exactly which companies benefit from the spending habits of Washington. 
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jcaz NickyGall Thu, 10/05/2017 - 08:37 Permalink

But increasing taxes won't pay off the debt or boost the economy either, so........MAYBE it's time to quit focusing on how much money is paid into taxes, and onto how our tax money is actually spent-  I'm thinking that MAYBE there might be some potential for improvement there...... Maybe........

In reply to by NickyGall

MoreFreedom jcaz Thu, 10/05/2017 - 13:06 Permalink

You're exactly right jcaz.  But the RINOs that dominate the GOP always focus on "tax reform" rather than cutting spending, because they depend upon campaign cash from the rich owner of big corporate (and non-profit) recipients of that spending.  Plus you've got the politicians on both sides selling retirement safety and health care redistribution/welfare to people who are happy to take it, even though we're wasting wealth and the promises won't be kept.The big problem with the article, is the reality that production and jobs move to where business owners are taxed less by government. "When that earnings boost is combined with any repatriated dollars to buy back shares, there will be an earnings expansion for the first year. (You didn’t REALLY think they would use repatriated dollars to expand production and hire workers did you?)Importantly, while there is a boost to bottom line earnings, there was NO increase in top-line revenues."Roberts provides no evidence for his assertions.  Why the use of past tense rather than future tense for "there was NO increase in-top line revenues" other than to conflate his assertion with past history (of which no historical evidence is provided)? Lower corporate taxes will lead to more jobs,  increases in wages and more production as companies with lower tax burdens have a big competitive advantage globally.  And the info on real corporate tax rates is also misleading, because big corporations employ a lot of people.  According to this link, http://honesthypocrite.blogspot.com/2011/11/where-are-jobs-small-busine…, corporations > 500 employees employ half the workers in the US.  Those would be the business with the most to gain from corporate tax cuts, contrary to Roberts' claims that cutting corporate income taxes doesn't matter because they are already low.  The top qunitile of businesses, employ 60% of the workers, where even Roberts admits, they pay 80% of the corporate taxes.  And note, contrary to his statement that "As shown below, 90% of all corporations currently have a tax rate below 10%." his chart doesn't show tax rates, it shows share of corporate taxes.  Roberts seems to have an agenda against cutting taxes.  I'd rather cut taxes and starve the beast because the politicians almost always spend more than they receive, and love to raise spending every chance they get.

In reply to by jcaz

new game Thu, 10/05/2017 - 08:21 Permalink

just moar goldman controlled bullshits for the plebs to feel good about.a fuking tax cut, wow can't wait to save a whole fuking 200 dollas.all whilst they save billions. fukheads.revolt-a-coming slowly but surely.can't wait for the petro dolla regime to fail.SA is the kingpin and trump is sure to do something to piss them offf.already Iran, Russia, Venz and China making preparations to trade oil off the dolla regime.bring it on, as something(the next black swan)will trigger it!trump the tweeter in charge, 10,9,8,7....just guessin... 

overmedicatedu… Thu, 10/05/2017 - 08:27 Permalink

trying to explain a criminal enterprise with economic theory and data..is at best foolish at worst a cover up..they live..and they live well..concentration of wealth and power continues, right bezos? right buffet and soros?? you get the idea.the size of the .gov debt means nothing..it is who owns the debt that means everything

Hkan Thu, 10/05/2017 - 08:31 Permalink

The illogical becomes logical depending on presentation. Or. People wanna hear what they wanna hear.Since living in a perfect era top rated super developed human beeings......illogicality will work.

mjcarr51 Thu, 10/05/2017 - 08:30 Permalink

Aaaaaah, ............ it's a TRAP, .............. it's a TRAP. THAT's why at this very moment, the SPZ's are tradding at an all time high. Now I understand. It's a TRAP. 

Oldwood Thu, 10/05/2017 - 08:33 Permalink

So business is getting this hige break on taxes and Chinese companies share similar tax burdens so the reason us companies can't compete is the American worker. Fuck off.Buy something....almost anything from China and tell me how their taxes and overhead are on parity with us, when it is virtually free.Part of the problem we face is that so few in this country have a fucking clue what it takes to actually make something, so they don't question these ridiculous low prices....prices that are below ANYBODY'S costs. So by all means, let's tax the fuck out of business....and throw in VAT just to keep the Euro freaks happy, so nobody has a clue WHY our costs are crazy high and China's are crazy low.Tax lovers always looking for something for nothing, money from heaven.....like American consumers don't pay every dime of business's taxes and overhead.Will we ever tire of these rationalizations that defy any normal person's common sense?/

To Hell In A H… Dode415 Thu, 10/05/2017 - 12:17 Permalink

Yes you can, according to many of the dimwit, brainwashed low/no tax zerohedgers on here. Tricklenomics/A rising tide lifts all boats bovine-manure, is held as steadfast as the Gospel in the bible. Zerohedge is full of dogmatic cunts without a brain of their own, who just spout other people unquestionably, because they don't have the brainpower themselves.I was riling against neoliberal economics 20 years ago and got labelled a liberal for doing so. It is as obvious as night follows day, and that a piss is followed by a shit, that the western world, led by the USSA, we are starting to see the brazen formation of a fascist state, in the original/traditional sense of what fascist means and the sad fact is, this move by the state is endorsed by many zerohedgers without them realising through the support of other polices, they are enabling a fascist state.Corporate power has consumed both the GOP and the Dems, and this tax cut is symptomatic of the captured state by the hands of an Oligarchy.

In reply to by Dode415

headhunt Thu, 10/05/2017 - 09:05 Permalink

The annual inflation rate comparison is a joke.If you include energy and more importantly tax rates it is much, much higher.The amount of taxes we pay has blown away all other 'inflation' indicators.The number of taxes on virtually everything, what are known as 'hidden taxes', suck huge quantities of money out of the economy all to  support inflated government union salaries, healthcare, pensions and politicians. ---> Now there is the inflation indicator.Also the game of 'percentage of taxes paid' is BS, the amounts of money earned by these huge corporations dwarfs anything in past history. They don't show the actual dollar amount paid because it doesn't work for this BS meme.

Herdee Thu, 10/05/2017 - 09:22 Permalink

Government will never get its' spending under control. Look at Trump, how much has he axed within government ranks? Next to nothing. It's giant socialism that is destroying the country. These bums have this whacked-out mission of world domination. You have to wonder what fucking drug the whole thing is on?

Thugocracy Thu, 10/05/2017 - 09:52 Permalink

Idiot savants notwithstanding, the scribblers are just printing money to keep the same degenerates in charge. Hard to take them seriously when their detachment from reality is so destructive. Psychobabble with numbers is still just psychobabble.

haruspicio Thu, 10/05/2017 - 09:53 Permalink

Why not show the charts as % of total income instead of gross paymwnts and you will se that the rich pay way less % wise than the poorer people.

Deep Snorkeler Thu, 10/05/2017 - 09:58 Permalink

The Middle Class Tax CutIs already gone, having oozed intothe hands of the Pentagon,medical care bleeding complex, Wall Stand mega-monster corporations.  You are already in Elysium.

Arrow4Truth Boris Gudonov Thu, 10/05/2017 - 11:07 Permalink

Whereas the U$ has engaged in aggression since inception, exploiting resources, murdering millions of innocents, destroying infrastructures of sovereign nations, etc,. etc., etc., it would be safe to determine that the U$ is it's own worst enemy. Won't it be grand when it destroys itself from within. Defense spending my ass. Oh, puhleeze Mr. Prez, prateck us from the hornets that you've stirred-up, so we can raise our chiluns to expect more free shit. 

In reply to by Boris Gudonov

Boris Gudonov Thu, 10/05/2017 - 10:12 Permalink

America doesn't have a tax problem, it has a spending problem.  During the Reagan years, tax rates were reduced but total tax take grew because the economy grew more.  But all of that increased revenue was spent, and more, by increasing budgets, so the deficit grew.  Again, in the late 90's taxes were cut, and revenues grew nonetheless, but this time, spending was cut as well, and deficits disappeared.The answer to to much US debt is simple:  cut taxes, and cut spending even more.  But it will never happen.  Americans want more, more more free stuff they didn't pay for.  

INTJ Economist Boris Gudonov Thu, 10/05/2017 - 11:20 Permalink

Cut government spending and a recession (or depression) will soon follow.  This is simple accounting.  The US Gov't HAS TO spend USD into existence before it can circulate through the economy.  Gov't debt = private surplus.  Private sector cannot create USD which means if the government cuts spending the private sector has to go further into debt to offset the contraction.  it's not a sustainable position to be in.  us gov't is NOT like a household because it creates its own currency.

In reply to by Boris Gudonov

hanekhw Thu, 10/05/2017 - 11:13 Permalink

Revisionist history ignoring the Regan years. We don't HAVE a revenue problem. We have a SPENDING problem and that will only end when the fiat money becomes worthless.

ElTerco hanekhw Thu, 10/05/2017 - 15:24 Permalink

Correction: We have a debt problem, and overspending is the worst part of that. But cutting taxes for the rich is just going to exacerbate the (debt) problem, especially given that 70% of the economy is personal-consumption based. 10% of the population can't significantly dent the 70% consumption component.

In reply to by hanekhw