Tax cuts to give little lift to U.S. economy: Fed paper

Reuters Staff

SAN FRANCISCO (Reuters) – The economic boost from U.S. President Donald Trump’s $1.5 trillion tax cut will probably fall well short of most analysts’ “overly optimistic” expectations, two economists wrote Monday in the San Francisco Federal Reserve Bank’s latest Economic Letter.
FILE PHOTO: U.S. President Donald Trump delivers remarks to mark six months since the passage of the Tax Cuts and Jobs Act, in the White House East Room in Washington, U.S., June 29, 2018. REUTERS/Jonathan Ernst

Instead of the boost to GDP growth this year of about 1.3 percentage points estimated by the Congressional Budget Office and other forecasters, they wrote, “the true boost is more likely to be less than 1 percentage point,” with some studies pointing to as little as zero.

That is because fiscal stimulus has a large effect on economic activity when unemployment is high and personal finances are constrained, but it delivers much less of a jolt when the economy is strong, they wrote.

In June the U.S. unemployment rate rose slightly to 4 percent, much lower than most economist estimates of a sustainable rate, as businesses added many more jobs than expected and more job seekers entered the labor force.  Governments typically increase deficits with spending and tax cuts when times are tough, not when an economic expansion is barreling toward becoming the longest running in U.S. history.

Doing so raises concerns about the nation’s capacity to combat future downturns, particularly if it does not deliver outsized economic gains in the meantime, the report suggests.

“Recent research finds that the effects of fiscal stimulus on overall economic activity are much smaller during expansions than during downturns,” wrote Tim Mahedy and Daniel Wilson, fomer and current San Francisco Fed economists, respectively.

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‘Morally Bankrupt’: After Tax Cuts for Richest, House GOP Unveils $5.4 Trillion Attack on Nation’s Safety Net

The Republican budget’s “extreme cuts to healthcare, retirement security, anti-poverty programs, education, infrastructure, and other critical investments are real and will inflict serious harm on American families.

Speaker of the House Paul Ryan (R-Wis.) answers questions on the possibility of a government shutdown at the U.S. Capitol on January 18, 2018 in Washington, D.C. (Photo: Win McNamee/Getty Images)

With the nation’s attention rightly fixated on President Donald Trump’s horrific treatment of immigrant children, House Republicans on Tuesday quietly unveiled their 2019 budget proposal that calls for $537 billion in cuts to Medicare, $1.5 trillion in cuts to Medicaid, and four billion in cuts to Social Security over the next decade in an effort to pay for their deficit-exploding tax cuts for the wealthy.

“It’s morally bankrupt, patently absurd, and grossly un-American,” the advocacy group Patriotic Millionaires said of the GOP’s budget proposal, which calls for $5.4 trillion in spending cuts from major domestic programs.

Robert Greenstein, president of the Center on Budget and Policy Priorities (CBPP), argued in a statement that the Republican proposal demonstrates clearly shows the “House majority’s fiscal priorities haven’t changed.”

“It’s easy to become numb to the harshness of these budgets and to brush aside their policy implications based on the assumption (likely correct) that few, if any, of these policies will be enacted this year,” Greenstein said. “But this budget reflects where many congressional leaders—and the president—would like to take the country if they get the opportunity to enact these measures in the years ahead. Rather than help more families have a shot at the American dream, it asks the most from those who have the least, and it would leave our nation less prepared for the economic and other challenges that lie ahead.”

Progressives have been warning for months about the GOP’s plan to axe crucial safety net programs following the passage of its deeply unpopular $1.5 trillion tax bill, which has sparked a boom of corporate stock buybacks while doing little to nothing for most American workers.

“Each GOP budget is more fraudulent than the last,” Seth Hanlon, senior fellow at the Center for American Progress, wrote on Tuesday. “We know what they stand for: tax cuts paid for with healthcare cuts.”

In addition to proposing devastating safety net cuts, the House GOP budget also calls for partial privatization of Medicare and the repeal of the Affordable Care Act, a move that would throw tens of millions off their health insurance.

“The 2019 Republican budget scraps any sense of responsibility to the American people and any obligation to being honest,” Rep. John Yarmuth (D-Ky.), the ranking member on the House Budget committee, said in a statement on Tuesday. “Its repeal of the Affordable Care Act and extreme cuts to healthcare, retirement security, anti-poverty programs, education, infrastructure, and other critical investments are real and will inflict serious harm on American families.”

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Unions Want to Know Where the Hell All That Trump Tax Cut Money Went

Several unions are demanding that employers explain what exactly they’re doing with they huge windfall Republicans gave them.

Livia Gershon
Apr 6 2018, 5:09pm


Certified nursing assistant Gloria Duquette starts each work day at 7 AM, dashes to her second job at 3 PM, and finishes at 11 PM. All day long, she transports nursing home residents to and from dining rooms and bathrooms and dialysis machines, helps them shower, and changes their clothes and diapers. The Connecticut resident works more than 90 hours a week, including a third job where she gets some hours as a home care provider, and her husband works nights as a machine operator. After paying insurance and taxes, she said, the family can only just cover its bills. So she was naturally hoping the tax cut package passed by Republicans in Congress and signed by Donald Trump late last year would help her out.

“When I heard that these tax cuts passed I’m happy,” she told me. “I’m like, maybe I could give up one of my jobs now.”
Duquette, a member of the Service Employees International Union (SEIU), said she went to the director of the nursing home where she works full-time to ask about what she’d heard Trump say on TV—that the tax cut, which lowered rates for businesses and the wealthy in particular, would result in raises for regular workers. But she found that the nursing home, operated by Genesis HealthCare, hadn’t announced anything like that. (Like several companies contacted for this article, Genesis declined to comment.)
In Georgia, Jerome Westpoint spends his days picking up trash from construction sites and the backs of grocery stores. The work is hard and dangerous—you never know what you’ll find in a dumpster or a landfill. Westport has been doing the job for nearly 44 years, and, as a member of the Teamsters, he earns a middle-class wage. He said a guy can make $55,000 to $75,000 a year doing what he does. After the tax cut bill passed, Westport said, he and other workers asked their employer, Republic Services, about getting a share of the windfall.
“They’re not going to give us anything,” he said. “Me personally, I feel like it’s a slap in the face. I have been out here long enough to see guys, once they retire five years, they don’t live long because they have been exposed to so much stuff out here in the field. In respect to that, I think we deserve something.”

Back in October, Kevin Hassett, chairman of Trump’s Council of Economic Advisers, predicted that cutting the corporate tax rate from 35 percent to 20 percent would result in a $4,000 to $9,000 jump in America’s average household income. House Speaker Paul Ryan’s office, as well as Trump himself, also cited the $4,000 number. The idea was that companies would bring jobs back from overseas and reinvest the tax savings in expanded operations—classic trickle-down economics, in other words,
Workers like Duquette and Westpoint are asking exactly where that money went.

Four major unions—the SEIU, the Teamsters, Communication Workers of America (CWA), and the American Federation of Teachers (AFT)—are calling on corporations to disclose exactly what they’re doing with the windfall from the tax cut. They’ve sent letters to ten companies that are currently in, or preparing for, negotiations with unionized workers. They argue that that information is vitally important to them as they prepare to hash out new contracts.
“We think the information is relevant for us to make counterproposals, or proposals, to make sure we are advocating on behalf our members and that they share in the profits that our members helped to create,” said Jennifer Abruzzo, special council for strategic initiatives at CWA. “If we don’t ask for them, our members won’t get them.”
In the wake of the tax bill, numerous companies announced bonuses for employees. Several targets of the union campaign—American Airlines, AT&T, and PepsiCo—gave $1,000 to some or all non-executive workers. These employers often tied the bonuses explicitly to the Trump tax cut and received a burst of positive media coverage, even as some of those same companies quietly cut jobs.

No one would turn down a bonus, but bonuses are not the same as real raises, said Kevin Leicht, a sociologist who studies inequality and class at the University of Illinois Urbana-Champaign. While a raise increases a worker’s base salary so that they make more money each year going forward, a bonus is just a one-time payment. Leicht told me that given the record profits that corporate America was already making before the tax cut, there’s no reason to believe companies will use a significant part of their tax savings for raises or reinvestment.
“I know almost no credible people who think that,” he said. “Past experience is, tax cuts have not resulted in wages rising, so why would that happen now in the absence of some overwhelming reason to do it?”

Instead, Leicht said, companies are most likely to use the money to pay dividends to shareholders, stockpile cash, or buy back stock—a move that boosts share prices and makes it easier to reward investors. Early signs already show big increases in dividend payments and stock buybacks this year.
Still, it’s unclear exactly where all the tax cut savings are going, prompting the unions’ action. They’ve sent letters to two divisions of AT&T, two American Airlines regional carriers, cable station operator Nexstar Media Group, Consulate Health Care, Genesis HealthCare, Kindred Healthcare, American Medical Response, Fresenius Medical Care, as well as Frito-Lay/Pepsi and XPO Logistics. The Teamsters is also planning to send one to Westpoint’s employer, Republic Services, and Abruzzo said unions will continue sending similar letters as they prepare to negotiate contracts with other employers.
In response to questions about the union campaign, American Airlines pointed to its $1,000 bonuses. One of its regional carriers, Envoy Air, said it could not comment because it’s currently engaged in negotiations with the union. A second division, Piedmont, said it has already negotiated an agreement with CWA and that it had provided the union with the relevant information.
In a statement, Brad Puffer, a spokesperson for Fresenius Medical Care North America, said that the “vast majority” of the tax benefit would go to employee salaries and improvements to its operations. “In fact, by investing in our value based care efforts, we will save the government in excess of what we’re receiving in tax reform while improving health outcomes and the experience for our patients,” he said.

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Pfizer, pocketing a big tax cut from Trump, will end investment in Alzheimer’s and Parkinson’s research

By Michael Hiltzik
Jan 08, 2018 | 2:50 PM
Not so much a drug company as a financial engineering company, Pfizer is bailing out of Alzheimer’s and Parkinson’s research. (Richard Drew / Associated Press)
With every passing day, it becomes clearer who’s reaping the benefit of the huge tax cut handed over to American corporations by the Republican-dominated Congress in December.
Spoiler alert: Not workers or customers, but shareholders, especially the rich ones. (Don’t be fooled by those $1,000 bonuses handed out by a few big companies anxious to curry favor with the Trump White House — if they were serious about improving their employees’ lot they’d distribute the money in the form of permanent raises, not a bonus that you can safely bet will be a distant memory by this time next year.)
The big drug company Pfizer seems intent on being a pace-setter in cranking out the benefits of the tax cut to stakeholders who need them the least. In an announcement over the weekend, Pfizer said it was shutting down its research efforts on treatments for Alzheimer’s and Parkinsonism. The company didn’t say how much it was spending on the two conditions, but said about 300 researchers will lose their jobs as it redirects its research and development budget elsewhere.
It’s really alarming to see such a large pharmaceutical company deciding to abandon research into the brain and central nervous system.

James Beck, chief scientific officer, Parkinson’s Foundatio

“Pfizer routinely reviews its R&D pipeline,” the company said in its formal statement of the change. It said it was continuing its R&D programs for the drugs tanezumab and Lyrica. That’s a bit of non sequitur, since the first is a treatment for chronic pain from osteoporosis and other conditions and the latter is a drug for nerve pain caused by diabetes, shingles and spinal cord injury and is an anti-seizure medication for epilepsy patients. They do both fall within the neurology field, however, which also encompasses Alzheimer’s and Parkinson’s.
Pfizer’s announcement dismayed advocates for victims of central nervous system diseases, which have presented researchers with some of the most intractable challenges in the healthcare field.
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“It’s really alarming to see such a large pharmaceutical company deciding to abandon research into the brain and central nervous system,” James Beck, chief scientific officer at the Parkinson’s Foundation, told me Monday. “It’s telling for how difficult it is to do research into neurodegenerative diseases.” Of even greater concern, he said, is that “having Pfizer exit does not augur well for what other companies are likely to do.”
Pfizer’s move also raises questions about what role Big Pharma should play in drug R&D, especially for conditions without known treatments or those with relatively few sufferers.
Research into these two diseases is about as risky as one could imagine, since no treatment thus far has been shown to have any promise in curing either disease or averting its onset; some drugs may delay symptoms for up to a year or temporarily alleviate symptoms, but patient advocates consider those to be modest advances at best.
On the other hand, an Alzheimer’s cure would be the very definition of a blockbuster drug, since 5.5 million Americans are known to suffer from the disease and the patient base is expected to expand markedly as the population ages. Parkinson’s afflicts about 1 million Americans, the Parkinson’s Foundation says.
Normally, that would place this research right in Pfizer’s wheelhouse. The company is explicit about basing its R&D strategy on drugs with “multi-billion dollar blockbuster potential,” as its R&D chief, Mikael Dolsten, told a J.P. Morgan healthcare conference on Monday.
The economic riddle for 2018: Will the middle and working classes see any gains from the big tax cut?
Dec 28, 2017 | 6:00 AM
No one would say that drug companies should engage in research as a philanthropic exercise, but within the context of the U.S. pharmaceutical industry, Pfizer looks risk-averse. The second-biggest U.S. drug company by sales (after Johnson & Johnson), Pfizer in recent years seems to have devoted more effort to financial engineering than biomedical engineering. In 2015, for instance, it announced a $160-billion merger with Allergan, the maker of Botox. The deal was a so-called inversion, aimed transparently at cutting Pfizer’s tax bill in part by eliminating U.S. tax on $147 billion in profits it had stashed overseas.
Although the company denied that the deal was “simply… a tax transaction,” the truth emerged in 2016 when the deal was canceled; the only thing that had changed was that the U.S. Treasury had implemented new rules that all but eliminated the tax savings. So, bye-bye, Allergan.
Pfizer is expected to be among the prime beneficiaries of the corporate tax cut. The measure allows companies to pay a tax rate as low as 8% on foreign earnings they bring home, a big discount from the 21% top rate the law assesses on domestic earnings, itself a big cut from the previous rate of 35%. By some estimates, that could be worth more than $5 billion to Pfizer alone, not counting any gains from the lower tax rate.
As it happens, Pfizer signaled how it would apply the tax savings even before the final passage of the tax bill: The company announced a $10-billion share buyback on Dec. 18, four days before President Trump signed the tax cut into law. That buyback was on top of $6.4 billion left to be spent from a previous buyback plan, and was accompanied by a 6% increase in the company’s stock dividend, which will be worth roughly another half-billion dollars a year.
For comparison’s sake, Pfizer’s entire research and development budget averaged about $8 billion a year from 2014 through 2016.
Pfizer’s diversion of its tax break to shareholders parallels its behavior the last time American companies received a tax holiday on repatriated foreign earnings. That was in 2004, after corporations promised to apply their tax savings to hiring more workers and investing in their business. Instead, they laid off workers, bought back their shares, and pumped up their CEO compensation.
Pfizer brought home more than any other company in that amnesty, $35.5 billion, according to a 2007 investigation by Sen. Carl Levin, D-Mich. From 2004 through 2007, Levin reported, Pfizer bought back more than $27 billion in stock and reduced employment by 11,748 workers.
This time around, the company is again gifting its shareholders and laying off workers. Abandoning a challenging research field is a new wrinkle, however.
What’s most discouraging to patient advocates is the dearth of alternatives to big pharmaceutical companies in brain research. Pfizer’s withdrawal, especially if it prompts other big pharma companies to flee the field, places more of the burden on small biotech firms, academia, foundations and government. The news “reinforces the urgent need for additional federal investment in Alzheimer’s research,” a spokesman for the Alzheimer’s Foundation of America told me. But the Trump administration has placed funding for government research projects in almost all scientific fields on the chopping block.
Some experts recognize that the big drug companies may have been less than sturdy partners all along. “Many groups have been hoping for quick wins in the [central nervous system] space and we haven’t succeeded,” Beck of the Parkinson’s Foundation says, “so there’s some frustration from the viewpoint of management that we’re not getting the progress we need.”
He says his organization and others will still focus on the most promising pathway to a cure: Trying to understand the mechanisms of these diseases, which are still very murky. Only once those riddles are solved can drug research truly move ahead.
But as long as purely economic considerations drive drug R&D, the prospects for progress are dim. The Republicans who drafted the corporate tax cut promised that it would lead to more business investment and therefore economic growth. But as Pfizer demonstrates, all the incentives run in the opposite direction: More investment in shareholder welfare, less economic growth, and less attention to what corporations are supposed to exist for — improving people’s lives.

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