Economist Paul Krugman took another look at the 2017 tax cuts in The New York Times Tuesday, arguing that they are “even worse than you’ve heard.”
Many critics of the tax bill have complained that while it encouraged multinational corporations to bring home billions of dollars in overseas profits, much of that cash has been used for stock buybacks rather than the long-term, economy-strengthening investments that were promised. But Krugman says that complaint falls short since, in his view, very little money has been brought home by U.S. companies. Even worse, the tax cuts may be lowering overall national income, leaving most Americans worse off in the long run.
On the first point, Krugman argues that the surge earlier this year in overseas dividends paid by foreign subsidiaries to their parent companies in the U.S. was little more than illusion produced by accounting entries in companies’ books. After moving money around internally, each company’s overall balance sheet “hasn’t changed at all,” Krugman writes, and there’s no reason to think the accounting maneuvers have meaningfully affected the investment outlook of any given firm. The economist cites data from the U.S. Bureau of Economic Analysis, which shows little change in net capital inflow to the U.S. in the wake of the tax cuts.
On the second point, Krugman argues that the tax cuts produced a significant windfall for foreign investors in U.S. companies, with money that was previously being collected by the federal government now flowing overseas. Roughly a third of U.S. corporate profits are claimed by foreigners, which means roughly a third of the corporate tax cut is now leaving the country. The size of the outflow is so large that it could negate any positive GDP growth resulting from the tax cuts. Given this effect, “the tax cut probably made America poorer, not richer,” Krugman writes.