Donald J. Trump based his recent State of Union address on the booming American economy. In the address, he talked about the skyrocketing stock market which is setting one record after another since the day he took office. Unlike some of his other facts in the state of union address, this one is true. However, one could argue the stocks were increasing even before he took office. But, the stock market did show a sudden spike around the time he won the election. But the irony of this situation is that within a few days after the address the stock market took one of the biggest fall ever seen in a day. So, the bigger question here is:
If the American economy really is doing well because of Trump and the Republican party’s policies or are they just hogging all the credits of the previous administration?
During the first year of his presidency, Donald Trump has failed to keep up with many of his campaign promises. However, as promised, he was successful in passing a massive tax overhaul bill. And, unsurprisingly Trump brags about this big change. In the state of the union, he praised the Republican party passing this bill stating that America is back to its glory days. However, many of his opponents criticize this tax cut bill is a path towards regressive tax whereby the burden of taxes falls to a greater extent on the poor than the rich; only increasing the ever-growing income inequality. In fact, Democrats and many other independent agencies have called this billed a tax cut for the rich. Of the 42 ideologically diverse economists surveyed by the University of Chicago on the impact of Republican tax plans, only one agreed that they would lead to substantial economic growth, while none disagreed with the proposition that they would substantially increase U.S. debt. Currently, the US debt is about 20 trillion dollar, 106% of the US GDP; making further borrowing a big reason to worry about the US economy.
In his twitter handle, he mentioned “I promised that my policies (referring to the tax cuts) 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!”.
However, there is a dark secret to this story…
Unlike some of his false tweets, this fact stands true. However, it stands true only in the literal sense. Apple did reveal the plan to bring back 245 billion dollars of cash held overseas to invest in the American economy; paying 38 billion dollars in taxes. The credit for this transfer also goes to the tax bill that was passed. The tax plan slashed the cost of repatriating cash held overseas from 35 percent to 15.5 percent. Thus, to make a comparison, Apple would have paid 86 billion dollars in taxes to transfer the same amount of money from European Union and rest of the world into the American economy.
However, the catch here is that one could easily assume this transfer as an increase in investment in the American economy. But what Trump did is only encourage Apple to use its own money from abroad than to collect money from the bond market. This means that only the source of money used to make investments has changed but the level of investment in the economy may have little to no changes. As a result, Apple has been cutting back on its investment in the corporate bond market looking to substitute the corporate bond market with its own overseas cash. Apple is not alone; many other companies are following the same strategy. In total it is estimated that biggest American corporations have 3.1 trillion dollars overseas. Thus, the corporations are issuing less bond and using their own cash to invest in the economy. But as mentioned before, this tax break may not lead any significant change in the level of investments in the American economy.
One may argue that due to this tax break, Apple has created 20,000 jobs and given huge bonuses to employees. But, it is not confirmed that Apple would have gone ahead with the investment even without the tax break. If the 245-billion-dollar investment truly does yield them better results, they would have gone ahead with it even without the tax break and would have funded this investment by borrowing from the corporate bond market. After all, we are talking about a corporation which is willing to squeeze every single penny they can get. European Union reports accused Apple’s Irish subsidiaries of only paying an effective tax rate of 0.005% in 2014, for all the sales made throughout the European Union.
Therefore, it is seen that Trump and the GOP (Republican Party) simply inherited a booming economy and is taking credit for the Obama era policies. Not every single one of the Obama era policies were leading America towards greatness, but he did inherit a plunging economy in 2009 and successfully brought it to this booming stage. Nobel prize-winning economist Paul Krugman famously said in an interview “the first year of any presidency is the actual result of the previous administration.” So, before buying into Trump’s claims of how he “Made America Great Again” during his first year of presidency, evaluate the direction the American economy was heading when he inherited the economy and question yourself:
“Has the economy ever seen any significant boost from where it was estimated to be?”