AOC Puts a Huge Price Tag on Fixing the Climate Crisis

Plus, why Trump’s tax cuts failed to spark an investment boom

Why Trump’s Tax Cuts Have Failed to Spark an Investment Boom

One major selling point of the Republican tax overhaul, which lowered the corporate tax rate to 21% and sweetened the rules for capital expensing, was a promised boost in investment by U.S. firms. A jump in capital expenditures would boost economic growth, supporters of the legislation said, and in the long run provide the basis for higher productivity and increased pay for American workers.

But a new research paper from the International Monetary Fund says there is still no consensus on whether that investment boost has in fact occurred. Outgoing White House economic adviser Kevin Hassett has linked better-than-expected GDP growth to a rise in business investment spurred by the tax cuts, but many analysts outside the Trump administration say the evidence is weak to nonexistent.

Reviewing the economic data since the passage of the tax overhaul, the IMF researchers said that while business investment did grow in 2018, the cause has been “the strength of expected aggregate demand” rather than changes in the tax code. In other words, U.S. firms spent more on capital investments because business was good and improving, not because the tax rules suddenly changed. And although there has been a jump in investment, the increase falls short of the levels predicted by economic models, the analysts said.

Why has investment fallen short? The researchers said that increased corporate market power has played an important role. Market power produces higher margins for dominant firms, which makes them less sensitive to policy changes such as a lower tax rate, the researchers found. Uncertainty over trade policies also played a role, depressing corporate investment as executives waited to see how the Trump administration’s tariffs and trade deals played out.

As a result, only about 20 percent of the tax-cut windfall has gone toward capital investment and R&D spending, the researchers said (see the chart below). The rest has gone mostly toward “share buybacks, dividend payouts, and other asset-liability planning and balance sheet adjustments.”

Quote of the Day: AOC Says $10 Trillion Needed for Climate Plan

“I think we really need to get to $10 trillion to have a shot. … I don’t think anyone wants to spend that amount of money, it’s not a fun number to say, I’m not excited to say we need to spend $10 trillion on climate, but ... it’s just the fact of the scenario.”

– Rep. Alexandria Ocasio-Cortez (D-NY), in an interview with The Hill on Wednesday, on the spending she believes is necessary to properly address climate change. Ocasio-Cortez, whose Green New Deal includes ambitious goals for carbon reduction, acknowledged that her price tag would not go over well politically. “It’s not popular, it’s not politically popular,” she said. “People are going to call it unrealistic, and I just don’t think people understand how bad the problem is.”

She also said that, of the climate plans presented by Democratic presidential contenders, she likes Washington Gov. Jay Inslee's, which calls for spending more than $5 trillion, and Sen. Elizabeth Warren's $2 trillion proposal.

Number of the Day: $4,500

House Democrats have proposed to give members of Congress a pay raise that would equal an extra $4,500 next year, Politico reports. As part of the Democrats’ 2020 funding bills, they would allow an automatic 2.6% cost-of-living increase to take effect in January, lifting lawmaker salaries for the first time since 2009, Politico says. Salaries have been set at about $174,000 a year since then.

Chart of the Day: Taxing the Top 0.01%

Proposals to hike taxes on the rich have long elicited a predictable response, New York Times columnist David Leonhardt writes: “It will wreck the economy.” That argument has become less common, though, “because it’s become so obviously false,” Leonhardt says. Instead, a cynical new argument has arisen: “There’s no point in trying to tax rich people, because they’ll just figure out a way to avoid paying taxes.”

Don’t buy it, Leonhardt says. Just look at where tax rates on the wealthiest among us have been over the past century (see chart below). That top rate has come down in recent decades because the federal government has slashed the top marginal rates, cut taxes on stocks and other investments and shrunk the estate tax.

The government made those changes, and it can change the tax picture again. “The long history of American policymaking actually shows that raising taxes on the wealthiest taxpayers is entirely possible,” Leonhardt writes. “History shows that when the government tries to collect more taxes from its richest citizens, it succeeds. So don’t give in to cynicism.”

The liberal Center for American Progress just issued a report outlining several options for taxing what they call “extreme wealth” and pushing back on what they describe as “an array of dubious arguments and outright falsehoods” used to argue against higher taxes on the rich. You can read the full report here.

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