By Paul Krugman
July 25, 2019
Donald Trump often complains that the media don’t give him credit for his achievements. And I can think of at least one case where that’s true. As far I can tell, almost nobody is reporting that he has presided over a huge — but hidden — increase in foreign aid, the money America gives to foreigners. In fact, the hidden Trump program, currently running at around $40 billion a year, is probably the biggest giveaway to other nations since the Marshall Plan.
Unfortunately, the aid isn’t going either to poor countries or to America’s allies. Instead, it’s going to wealthy foreign investors.
Before I get there, let’s talk for a second about a claim Trump often makes about a highly visible part of his economic strategy, the tariffs he has imposed on imports from China and other countries. These tariffs, he has insisted again and again, are being paid by China and represent billions in gains to the United States.
This claim is, however, demonstrably false. Tariffs are normally paid by consumers in the importing country, not exporters. And we can confirm that this is what’s happening with the Trump tariffs: Prices of goods subject to those tariffs have risen sharply, roughly in line with the tariff increases, while prices of goods not subject to the new tariffs haven’t gone up.
So Trump’s tariffs aren’t a tax on foreigners, whatever he may think. On the other hand, his other policies have given selective foreigners a huge tax break.
Remember, Trump’s only major legislative achievement so far is the 2017 Tax Cut and Jobs Act. The core of that bill was a sharp reduction in corporate tax rates, which has led to a drastic fall in tax revenues, on the order of $140 billion over the past year.
Who gains from this tax cut? Supporters of the bill claimed that the benefits would be passed on to workers in the form of higher wages, and they made a big deal over a flurry of corporate bonus announcements in early 2018. But those bonuses weren’t actually very big, and they didn’t continue.
In fact, at this point it’s clear that the bonus surge, such as it was, was all about tax avoidance: By moving up payments they were going to make anyway, corporations got to deduct the expense at the old, higher tax rate. Now that this option has expired, bonuses have dropped back to their normal level, or even a bit lower.
What about the argument that tax cuts would promote a huge swell in business investment, which would push up wages? Well, that isn’t happening, either; when it comes to business spending, the tax cut has been a big fizzle.
So who is benefiting from the tax cut? Basically, shareholders, who have received increased dividends and seen a lot of capital gains as corporations use their windfall not to invest, but to buy back their own stocks.
And a big share of these gains to shareholders has gone to foreigners.
We live, after all, in an era of globalized finance, in which wealthy investors normally own assets in many countries. Americans own trillions in foreign equity, both directly in the form of foreign stocks and indirectly in the form of stocks of U.S. corporations with foreign subsidiaries. Foreigners, correspondingly, have a big stake here, again both through direct stock ownership and via operation of their corporate subsidiaries.
Over all, foreigners own about 35 percent of the equity in corporations subject to U.S. taxes. And as a result, foreign investors have received around 35 percent of the benefits of the tax cut. As I said, that’s more than $40 billion a year.
To put this in perspective, Trump’s tariffs on China have raised $20 billion so far. Even if China were paying those tariffs — which it isn’t — that would fall well short of the gift he’s made to foreign investors.
Alternatively, we can compare Trump’s gift to foreign investors with our actual spending on foreign aid (which is much smaller than most people imagine). In 2017, the U.S. spent $51 billion on “international affairs,” but much of that was either the cost of operating embassies or military assistance. The Trump tax break for overseas investors is considerably bigger than the total amount we spend on foreign aid proper.
Now, the U.S. economy is almost inconceivably huge, producing more than $20 trillion worth of goods and services every year. We’re also a country that investors trust to honor its debts, so the tax cut, irresponsible as it is, isn’t causing any immediate fiscal stress.
So Trump’s giveaway to foreign investors isn’t going to make or break us, although it’s probably enough to ensure that the tax cut will be, over all, a net drain on economic growth: Even if the tax cut has some positive effect on the total income generated here (which is doubtful), this will probably be more than offset by the increased share of that income accruing to foreigners rather than U.S. citizens.
Still, even in America, $40 billion here, $40 billion there, and eventually you’re talking about real money. Furthermore, it does seem worth pointing out that even as Trump boasts about taking money away from foreigners, his actual policies are doing exactly the opposite.