One Reason Trump Tax Cuts Are Benefiting Big Firms More than Anyone Else

Iris Zhang interviewing Jenny Brown

Half a year after Congress passed the Tax Cuts and Jobs Act — more commonly referred to as the Trump Tax Cuts — economists say that small businesses and low-income tax filers have yet to reap the purported benefits. Despite President Trump’s boasting that the bill has reduced the unemployment rate to historic lows, wages continue to lag, and more than 80% of small business owners said they don’t see what they stand to gain. Large corporations, however, are reporting their best profits in seven years. We think that empirical research by Professor Jenny Brown of Arizona State University and her colleagues Katherine Drake and Laura Wellman helps to explain why: big businesses got the policy they wanted by investing significant amounts of money in politics over time. 

This causal path may seem obvious to the public, the overwhelming majority of which believes that money has too much influence in politics. Wealthy donors who threatened to withhold  campaign donations if legislators did not pass the 2017 bill only served to confirm this belief. But finding scientifically rigorous evidence to prove what seems like common sense has remained a surprisingly thorny problem for social scientists. This is where Brown’s work comes in.

Her team’s 2014 study, The Benefits of a Relational Approach to Corporate Political Activity, tracked 2,610 firms’ investment in PACs that supported members of the Senate Finance Committee and the House Ways and Means Committee — who have power over tax policy — over a six-year period. The more consistently the firms gave, the greater their tax benefits in the long run, compared to those who never gave or only gave sporadically. Moreover, firms that employed both PAC-giving and lobbying performed the best and most stably over time in terms of tax burden.

The struggle in understanding whether and how political money affects political outcomes, Brown explained to us in an interview, has been in looking at the question on a single-transaction rather than long-term scale.  The way corporations use political spending, she said, is never as blatant as “they buy off the guy, and we could see it if we just looked at the voting record.” But by digging deep into the political history of taxes, it is possible to find relationships that may be just as powerful.

Moreover, looking for single beneficial transactions misses capturing one major corporate strategy: influencing legislators simply to do nothing. “Part of this bigger political marketplace is not getting some legislation to go through, which is much harder to observe” in snapshots, Brown said. “Firms who have relationships can access information . . . such as if some policy is coming down the pipeline,” and can strategize in advance to lobby against the policy before the public ever finds out about it.

Though Brown’s research reveals a fruitful path for exploring causal relationships between political contributions and policy outcomes, important questions remain. For instance, in spite of her finding that systematic political giving matters, Brown offers that, “ultimately, constituency matters the most. Even these corporations have to make an argument to the policymaker about why this proposed policy matters to the voters, because in the end, the policymaker has to be re-elected by voters in their home district.” Brown’s study speaks volumes about the benefits to the firms who engaged in such lobbying, but cannot offer evidence about individuals who often do not have the income to spend on political giving.

We hope that future research will seek to measure the relative power of voters versus corporate political activity to achieve policy outcomes, among many other causal questions.  In the meantime, we provide below our full conversation with Prof. Brown (lightly edited for clarity), which includes intriguing details about the conceptualization and methodology of her team’s study, and what related projects are next.

Zhang (Brennan Center): Please introduce your paper.  What drew you to the topic?

Brown: The paper investigates the relationship or correlation between a firm’s tax performance (i.e., how much taxes they need to pay) and firm investment in the political arena in a tax-specific context — that is, firm investment in political processes directed towards tax policy-makers such as those on the House Ways and Means or Senate Finance committees or other tax related tax-related policymakers.

Two lines of thinking got us interested. First, prior research on this topic has been mixed, especially in terms of political giving. There have traditionally been two ways to look at political giving: PAC-giving and lobbying. Researchers have moved away from studying PAC-giving to focus on lobbying dollars, because PACs tend to draw more money from small donors, while lobbying money swamps PAC-giving. But, we weren’t convinced that these two should be looked at separately. Sure, PACs are small dollars compared to lobbying, but PACs are about laying foundation and being in the game. That can help the lobbying dollars go further. So, we became interested in whether PAC and lobbying activity work hand in hand.

Second, when researchers looked at investment pay-offs, they were only comparing year t against year t+1, and would use effective tax rates (ETR) as their measurement of firm performance. This measure is very noisy, volatile, and very industry-driven. It can be affected by “just having a bad year,” so, it can hide long-term, long-affecting policy breaks and policy incentives from the government. The observable result is too short-term. Our intuition was that firms’ political activity is much more about investing in a relationship over a longer period of time, and we wanted to show how corporate giving can contribute not just to increased returns (ETR), but to more stability and lower volatility in the long run, which stockholders like.

Zhang: What are the limitations and opportunities of using political contribution amounts to measure a firm’s relationship with policymakers?

Brown: There’s lots of activity we can’t see from just looking at political contributions. That’s one challenge, and I credit Michael J. Cooper for arguing that we should look beyond the hard dollars. But, hard dollars can still be a good proxy for firms’ activity in building long-term relationships with policymakers. Looking at hard dollars can tell us:

whom firms are building relationships with;

how many politicians or policy makers they are trying to build relationships with, to establish the breadth of their influence; and

how consistent firms are in terms of giving to support the same people.

Zhang: And what did you find?

Brown: First, we found that PACs matter, especially over a longer period of time. Even when we account for the money given by lobbyists, PAC-giving still matters. Second, we found that PAC-giving is incremental to lobbying — they are complements. Firms that employ both strategies are doing the best on their ETRs. Volatility is also lower for these firms.

Stability is also an important finding. In money-in-politics research, I think the general public expects firms that invest in the political arena to get some discrete outcome — like, they buy off the guy, and we could see it if we just looked at the voting record. But we forget that part of this bigger political marketplace is not getting some legislation to go through, which is much harder to observe. One example of this could take the form of firms who have those relationships that can access information in advance, such as if some policy is coming down the pipeline, and they can plan in advance.

Zhang: You write that firms will focus on tax breaks that benefit not only their own firm but also a small number of other firms. Are there firms that don’t contribute to PACs but still benefit from others’ political activity, and how would one explore that issue?

Brown: I’m currently working on a paper with a colleague looking at targeted tax breaks within an unnamed industry. In this industry, there were two dominant players who did the bulk of the lobbying. The two players got the bulk of the tax break. Other firms did no lobbying — free-riding. They did get breaks, but less compared to the two dominant firms, for two reasons. First, they are smaller and have less of the market share, so changes to the market affect them less. Second, over time, the two big players managed to get the provision reworked in specific ways that made the break more favorable to them specifically and more favorable to the way that big players do business. In conclusion, yes, there is free-riding, but not in such a way that the rising tide in the industry lifts all ships equally. Size and political influence still matter.

Zhang: How do firms with competing interests compete for Congress members’ attention? Where is the competition stronger: between similar firms or between different industries — say, healthcare industries versus tax firms?

Brown: There is both intra- and inter- industry competition. It’s interesting to look at trade associations, because they often break down when they can’t agree on what they want to lobby for. I think this splintering probably makes each weaker, but it depends on the situation.

Again, it’s all about relationships, not one-off deals. This is what we mean in the paper by focusing on a relational approach (versus a transactional one). It’s about who has good relationships with the Hill, and who knows how to push forward their agenda and whom to talk to. And if you don’t do these things regularly, when, say, a tax bill, comes up, you’re going to lose out.

Zhang: How do elected officials’ relationships with their individual constituents compare to their relationships with political active corporations?

Brown: This paper may not speak to that directly, but we find that size does matter, and money definitely matters. And yet sometimes it still doesn’t matter how much these corporations give, right? Ultimately, constituency matters the most. Even these corporations have to make an argument to the policymaker about why this proposed policy matters to the voters, because in the end, the policymaker has to be re-elected by voters in their home district. But I’m not sure I can speak to whether the relative power of corporations via lobbying, compared to that of constituents, has changed.

Zhang: What research do you have coming down the pipeline?

Brown: I have an upcoming piece in the Journal of the American Taxation Association with John Barrick, which is a review of research on tax-related corporate political activity. We have three questions that framed this review:

1. Which firms are participating in the political process?
2. What do they want?
3. How do they go about pursuing what they are interested in?

We know a bit about number one, since that is mostly observable. Number two is a bit of a chicken-and-egg question. Do firms engage to get low rates or to maintain low rates?

Number three, the how, is the biggest black box. There are all kinds of lobbying activity, like funding travel and other small perks, giving congressional testimony, through think tanks, etc.

We also don’t know much about how corporate political activity at the state level interacts with corporate political activity at the federal level, or even at the international level.

Zhang: What’s interesting about looking at that interaction at different levels of government?

Brown: Say we see a cut in the federal tax rate. In a relative sense, the state tax burden is going to be higher, so states may not cut their corporate tax rates because balancing their budget constraints may become more difficult. Therefore, lobbying for a federal policy is a bigger bite in some ways because you can get more bang for your buck. But then, at the state level, it may be easier to get one-off deals.

In short, the lobbying strategies depend on the level of government, and the international level is a whole other game because the procedures for reforming tax policy may be totally different.

Jenny Brown is assistant professor of Accounting at the Arizona State University W. P. Carey School of Business. Her co-authors on the paper are Katharine Drake, assistant professor of Accounting at the University of Arizona, and Laura Wellman, assistant professor of Accounting at Pennsylvania State University. Iris Zhang is a Research and Program Associate in the Brennan Center’s Democracy Program, and will be joining Stanford University’s sociology PhD program later this year. Brennan Center interns Henry Graham-Costello and Julia Stadlinger contributed research and transcription assistance.

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Purchasing Power: The Conversation This post is part of the special series designed to provide well-informed commentary, fresh questions, and new answers about the facts of money in politics. Dive in to 'Purchasing Power: The Conversation’ here.  The views expressed by blog contributors are the authors’ own and not necessarily the views of the Brennan Center.