The real value of ‘Trump tax bonuses’
Some U.S. workers treat $1,000 lump sum from private firms as a windfall, while others see it as a lifeline
In late 2017, companies such as Home Depot, AT&T and Best Buy made headlines for promising their workers lump-sum bonuses of around $1,000 — if and when Congress passed the Trump administration’s massive corporate tax cut. Republicans held up these potential bonuses as proof that the president’s tax bill would be more than a handout to big business: Ordinary people would benefit too, just as swiftly and surely as if they had hit on a lucky scratch-off ticket.
For a time, the promised bonuses injected a dash of “Oprah”-style giveaway excitement into the normally staid tax debate. Which is why some conservatives seized on them as a metonymous stand-in for the Trump tax plan — despite the fact that the bonuses weren’t part of the bill.
Nothing fires the imagination like the prospect of a windfall: You get a bonus! You get a bonus! Everybody gets a bonus! If you were a worker, you couldn’t help but wonder: How would I spend an extra thousand bucks if it fell into my lap?
After the tax bill was signed into law in December 2017, its critics derided the bonuses as a publicity stunt meant to distract from larger payouts to corporate elites. Most memorably, House Speaker Nancy Pelosi (D-San Francisco) — the minority leader at the time — described the bonuses as “crumbs” compared with the money that companies would save on taxes and give out to investors as share buybacks.
In the last year, Pelosi’s view seems to have largely prevailed among voters. Republicans barely mentioned the tax law on the campaign trail during last midterm election, and Democrats regained control of the House. As for the macroeconomic impact of the bonuses, economists say it’s too soon to tell, and even after some time has passed, we still may not know the full answer. This is in part because it’s unclear how many people even got these bonuses, since they weren’t given out by the federal government, but rather by private companies. (President Trump has estimated a beneficiary pool of 3 million.)
What we do know about the effects of bonuses comes from psychologists and behavioral economists. And — surprise! — it’s complicated. “Money is never just money. Money is something you have to interpret. What is this money for? Where did it come from?” said Nicholas Epley, a behavioral scientist at the University of Chicago who is an expert on windfall effects.
Take tax rebates, of the type promoted by President George W. Bush as economic stimulus measures in 2001 and 2008: Studies have shown that people are less likely to spend windfall money when it’s called a “rebate” as opposed to a “bonus,” thus decreasing their economic stimulus power. The reason? Rebates get categorized in your brain as “old” money that’s being returned to you to furnish existing needs like retirement savings or mortgage payments.
Then there are wage increases. Some firms raised wages in the months before and after the Trump tax cut passed. But wages are susceptible to what behavioral economists call the adaptive treadmill effect. For instance: If $1,000 is distributed to workers as an extra $80 or so per month, that money tends to be steadily, subconsciously absorbed by extra groceries, utilities and other utilitarian expenses rather than spent on more intentional purchases. The result is economic stimulus, but not as much of a boost to happiness or well-being as one might hope.
In contrast, windfall gains such as bonuses are more likely to be spent on what economists call hedonic purchases — indulgent, pleasure-giving goods such as vacations, meals out and clothes for special occasions. As one researcher put it, it’s as if the mind is telling you, “This is a rare treat, so I should enjoy it!”
Given this body of literature, it’s not surprising that many of the several dozen tax-cut bonus recipients interviewed for this article put their money toward trips and treats instead of doing the supposedly responsible thing of saving it all. This kind of hedonic spending hardly seems indefensible — if you consider happiness to be an integral part of overall well-being (a factor that economic policy still struggles to calculate).
After reaching out to numerous companies nationwide that gave out $1,000 bonuses, a company called Harvard Business Services in sleepy Lewes, Del., turned out to be a perfect case study in the psychological effects of bonus giving.
Harvard Business Services is a meta-business: Its main function is to help other businesses register and incorporate in the business-friendly state. So its leadership is perhaps more attuned than most to shifting macroeconomic tides. In this case, Rick Bell, the company’s founder, was sitting at home watching Fox News when he first learned about other companies’ plans for a “Trump tax bonus.” His first thought was: How could I get in on that action?
Bonuses are kind of Bell’s thing — the cornerstone of a behavioral management theory he began to devise decades ago. His core insight on how to build lasting, loyal relationships with subordinates is simple: When in doubt, give people money.
Bell’s first job after leaving college was at none other than Rolling Stone magazine, as one of seven employees working under legendary co-founder Jann Wenner. No one worked harder than Wenner, Bell said, but woe on those who couldn’t keep up. “I burnt out,” Bell recalled of his time running Rolling Stone’s circulation. “And when you burn out, it’s like a mental breakdown. You’re not there.”
So in 1981, when Bell became boss of his own company, his labor relations strategy centered on flexible hours, vacation days and lots and lots of bonuses. There’s a holiday bonus, a tax-season bonus and various business performance bonuses. There are bonuses tied to major work anniversaries and special accomplishments. There are surprise companywide bonuses — sometimes a few hundred dollars, sometimes more. And in 2018, there was one soon after Congress passed the $1.5-trillion tax overhaul that lowered the federal corporate tax rate to 21% from 35% and allowed Bell to greatly increase his annual take-home profits.
As Bell put it, “There’s no stock option plan here. Nobody owns the company besides me and my wife and my kids. There will never be a stock option plan.”
“But,” he continued, “there will be continual bonuses of real money that people can take in and use for their lives. I believe people work because they need money. They don’t necessarily work because they love their work. And therefore, let’s pay them. Let’s give them money!”
Consider, then, some of the ways his employees spent their Trump tax-cut bonuses.
Devin Scott, 40, who works in sales, said: “My wife and I have two kids, 4 and 8. What we did with the bonus is we took the kids to Williamsburg [in Virginia] — Busch Gardens. We went to the park on back-to-back days. The second day the park wasn’t as crowded, so my kids could ride the rides again and again. They loved that. I won them a basketball to take home at one of the stands — I got it done! We don’t take a vacation like this every year, only when the opportunity presents itself. The bonus definitely made it easier to say yes.”
Alexis Oliveras, 38, runs the company’s mailroom, which ships tens of thousands of letters a week to owners of the Delaware companies that Harvard registers. Oliveras recently bought a large family home in foreclosure and moved his family into it. “It’s nice, but it needs work,” he said. His bonus went to replacing the floor in his mudroom, as well as to paying off part of a Caribbean cruise his family took. But Oliveras knows not everyone is doing so well. He also gave part of his bonus to a cousin in North Carolina who works in the warehouse of an overhead door company and wants to land a higher-paid position. “He was telling me he wanted to get a briefcase to bring to work to look more professional. I just threw him $100 and was like, ‘Just take it and get the thing you want.’ It felt good to do.”
For Loretta Stewart, 51, an office cleaner, the bonus was a lifeline: “I have oil heat, and it’s very expensive. At the time Mr. Bell gave us that bonus, I needed oil, and I had no clue how I was going to get the money. Every bonus this man gives me, I have a need when it’s time. And it just happens that way — I don’t plan it! I’ve had car troubles, I hurt my shoulder.... Last year he gave us a [surprise] bonus in the summertime. We’d been mowing our lawn for four years with a push mower. Well, I’m 50 years old, and it was getting hard for me to do. I went and bought a riding lawnmower with my bonus. I couldn’t have done that otherwise.”
Lisa Kline, 56, works in the mailroom. The bonus helped her fix her deck, which had fallen down. “It’s never just the deck — it’s painting the deck, it’s the railings. I also paid off credit card debt. I’m at the age where I don’t like credit card debt, because I want to retire and keep my house. But the thing is ... my son just got married last year. He’s in the National Guard, and his wife’s family comes from nothing. We’ve known her since she was 10. Her mom is divorced and her dad lives out in the Midwest, so she kind of gravitated to our family when they started dating. She’s like a daughter to me. The wedding was so beautiful.”
Laurie Schell, 51, in accounting, used part of her bonus to pay off credit card debt. “I’m not a planner. But I’ve been working on getting rid of my debt, and to take some money right off of it [with the bonus], it was awesome. Awesome. Especially because it was unexpected. Other than that ... I’ve been painting my whole life. Now, I’m not saying I’m good! ... I spent the bonus on little things: I bought art supplies, some books by Dean Koontz, a bunch of steaks.” The rest she gave to her church, which has been helping families affected by the opioid crisis. “There’s a lot of people in our church who’ve been affected. It’s reaching everyone, it’s not prejudiced.”
Jeremy Reed, 40, in sales, took his family to Orlando, Fla., in February 2018. “We did three days at the Disney parks and then we did a day at Universal. Park tickets were like 99 bucks apiece, and I have four sons. We had saved up money for most of the trip, but when I found out about the bonus, I thought, ‘This is gonna make it so much easier.’ Because it’s all about the extras down there: the Mickey hats, the ears, the superhero stuff. My youngest son, he wanted a pirate sword. At home it would cost like $5. At Disney it was $20, but we got it for him. Not having to stress about the money, not having to say, ‘OK, guys, let’s try to rein it back a bit?’ — that was great.”
Alex Maclean, 26, handles web development for Harvard Business Services. “This is the first company I’ve done a 401(k) with, so I put some of my bonus there. And then it did help pay for a vacation to Oregon for me and my girlfriend. My brother’s lived there for 10 years, and my mom just moved out there this past summer. I hadn’t seen my brother in five years.”
Epley, of the University of Chicago, gave a behavioral scientist’s thoughts on Bell’s bonus-based management experiment. He found Bell’s methods to be most probably effective.
“My guess is that people in that company love their boss and think what he’s doing is amazing,” Epley said. Bell’s employees bore that out. One referred to him as a saint, adding: “It’s like he has this sixth sense when he knows people are struggling. We don’t even have to ask.”
Still, Epley’s mind couldn’t help but turn to how a similar bonus strategy might be used by a less scrupulous boss: “We’ve known since the days of B.F. Skinner” — the pioneering behavioral psychologist — “that the best way to increase motivation is with intermittent reinforcement. Once reinforcement becomes predictable or routine, you don’t work for it as much.... Positive reinforcement, when it’s intermittent, is the most motivating thing.” Furthermore, Epley said, “what really makes people feel good are random acts of kindness. Kindness that is expected is good, but not as good as if it just comes out of the blue.”
Which brings Epley back to that theoretical shady boss: “If you want to treat people fairly and give people a living wage, then [intermittent, unexpected bonuses] are not the way to do that. But if you’re trying to make people feel happy where they are, without costing your company very much money, then there’s a lot of wisdom in it. Evil wisdom maybe, because you’re not really making people wealthier.” But wisdom all the same: “If you have a fixed amount of money and you want to make people feel as good as they can, then the way to do it is probably not to raise wages to a stable level, but rather to give occasional bonuses.”
The next question — especially with the Trump tax bonuses in mind — is whether similar wisdom could be applied to state and national politics. Traditionally, the answer would be no, Epley said: The relationship between government agents and average citizens is seen as too distant and impersonal compared with the relationship dynamics you’d see in a smaller workplace. (At least, the thinking goes, for a mature government like the United States’. Clientelism — the patronage-fueled exchange of money for political support — is typically regarded as the province of less “advanced” democracies.)
That said, Epley added, “It might be different with this administration. Trump, for all his ... really almost inconceivable number of faults, does actually have a strong, seemingly personal relationship with 42%, roughly, of the American electorate. So people might feel really like he is their friend, and that money really is coming from him somehow.”