For some reason, probably known but to the major donors of the Republican Party, “we” need a tax cut. The rationale for this exercise echos the ubiquitous adolescent argument for automobile ownership — I need the car to go to work, I need to work to pay for the car. In this instance, it’s argued that we need the tax cut to promote growth, and the growth to pay for the tax cut. It’s the same old southbound product of a northbound male bovine we’ve heard so many times before.
Even the GOP assertions connect to this circuitous argument. A tax cut, we are told, will promote economic growth — and Everyone will win. Unfortunately, there’s no unanimous jury decision on this question. First, there are some common methodological problems with altogether too many academic studies purporting to answer the question definitively. Secondly, there are further issues intrinsic to discussion about how the tax cuts are to be offset. Not all tax cut/reform proposals are created equal.
“The results suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.” [Gale, Brookings]
Therefore, if we step back and adopt the centrist conclusions of the Gale-Samwick Study quoted above, there appear to be some boxes to be checked off if the goal is to encourage long term economic growth, and one of those boxes calls for the avoidance of deficit financed tax cuts.
We are cautioned by Republican advocates that there are only two ways to reduce a federal deficit, either raise taxes or reduce spending. The last iteration of a Republican tax cut, was not only deficit financed but the deficit was enhanced by the spending associated with the wars in Afghanistan and Iraq. Since raising revenue by increasing taxation is anathema to Republican orthodoxy then there must be a reduction in spending. Enter the proposals from the current Republicans to reduce Medicare spending by $472.9 billion over the next decade, and a further reduction of $1 to $1.5 trillion in cuts to the Medicaid program.
The current FY 2018 budget makes some assumptions which may be quickly frustrated. For example, the budget assumes no further military conflicts — the military expenditures assume readiness costs, not military operations; and, cuts to domestic expenditures to a level not seen since the Hoover Administration.
If this sounds like the same old prescriptions from GOP decades past, there’s a reason for it which becomes obvious when the framework is examined. What we have herein is NOT a new proposal for tax reform, but a recycling of ideas included in every recent Republican tax plan.
Cut the corporate tax rate from 35% to 20%. As noted previously in this site, there are several options available to corporations, none of which have anything to do with increasing employment or raising wages — share buybacks, dividend payments, mergers and acquisitions, corporate bonuses, management compensation, etc. The GOP argument rests on the fluid assumption that corporations will reward the nation with more plant expansion, research and development, and rising wages — without a scintilla of proof this will actually happen.
The 25% (15%) pass through rate. This purports to be a bonus for small businesses. In the real world most small businesses are already paying this rate or rates even lower. Consider the following evaluation of the Pass Through business:
“Finally, the top statutory rates and average effective rates mask substantial differences in what individual business owners pay in taxes. Most businesses are small, earn relatively modest income, and thus face relatively low bracket rates. As a result, more than 85 percent of pass-through businesses in 2014 faced a top rate of 25 percent or less; only 3 percent faced a marginal rate greater than 30 percent (Figure 6). However, a much larger share of pass-through income does face high marginal income tax rates. Almost half of pass-through income in 2014 came from businesses with a top rate of at least 35 percent. In other words, a small number of large pass-throughs are responsible for the vast majority of the sector’s tax burden.” (emphasis added)
Consumer Warning: Beware of muddled conflation of pass through taxation with income from pass through businesses. 85% of small businesses are already paying low pass through rates, and the income is coming from a small number of very wealthy pass through businesses. It doesn’t take too much imagination to figure out these are lobby shops, law firms, and other wealthy operations which bear little resemblance to small law offices and other independent businesses.
The Death Tax is Coming, The Death Tax is Coming. I have no reason to believe that there won’t be one more “small business owner,” or one more family farmer, hauled into camera range at a GOP function who will have some tale of woe about inheritance taxation — or as I prefer to call it: The Paris Hilton Legacy Protection Act. 99.8% of all Americans don’t have to pay the estate tax, and such taxes as are paid are 40% of the excess above $5.45 million. One other point might be made at this point, it’s not the heirs who pay the estate taxation if any is due — it’s the estate, via the executors. But the major number here is 99.8%, the 99.8% of Americans who will see absolutely no benefit from this “tax cut” at all.
Eliminating the Alternative Minimum Tax, “which is intended to ensure that higher-income people who take large amounts of deductions and other tax breaks pay at least a minimum level of tax.” Now, gee, if I could just see a certain President’s tax returns I could tell if he were liable for the AMT? If I could be reassured that high profile NYC real estate developers, who take a spectacular range of deductions, might have to pay the Alternative Minimum Tax so they aren’t dodging their contributions almost entirely? However, it’s been since May 20, 2014 since a certain presidential candidate said that if he decided to run for high office he’d release his tax returns — some 1,313 days ago…
In short, there’s nothing new here. It’s the same old south bound produce of a north bound bull. Repackaged, with a new face in the Oval Office, and I remain convinced that two of our Congressional representatives, Senator Dean Heller and Representative Mark Amodei, will happily twist themselves into rhetorical knots trying to explain how cutting Medicare and Medicaid will benefit middle income Nevadans by pleasing the millionaires and billionaires among us.