Good day, It’s time for our daily reminder that the GOP’s grand idea that Tax Cuts cure all ills is quack medicine. To hear ads from the Business Roundtable and associated PACs one might think that merely enacting a tax cut will cause Business To Boom, Wages To Rise, and, who knows, flowers to bloom. Probably not, and probably not for some obvious economic reasons.
The proposed tax cut is deficit financed. Yes, tax cuts are lovely, BUT:
“Tax cuts have the potential to grow the economy, but their benefit depends on how they are structured and financed. For tax changes to promote growth, changes should encourage work and investment through lower rates, efficiently encourage new economic activity (rather than providing a windfall for previous investments), reduce economic distortions, and create minimal (if any) increases in the budget deficit.” [CRFB]
The current proposal doesn’t really encourage new activity, it doesn’t reduce economic distortions (income inequality, etc.) and it certainly doesn’t reduce the budget deficits.
Reducing the statutory tax rate is meaningless if not paired with closing corporate tax loopholes and incentives. Under the current system AT&T paid an effective tax rate of 8% from 2008-2015. How do these corporations pull this off? They can book most of their profits overseas, out of the IRS reach. The GOP proposal assumes that if the statutory rate is reduced to 20%, the companies will reflexively book profits here, and decide to avoid other techniques which reduce the statutory rate to almost 0. Here’s a brief list of popular tax dodges:
American Electric Power, Con Ed and Comcast, qualified for accelerated depreciation, enabling them to write off most of the cost of equipment and machinery before it wore out.
Facebook, Aetna and Exxon Mobil, among others, saved billions in taxes by giving options to top executives to buy stock in the future at a discount. The companies then get to deduct their huge payouts as a loss. Facebook used excess tax benefits from stock options to reduce its federal and state taxes by $5.78 billion from 2010 to 2015, the institute found.
Individual industries have successfully lobbied for specific tax breaks that function as subsidies: for instance, drilling for gas and oil, building Nascar racetracks or railroad tracks, roasting coffee, undertaking certain kinds of research, producing ethanol or making movies (which saved the Walt Disney Company $1.48 billion over eight years, the report says). [NYT]
Nice, and nothing in the current proposal should give anyone any comfort that if given a 20% statutory rate major corporations won’t try to pull the same tricks to get into the 0%-8% effective tax rate. It just makes it easier to get there.
Reduced statutory tax rates don’t automatically create employment. For the 1 millionth time (?) — There is one reason, and only one rationale reason, for hiring anyone ever: The company doesn’t have sufficient numbers of employees to deliver goods and services demanded by clients and customers at an acceptable level of customer service. That’s it. That’s all there is to it. An employer might give preference to a veteran IF there is a need to hire someone (and get a tax break for doing so), or an employer might decide to hire someone to create a more diverse workplace, or a workplace that is more flexible. However, that hire will take place IF and ONLY if there is a need to hire someone in the first place. Put more mundanely, if having four check out clerks on every shift is enough to insure that no one waits longer than 5 minutes in the grocery check out lanes, then the fifth won’t be hired.
Secondly, there is no evidence that tax cuts themselves produce increased employment. If one is referring to the Reagan Era tax cuts for evidence — be careful — one of the prime drivers following that tax cut was the Fed’s monetary policy. [CAP] Otherwise there is preciously little research concluding that tax cuts for millionaires and billionaires spurs employment or even wage growth for working Americans. [CNBC] [CBPP] [NYT] [WallStJournal]
A third point — the argument that “tax incentives” encourage entrepreneurship is almost risible. No one starts a business because of the “tax environment.” Listen to one successful entrepreneur:
“While I can imagine tax regimes that would create disincentives for entrepreneurship, we don’t have that situation today in America, where tax rates on capital gains (the primary way that founders of successful start-ups make money) are already far lower than rates on ordinary income. Indeed, some of the most admired entrepreneurs — Bill Gates, Steve Jobs, Jeff Bezos — started their companies under significantly higher tax regimes. This is consistent with empirical research; the economists Robert Moffitt and Mark Wilhelm, for example, found that the large cuts in marginal tax rates in 1986 did not induce high-income men to work longer hours.”
There are two things to unpack from this analysis: (1) Companies aren’t formed because of the tax environment; and (2) Companies ARE formed because of the availability of capital. Now, take a look at the FRED trends in real gross domestic investment. See any downward trends? Seems like there’s been a steady upward trend from 1950 onward. This doesn’t argue for a lack of capital being a major problem for start ups.
And then there are the details, summarized by Patriotic Millionaires:
– On the elimination of the Estate tax: “We can’t wait to hear President Trump try to explain how a $4 billion tax cut for Ivanka and Tiffany helps the middle class.”
– On the elimination of the AMT: “The elimination of the Alternative Minimum Tax will virtually guarantee that thousands of Americas wealthiest people will pay no tax at all. How will be left holding the bill for that lost revenue? The middle class.”
– On the territorial tax system: “President Trump’s big plan to boost the middle class starts by helping multinational corporations avoid paying any taxes at all? That is absurd.”
– On reducing the number of tax brackets: “If anything, we need more tax brackets. Someone making $5 million, $10 million, or $50 million a year should definitely pay higher taxes than someone making $400,000 a year. How can we even debate this?”
That last question is a good one, as are the other items in the list. How is demand for goods and services increased by (1) giving tax breaks to corporations which can use the windfall to pay higher executive compensation, indulge in more mergers and acquisitions, or enjoy the fruits of stock buy-backs; (2) eliminating taxes on millionaires and billionaires and placing more of the burden on working Americans; (3) eliminating the estate tax which doesn’t apply to most American taxpayers and helps only the few at the expense of the many? —
“For decedents in 2017 (with an exemption of $5.49 million), the Tax Policy Center estimates there will be only about 11,300 estate tax returns filed, of which 5,500 will be taxable. Estate tax liability will total $19.9 billion after credits.” [TPC] (Note: There were 150,493,263 returns filed in 2015. (download) Divide 5,550 by 150 million and your plastic brains will yield an infinitesimally small number complete with exponents.]
A final point — Nevadans (and residents of the other 49 states) should be aware that many of the arguments set forth by proponents of the Republican tax plan are couched in vague or highly generalized terms. Not many politicians want to have to explain why eliminating the Alternative Minimum Tax will benefit lower income Americans. Quick answer: It doesn’t. Or, the arguments may be set forth in platitude form, for example: This will put money back in your pockets. The major question is WHOSE pockets and for how long. It’s no secret that the GOP tax plan puts the majority of the benefits into the pockets of the ultra-rich, something like 80% of the benefits accrue to the top income earners.
Apologists may take a step or two further. “Democrats are engaging in class warfare.” Well, if it’s the ultra-rich vs. the other 99%, so far the 1% are winning very nicely, thank you. And, then there’s the “Democrats want to punish success.” Please spare me. First, it’s not “punishment” to pay for the military that defends you, the schools that educate you, the national parks you visit, the hospitals that treat you, the roads that smooth the way for you get to work… Secondly, no one is talking about punishing anyone, it’s just a matter of equity — we should all be paying our fair share.
Please contact your Representatives and Senators to oppose this egregious handout to the multi-national corporations and the millionaires and billionaires who stand to reap 80% of the benefits of this Great Republican Giveaway.