Sunday, January 21, 2018

GOP Tax Policies in Shambles

Vijay K. Mathur

A brief history informs us that GOP political identity is defined by their political policy stand for tax cuts, with only lip service to reducing budget deficits and national debt.   The Reagan administration cut taxes that primarily benefitted the rich, but the increasing deficits forced the administration to pass tax increases.

George H.W. Bush stated “read my lips-no new taxes” in the GOP primaries, but gave up on that promise due to the reality of more deficits.   As president he signed the budget deal to raise taxes.  George W. Bush’s administration cut taxes in 2001 and 2003.  However, more spending, low real growth rate, rising unemployment rates, more deficits and debt, and the great recession of 2007-08 did not accomplish what was promised.

The GOP is obsessed with tax cuts as a policy tool to stimulate growth and employment.  And even though the rhetoric of tax cuts is buttressed by high growth and claims of reduced budget deficits, those claims seldom materialize.  In addition, tax cut during times of economic expansion is counter to any economic logic.  It makes it harder to implement any tax stimulant in case of economic downturns. But it seems logic of any kind escapes Republicans in the Congress. 

In the Trump administration there was a clarion call to reduce corporate and other taxes. The GOP marketing campaign to sell their tax plan as a middle class tax cut was a sideshow without much tax benefit to middle class taxpayers.  GOP Congressmen emphasized that corporate tax cuts will boost profits, investment, growth, employment and high wages for the middle class. They are oblivious to the fact that, historically, economic growth is declining over time despite reductions in corporate taxes.  However, the Congress passed the tax cut under the "Tax Cuts and Jobs Act" with a slim majority. 

Thomas L. Hungerford of Economic Policy Institute (EPI), June 4, 2013, finds that during 1950-1960 annual average economic growth was 3.9 percent when the statutory corporate tax rate was above 50 percent.  However, during 2000-2010 statutory corporate tax rate was 35 percent while the annual average growth rate was 1.8 percent.  In fact, from 1948-2010 there is a positive relationship between higher real growth rates and higher statutory corporate tax rates. 

GOP Congressmen are dreaming if they think that cutting statutory marginal tax rate for corporations from 35 percent to 21 percent will create a flood of repatriated profits to the US from tax havens, where tax rates are next to nothing or much below the proposed rate.  As EPI authors Josh Bivens and Hunter Blair state, October 3, 2017, multinational corporations are waiting for another tax holiday, such as in 2004, when they paid 5.25 percent on repatriated profits.

There is an emerging consensus among many experts, including Congress’ Joint Committee on Taxation, that the tax proposal favors the wealthy and rich over middle and low-income Americans.  Even though the tax cut proposal reduces tax brackets from 7 to 4 with generally lower marginal tax rates, it either takes away or limits deductions for state and local taxes, mortgage interest, property taxes and medical expenses. 

Aside from the repeal of the estate tax, rich and very rich Americans, the tax law would benefit only certain businesses such as LLC's, S-corporations and partnerships with "pass through incomes.''  Pass -through incomes of businesses (close 40 million) are taxed at the individual tax rates than at the corporate tax rates. They could get close to 20 percent deductions in earnings. The law has made the tax for small businesses more complicated and confusing than before.  It has also excluded certain business services from tax benefits.  C-corporation do not gain much benefits. But the fact remains that tax cuts worsen income distribution, already skewed toward the rich, and increase national debt. Therefore I propose that if Democrats are in the majority in the Congress they should make some major changes in the tax law that will benefit all Americans.  

I propose the following:

1. To stimulate investment there should be targeted tax breaks for investment and saving in 401(k) type plans for all Americans irrespective of their employment status.  The Economist, July 29, 2017, reports on a study by German Gutierrez and Thomas Philippon, that found reduced investment since 2000 is due to an increase in business market power and decline of competition.  Hence, tax breaks for investment must be complemented by enhanced enforcement of Anti-Trust Laws.
In addition, to encourage innovations and entrepreneurship a tax cut for small businesses that employ 100 employees or less should be much more than the tax cut for large corporations.
2. Impose a carbon tax, and the revenue should be earmarked for infrastructure investment.

3. Capital gains, dividends and carried interest (akin to capital gains) when received should be treated as regular income for tax purposes.

4.  A progressive tax should be levied on earnings of all Americans to finance Medicare and Social Security programs.  States should be required to make a larger proportionate contribution to the Medicaid program.  Abuses in the disability insurance program must be prevented.

5. Keep the new corporate tax rate and lower tax rates for small businesses but all tax expenditures, loopholes and subsidies for businesses must be taken away.

These are some suggestions that would benefit the country and all Americans and put the budget deficits and national debt on a lower trajectory.  Bob Bryan of Business Insider, November 6, 2017, states that Penn-Wharton model predicts that the tax plan reduces Federal revenue by $1.75 trillion during the first decade.  In addition, over 22 years the plan reduces tax revenue by $4.4 trillion, thus contributing to substantial increase in national debt.  However, such predictions did not matter for the GOP in the Congress.     

I hope that GOP Representatives in the Congress start thinking about the country first rather than about the next election.  I also hope that they do not get the impression that all Americans in the middle class and at lower income levels are ignorant of the real intent of the Republicans in the Congress in passing the current tax law.  The majority of Americans do not favor the new tax law.  Hopefully they would  express their dislike in their votes in the upcoming elections.

Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.  He resides in Ogden, Utah.  

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