11/11/2017
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 the Trump administration there is a clarion call to reduce corporate and other taxes under the bill “Tax Cuts and Jobs Act”. The GOP marketing campaign to sell their tax plan as a middle class tax cut is a sideshow without much tax benefit to middle class taxpayers. GOP Congressmen emphasize 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.
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 statuary 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 20 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, as it stands now, 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, especially those with “pass through incomes” in proprietorships, partnerships, and S–corporations, would hit the jackpot in tax savings due to the proposed 25 percent rate, which is lower than the marginal tax rate on personal income. Hence, tax cuts worsen income distribution, already skewed toward the rich, and increase national debt. The recently proposed Senate bill is not much of an improvement over the House bill. Therefore I propose that the Congressional GOP should scrap the current tax proposal and work on tax reforms 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 is warranted for small businesses that employ 100 employees or less. Subsidies including tax expenditures for corporations must be taken away.
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. I am not against lowering corporate tax rate if it results in lower consumer prices.
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, more than $1.5 trillion permitted under the budget “reconciliation” rules. In addition, over 22 years the plan reduces tax revenue by $4.4 trillion, thus contributing to substantial increase in national debt. Thus the proposal violates budget “reconciliation” rules and is therefore subject to a possible Senate filibuster.
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 House GOP in the current tax proposal.
Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah