In every presidential election, office seekers elbow each other to position themselves as favoring tax breaks for the electorate. Kamala Harris raced in quickly with proposals for a tax break for the middle class and a tax deduction of up to $50,000 for new small businesses ─ two debt producing polices. To her credit, the vice president intends to roll back a Trump administration law by raising the corporate tax rate to 28%, a needed revenue-raising policy. The first two tax proposals sound good but aren’t good. Both candidates favor Child tax credits, a worthy policy for a huge class of voters and another example of pandering to the taxpayers.
The Middle Class Tax Cut
No matter how it is sliced, diced, or spiced, this middle class tax cut benefits nobody, harms the nation, and questions Harris’ credibility. The presidential aspirant said in her acceptance speech that she will be a president for all peoples in the nation. Singling out a tax cut for the more fortunate does not match her words. Unexplained is why this special class needs a tax cut.
Tax cuts are usual when demand is low, such as in a recession. The present economy is healthy with plenty, and I do mean plenty, of new Teslas in my middle class neighborhood. Elevated consumer demand is subsiding, noted by the decrease in consumer-inflated prices and increase in stock and housing market asset prices. Money is flowing into assets and a middle class tax cut will accelerate the trend.
Taxes transfer money between the government and the public. Neither method adds or subtracts to the money supply nor allows more or less available spending to the economy ─ the purchasing power stays the same, which means the purchasing of goods and services remain the same, and the GDP remains the same Lowering taxes mainly assists the already employed, and that is not the major priority. Who pays taxes ─ the employed. Who receives tax breaks ─ those who pay taxes. Lowering taxes redistributes federal assistance from needy persons to the employed. Which is preferable, redistributing income so the employed have more to spend or redistributing the income so the underemployed have something to spend?
Stimulating the economy by tax breaks is a psychological phenomenon. The talk, exaggerations, promises, and general optimism of tax breaks fashion a more optimistic public, which supposedly stimulates spending, investment, and courage to carry more debt. Creeping in to the debate is another assumption ─ those who have excess funds will invest and stimulate growth. Not considered is they might invest in speculative ventures that only churn money or might purchase imports, which decreases purchasing power of domestic production.
GDP has steadily grown, with a few bumps, in the last 80 years, and no relation to lowering of taxes has been shown. A government report: Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, Thomas L. Hungerford Specialist in Public Finance, September 14, 2012 at concludes:
The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War. The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced ─ lower top tax rates may be associated with greater income disparities.
Because taxable incomes do not include inflation and these have increased greatly during the last decades, it is difficult to compare tax rates in 2024 with earlier tax rates. Peering through data, they seem just as low as they were in 2014, when the government report was published, or at a near historic post-World War II low. Why go lower?
Tax Deduction of up to $50,000 for New Small Businesses
The principal hindrance to starting a small business is the high interest rate. Tax deductions will not help small businesses that have no access to funds and no profits to tax. The proposal affects a minor portion of the small business community and is subsidized by a major portion of the economy ─ those who can also use tax breaks.
This tax benefit is a policy seeking a problem. Newly created small businesses have exploded in the post-pandemic period. An April, 2024 Treasury Department report relates,
Small businesses created over 70 percent of net new jobs since 2019. In the previous business cycle, small businesses created 64 percent of net new jobs.
Small business optimism is rebounding as inflation falls. Multiple measures of business optimism show substantial increases in recent months. More than 70 percent of small business leaders expect revenues to grow over the next year, the most since the pandemic.
Entrepreneurship continues to surge: the United States is averaging 430,000 new business applications per month in 2024, 50 percent more than in 2019. The subset of applications for businesses most likely to hire employees has also risen to 140,000 per month, 30 percent more than in 2019. Over 19 million businesses have been formed since Biden’s inauguration, and these are not just sole proprietorships or fly-by-night operations. The subset of applications for businesses most likely to hire employees has increased 30 percent from 2019.
The Main Street Alliance(MSA) establishes priorities for small businesses. Its 2025 agenda does not include a suggestion for a tax deduction. The Alliance advocates for “stronger antitrust enforcement, fair tax policies, and expanded access to capital. This includes efforts to revise the Tax Cuts and Jobs Act, support the Federal Trade Commission (FTC) and Department of Justice Antitrust Division, and fight against cuts to critical small business funding from the Small Business Administration (SBA) and other agencies.”
MSA “plans on supporting the continued implementation of the Inflation Reduction Act, paid family and medical leave, investments in child care, and enhanced subsidies for health insurance on the Affordable Care Act exchanges.”
Child Tax Credit
Kamala Harris’ economic plans include a $6,000 tax credit for parents of newborns and a continuation of the pandemic-era Child Tax Credit (CTC). The latter expanded the Child Tax Credits and boosted the benefit to $3,600 for children under six years old and to $3,000 for children from 7 to 17 years of age.
Seems beneficial to subsidize those in need, which are usually growing families. In addition, it is good economics — places funds in hands of those who will spend them for essentials and move them through the economy. The question that Harris has not answered is, “To what level of income will the credits apply?” My recommendation is that credits should also be based on assets and slide off gradually from $60,000 income to $100,000 income. Their effects on inflation need study.
Corporate Tax Rate
Before Trump lowered the maximum corporate tax rate to a flat 21 percent, the 35 percent rate for income greater than $18.3 million, had been relatively constant for 32 years, and economic gyrations had not shown to be due to that rate.
The effective corporate tax rate graph tells another story — corporations have taken advantage of tax breaks and loopholes to reduce their taxes.
The problem is not high corporate tax; the problem is the ability of corporations to avoid paying taxes. If tax breaks and loopholes unique to U.S. corporations, such as accelerated depreciation, using excess tax benefits from stock options to reduce federal and state taxes, and industry specific tax breaks were reduced or eliminated, then the tax rate could also be reduced; the government charges with one legislation and discharges with another legislation. Corporations are responsible for finding loopholes to avoid taxes, and the government is responsible for providing the loopholes.
The posed advantages of a lower corporate tax rate — increased funds for investment translating into increased production, which increases employment and Gross Domestic Product might be true if corporations used the greater part of their profit for increased investment. However, corporations have used the excessive profit for executive bonuses, for stock buybacks, for corporate takeovers, and for augmenting retained earnings. With corporate profits at all-time highs, “S&P 500 Q1 2024 buybacks were $236.8 billion, up 8.1% from Q4 2023’s $219.1 billion and up 9.9% from Q1 2023’s $215.5 billion.”
Left out of the corporate books is responsibility to support infrastructure – transportation, communication, utilities – government research, government loans, credit guarantees, bailouts, assistance to education, job training, subsidies, and other programs that benefit corporations. Shouldn’t corporations repay a fair share of the financial assistance that guarantees their prosperity?
The oft-quoted assertion that high tax rates have been the primary driver for corporations to move facilities to nations that have low tax rates is not proven. Manufacturing close to market and utilization of low labor rates have been the more prominent drivers. Commentators spuriously define the words tax havens, tax deferred, and tax inversions to confuse the public, and promote the mistaken belief that U.S. corporations can change their domicile and easily escape major payments of the corporation’s federal taxes on income earned outside the United States.
Corporations, whose sales contain much intellectual property (Microsoft), are able to shift certain profits on sales, but this cannot easily occur for profits earned from trade or business of defined products manufactured outside the United States. If repatriated, these profits are eventually subjected to U.S. taxes.
The key proposition, which is overlooked, is that government spends all of corporate taxes and all the money circulates in the economy, some invested, some increasing production, some increasing employment, and all adding to or maintaining GDP. Why is this proposition “the key proposition?”
Economics becomes simplified when it is realized that all money is debt. The money supply can only be increased by either banks’ lending money from Reserves and essentially creating money, or by the Federal Reserve engaging in Open Market Operations ─ purchasing government debt that is financed by the Treasury Department. Treasury prints money that appear as IOUs at the Federal Reserve. If money remains dormant as excessive retained earnings or circulates speculatively as stock buybacks, the money, which is debt is not wisely used; it is comparable to borrowing money at 6 percent and then, rather than purchasing a product, investing it at 3 percent. All money in the economy is debt and all the debt is paying interest and being constantly retired and renewed.
This last tidbit is, admittedly, controversial and needs more discussion. It is the essential of the capitalist system, which grows by reinvesting profits ─ capital generating capital ─ and where all the money supply, including profits, that is needed to generate capital is equal to the debt in the system. Positive trade balances play a role, but generally, capitalism only moves forward by increasing debt.
Trump Tariffs
One mystery that has clouded the Biden administration is negligence in canceling the Trump administration’s tariffs on goods from China. During their debate, Trump questioned Harris on why, “if the Dems do not support the tariffs, has the Biden administration kept them?” Harris did not supply an answer.
Tariffs are used to either increase government revenue ─ the principal method before the income taxation system ─ or to protect domestic industries.
Former President Trump proudly declared that his tariffs had harmed the Chinese government. Is the function of a U.S. president to harm another government? He also claimed that foreign companies are paying for tariffs. “Multiple studies suggest this is not the case: the cost of tariffs have been borne almost entirely by American households and American firms, not foreign exporters.”
Protection is difficult to gauge; tariffs may have helped some producers and harmed companies who use the imported goods and now have to pay higher prices for the commodity. The export country, in this case, China, can retaliate and raise taxes on imports from the U.S. and harm American industries.
Have the tariffs protected the steel industry, the principal industry in the tariffs? The answer came in December 2023, when Nippon Steel announced a $14.9 billion takeover deal of U.S. Steel.
Conclusion
In conventional economic theory, the government formulates a budget and taxes the public to pay for the budget. If the tax revenues do not reach the expenditures, then either the government cuts the budget ─ done during Bill Clinton administration ─ or issues debt. What is never done is to have taxes planned to follow budget considerations. The promises by presidential contenders of cutting taxes are promises that have no rational; future budgets will be forced to be planned about tax revenue rather than having tax revenue agree with budget plans, a bad way to run a country.
The post Pandering to the Taxpayers first appeared on Dissident Voice.
This content originally appeared on Dissident Voice and was authored by Dan Lieberman.
Dan Lieberman | Radio Free (2024-09-16T15:18:52+00:00) Pandering to the Taxpayers. Retrieved from https://www.radiofree.org/2024/09/16/pandering-to-the-taxpayers/
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