Why does the GOP tax reform have more tax brackets than today? It’s imperfect, unpopular, has too many tax brackets and deductions, but is a good first step. Taxing firms reduces organic growth, job-creation, and invites waste. Left-leaning media and politicians either don’t understand business or they want to dupe the public who do not know the market or the economy.
Before I examine three criticisms of the tax reform proposal, here are three comments. First, taxation can and should be simple. Nobody should need an expert to do his or her tax return. The late Steve Jobs said, “… Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple.”
Second, it’s a shame politicians, the press, and the public, play politics with tax reform. Lives are at stake. Then again, politicians focus on the “middle” class. What about other “classes”? Will preoccupation with one group cause some policies to hurt other “classes”? Consider what’s right for all citizens?
Politicians’ single focus cause them to use money as their barometer for entitlement programs. So, they tax and spend and tax and spend. This is absurd! Money is the means to the end. Government’s role is to offer needed services for each citizen. And money is the means. They must focus on delivering relevant, needed, quality programs, not how much they spend.
Third, income redistribution from one class to another doesn’t work. It’s no mistake Russia exists, and the former Soviet Union doesn’t. Stop playing politics with people’s lives! Do what’s right.
Three Criticisms of Proposed GOP Tax Reform
Here are three criticisms of the GOP tax reform proposal I hear:
- Big corporations win
- The rich receive the largest savings
- Adds around USD 1.5 trillion to the deficit
GOP Tax Reform Doesn’t Mean Big Corporations Win
In great pain, I listened to a commentator on PBS lamenting the fact that big corporations are the “winners” of the GOP tax reform. He couldn’t understand why they should get such a huge break when the “middle class” suffers. He doesn’t realize that without vibrant firms (public, private, sole proprietors) there would be no middle class—there would be no jobs.
Who or what is this big corporation that he hates? It is not a person. We must stop humanizing firms. They are not humans. They are inanimate vehicles people use to offer goods and services to clients. People own them. Let’s look at FedEx, a big firm. On December 20, institutional investors including Bill and Melinda Gates Foundation Trust, and Canada Pension Plan Investment Board (providing pensions for Canadians) held seventy-six percent of its shares. Big-business-FedEx helps many small, medium and high-income pensioners. These entities and their workers see this big business vehicle as a good income source.
A Corporation is an Investment Vehicle
FedEx earned USD 4.6 billion income in year ended May 31, 2107 and paid 1.6 billion taxes; they should pay zero taxes, not 21%. If FedEx paid no corporate taxes, it would use USD 1.6 billion to invest, grow, hire more people to expand the economy, and pay more dividends. It could buy back its shares (investing) too, which I admit it can abuse, and needs separate review. When FedEx pays dividends, the government taxes those dividends in people’s tax returns. But the government will waste a big portion of those funds.
Business is a vehicle, a shell we should encourage to grow and expand the economy. That said, the proposed GOP tax reform shows actual corporate tax rates will fall. But, the impact on government revenues will be small as firms have been using legal means to lower taxes. USA companies earn huge sums abroad and are holding them there to avoid paying USA taxes. Research by Capital Economics shows American corporations holding USD 2.6 trillion of overseas earnings.
Effective Tax Rate 21%
The Institute of Economic Policy found between 2008 and 2015, 258 Fortune 500 corporations paid an effective Federal Income Tax rate of 21.2 percent. And in 2015, the Federal Government collected a mere 10% of its revenues from corporations. So, the facts do not support the claim that the government will lose vast sums from tax reform.
Taxes reduce a firm’s ability to create jobs in the right places. It lessens the capacity to support economic growth and develop needed technology. Besides, it can weaken the firm’s competitive position. That’s why firms spend vast sums to cut their taxes.
How will big business enjoy the GOP tax reform? In time, several US firms (investment vehicles), will return funds to the USA that will to grow the economy, and create jobs. There will be no incentive to keep funds abroad until taxes creep up again.
It is essential we know corporations create jobs, not governments. And small firms are leaders. The best thing to happen to a healthy, vibrant, middle class is for firms to thrive and boost the economy. Let’s remove all taxes from businesses and allow them to grow and create sustainable jobs.
High Incomes Paid More Receive Most Reductions
We should expect across-the-board tax changes to impact those paying a higher percentage of taxes more than those paying a lesser proportion. So, we know higher income folks will gain more than others from these reforms. Let’s review a few taxes facts:
- In 2014, the top 50 percent of taxpayers paid 97.3 percent of total individual income taxes while the bottom 50 percent paid the remaining 2.7 percent.
- The top one percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent (29.1 percent).
- The top one percent of taxpayers paid a 27.1 percent individual income tax rate—over seven times higher than taxpayers in the bottom 50 percent (3.5 percent).
Those who paid the most will receive the highest reductions. Politicians and the media promote class warfare. They must stop now! Robin Hood economic policies of taking from the wealthy to redistribute to other classes do not fix problems. They create them. Let’s find challenges facing people and fix them without creating divisions.
Government isn’t the solution to most issues. In fact, often government is the obstacle. They spent vast sums over the years to manage social programs and improve lives with little or no progress. Throwing more money at problems never works. Money is a bridge; a means to an end that we should not use to test performance or to assess solutions.
The crucial issue is for governments to stop playing politics and handle real matters honestly. They must offer workable solutions to take care of the vulnerable in society. We must limit their access to funds beyond doing this role. The records show the more they get, the more they waste.
USD 1.5 trillion to the Deficit is Voodoo Economics
How does the GOP tax reform add to the deficit? How do people compute this deficit? They use the archaic baseline budgeting that assumes existing inflation-adjusted programs will continue. That’s unrealistic! Review US Senator James Lankford’s sampling of government fumbles for a glimpse of government waste. Governments must find and stop wasteful spending and start becoming better stewards of tax dollars. But, this approach begins by getting rid of the awful waste-generating baseline budgeting. I was a CFO for many years, and I would never accept incremental budgeting. The past is neither a correct representation nor a good predictor of the future.
Budgeting is our best estimates of resources we need to do future goals. It is time governments examine not only their purposes but the means they use to achieve relevant goals.
The GOP tax reform didn’t go far enough. It should have eliminated most brackets, abolished corporate taxes, raise the threshold for personal income tax high enough to remove deductions. The right individual income tax threshold for tax payment, and the right level for State taxes’ offset should be easy if we stop political maneuvering. Every broad-based tax reduction proposal will cause those who paid most taxes to benefit the most from sweeping rate reductions.
Big corporations are not people, but productive, value creating, job-creating vehicles we must encourage to grow and create jobs. They should get neither benefits nor blame. Don’t tax them. Tax the people who earn from them. Blame the folks who run them and decide the things they do.