Why does the GOP tax reform result in more tax brackets? Though imperfect, unpopular, with too many income tax tranches and deductions, the proposed GOP tax reform is a step in the right direction. Taxing businesses reduces their ability to grow organically and create jobs in the right locations. Left-leaning media and left-leaning politicians either are ignorant of business or have chosen to deceive the public who do not understand the market and the economy.
Before I examine three criticisms of the GOP tax reform proposal, I have three comments. First, I thrive on simplicity. Like the late Steve Jobs, I believe, “…Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple.” Taxation can and should be simple. Nobody should need an expert to prepare his or her tax return.
Second, it’s a shame politicians, the press, and the public, view tax reform politically. People’s lives are at stake. Why don’t we look objectively at what’s right for all citizens? Politicians focus exclusively on the “middle” class. What about other “classes”? Does preoccupation with one group cause some policies to hurt other “classes” inadvertently? Maybe this single focus is the reason politicians use money as their barometer for entitlement programs, which ignores long term adverse effects of these measures on individuals’ lives. After all, government’s role is to protect the vulnerable in society and provide needed services for all citizens.
Third, income redistribution, taking from one class and giving to another, has never worked. It’s no mistake Russia exists, and the former Soviet Union does not. Let’s stop playing politics with people’s lives.
Here are my views on three criticisms of the GOP tax reform proposal I read about and hear regularly:
- Big corporations win
- The rich receive the largest savings
- Adds ~ 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 recently 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 businesses (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’s inanimate, merely a vehicle that employs people to provide goods and services. It is not a person. People own it. Let’s look at FedEx, a big corporation. On December 20, institutional investors including Bill and Melinda Gates Foundation Trust, and Canada Pension Plan Investment Board (providing pensions for all Canadians) held seventy-six percent of its shares. Many small, medium and high-income pensioners benefit indirectly from big business FedEx. These institutions, along with many workers see this big business vehicle as a source to provide income for them.
A Corporation is an Investment Vehicle
For FedEx’s year ending May 31, 2107, it earned USD 4.6 billion income and paid 1.6 billion taxes. FedEx should pay zero taxes, not 21%, but zero. If FedEx did not pay corporate taxes, it would use USD 1.6 billion to invest, grow, hire more people to expand the economy, pay more dividends, or buy back their shares, a form of investing, I admit, can be abused, and needs to be looked at separately. If FedEx paid dividends, the government would tax those dividends, and people would get that after-tax income. When FedEx pays taxes, sadly, the government will waste a significant portion of those funds.
Business is a vehicle, a shell we should encourage to grow and expand the economy. That said, the GOP tax reform proposal shows actual corporate tax rates will fall. However, the likely impact on government revenues will be small as companies have been using legal means to lower taxes. Look at the vast sums USA companies earn abroad and are holding abroad to avoid paying USA taxes. Research by Capital Economics shows American corporations holding USD 2.6 trillion of overseas earnings.
According to The Institute of Economic Policy, between 2008 and 2015, 258 Fortune 500 corporations paid an effective federal income tax rate of 21.2 percent over that eight-year period; several paid no taxes. So, the idea that government will lose significant sums is ludicrous. Indeed, in 2015, the federal government collected a mere 10% of its revenues from corporations.
Taxing a business reduces its ability to create jobs in the right locations, and reduces the vehicle’s (business entity) ability to contribute to economic growth to its full potential. Then again, taxing businesses lessens their ability to compete internationally.
How does big business benefit from the GOP tax reform? In time, several US businesses, investment vehicles, will return funds to the USA which will generate economic activity, thereby creating jobs. Further, there will be little incentive to keep funds abroad until taxes start creeping up again. It is essential we realize that corporations create jobs, especially small companies. The best thing to happen to a healthy, vibrant, middle class is to have healthy thriving businesses generating economic activity. 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 more significantly those paying a higher percentage of taxes than those paying a lesser proportion. So, it is not surprising that higher income folks will benefit more than others from these reforms. Let’s look at some tax facts:
- In 2014, the top 50 percent of all taxpayers paid 97.3 percent of all 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 combined (29.1 percent).
- The top one percent of taxpayers paid a 27.1 percent individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).
Politicians and the media should stop promoting class warfare. Robin Hood economic policies of taking from the wealthy to redistribute to other classes do not fix problems; they create them. Let’s identify challenges facing individuals and try to fix them without creating divisions. Government isn’t the solution to most issues. In fact, often government is the obstacle. Look how much money government spent over the years trying 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 evaluate performance or to assess the magnitude of solutions.
The crucial issue is to stop playing politics and start dealing with real matters honestly without political interference. The private sector isn’t perfect, corruption exists, but with diligence, transparency, and proper accountability, that sector is likely to do a better job than governments to execute solutions in many areas of the economy. Finding the right balance between public and private sector policy execution is where we should be spending effort. Still, a significant challenge is how to minimize governments’ access to funds, while allowing them to take care of the vulnerable in society constructively.
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 an archaic baseline budgeting system 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 identify and stop wasteful spending and start becoming better stewards of tax dollars. However, this approach begins by getting rid of the awful, waste-generating baseline budgeting system. I was a CFO for many years, and I would never accept incremental budgeting. The past is neither an accurate representation nor a good predictor of the future.
Budgeting is our best estimates of resources needed to achieve 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. Finding the right individual income tax threshold for tax payment, and the right level for State taxes’ offset should not be difficult if we eliminate political maneuvering. Every broad-based tax reduction proposal will result in those who paid most taxes benefiting the most from sweeping rate reductions. Big corporations are not people, but productive, value creating, job-creating vehicles to be encouraged and not taxed.