Election issues: Taxes
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E minus 36 – In a nutshell, Democrats are proposing tax increases whereas Republicans keep talking about tax cuts. And if this sounds familiar it should, because Americans have seen this movie before. Query, which side is closest to being right this time, and why? Let’s take a look.
A. Back story - Consider the action during the primaries phase of the 2016 presidential race. Both Democratic candidates (Hillary Clinton & Bernie Sanders) were advocating tax increases (and even bigger spending increases). All of the Republican candidates (except John Kasich) had a tax cut plan, of which Donald Trump’s plan was – surprise, surprise - the biggest and boldest. Campaign issues: Deficits and debt, Section III, 2/29/16.
•Hillary Clinton & Bernie Sanders have both proposed to hike taxes on well-to-do individuals and big business, but the proceeds would be earmarked for additional spending programs rather than being applied to reduce the deficit and there has been no apparent recognition of the drag effect on the economy. If either of them was elected president, we would expect the fiscal problem to continue getting worse.
•Donald Trump’s tax plan seems “unacceptable” given the Tax Foundation’s estimate that it would cut government revenue by about $1T per year. He proposes to rebuild the military, and his rhetoric about cutting spending in other areas is vague. All things considered, we doubt that the deficit would be reduced under his aegis.
After Trump won the election, he and congressional Republicans succeeded in getting major tax cuts (individual and corporate) enacted at the end of 2017 via the reconciliation process (to avoid a Senate filibuster) – with a projected revenue loss of some $1.4 trillion over 10 years. The Tax Cuts and Jobs Act was approved without a single Democratic vote, and there was a nonstop negative reaction from the mainstream media and Democrat leaders about how the TCJA was a giveaway to the wealthy, etc.
Given the timing and other details, most Americans weren’t clear just how much their taxes had been cut and Republicans didn’t garner anywhere near the political boost they had hoped for. Trump struggles to convince Americans he cut their taxes, Colin Wilhelm, Washington Examiner, 4/15/19.
An NBC/Wall Street Journal poll released last week found that only 17% of respondents believed they would pay less in taxes due to the law, while 28% thought they would pay more (the majority didn’t know or thought their taxes would be the same). In fact, about two-thirds of households received tax cuts in 2018, according to an estimate from the Tax Policy Center, a nonpartisan think tank. Only 6% saw tax hikes.
B. Current proposals – Since 2019, the president (and to a lesser extent other GOP leaders) has been talking about a further tax cut that would most likely be delivered – election outcomes permitting – in 2021.
The details are fuzzy, but the basic idea seems to be tax cuts for middle class workers (including those who are currently paying payroll taxes but not income taxes), corporations that bring back offshored manufacturing operations to the US, and investors subject to capital gains taxes. President Trump outlines second term tax ideas, Erica York, taxfoundation.org, 8/25/20.
There has also been thought of providing further relief (on top of the CARES Act enacted in March 2020) from the economic effects of the coronavirus pandemic. With Democrats balking on Republican proposals in favor of its own massive spending package, the president signed several executive orders that would demonstrate action by his administration. One of these orders directed the Treasury secretary to defer collection of the employee portion of most FICA (Social Security) taxes during the period Sept. 1- Dec. 31 2020. Further, the secretary was directed to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred” later. The phase four coronavirus relief battle, 8/10/20.
If the president gets his way, the FICA tax on employees (including self-employed individuals) may wind up being forgiven for the last four months of 2020 and then reinstated in 2021 at a reduced rate. To date, however, most employers haven’t opted to implement the temporary deferral plan. Accordingly, this plan seems to represent little more than a talking point unless and until it’s backed up by legislation. Trump payroll tax delay plan finds few, if any, supporters, Jay Heflin, Washington Examiner, 9/17/20.
For their part, Joe Biden and other Democrats have continued to advocate tax increases for big corporations and affluent individuals to ensure said taxpayers will pay “their fair share.” Also, a variety of special interest tax breaks are contemplated for various persons/purposes, e.g., low income renters, first time home buyers, informal caregivers, clean energy tax credits, manufacturing communities (copying the idea of opportunity zones?), and builders of childcare facilities. Reviewing Joe Biden’s tax vision, Garrett Watson & Erica York, taxfoundation.org, 8/20/20.
Biden has stated that no one with taxable income of less than $400 thousand per year would pay higher taxes, but there are several reasons to question this. Notably the statement is belied by the details of his own tax plans. Biden’s no tax increase pledge contradicts campaign plan, Jay Heflin, Washington Examiner, 5/23/20.
For example, under Biden’s proposal, single filers earning more than $163,300 in 2020 could only deduct 28% for itemized expenses even though they are in a 32% tax bracket. This equates to a 4% tax increase because without the limitation, they could have taken a 32% deduction.
An additional point is that an increase in the top corporate income tax rate (from 21% to 28%) would probably be passed on to consumers via higher prices. Also, tax increases tend to slow economic growth, which again would represent a burden (even though it can’t be provably quantified) on the general public.
Further confusion re the Democrat position has been created by recent statements to the effect that contemplated tax increases might be deferred pending recovery from the coronavirus pandemic recession. Progressives like Sens. Bernie Sanders and Elizabeth Warren are reportedly still pushing for immediate tax increases, but other Democrats seem to support a more cautious approach. Democrats no longer promising to raise taxes, Asche Schow, dailywire.com, 9/15/20.
C. Fiscal principles – Here are some points that may be helpful in evaluating the current tax proposals of the respective sides.
#GOVERNMENT SPENDING – No matter how wasteful it may be, every government spending program (existing or proposed) is of benefit to some persons or business interests and will therefore have political support – which is typically better organized than the generalized opposition of advocates of fiscal responsibility. Small wonder, therefore, that big spenders tend to prevail over fiscal conservatives and the US government has been running chronic deficits most of the time during the past half century.
As the saying goes (and economist Milton Friedman famously observed), there’s no such thing as a “free lunch.” If the US government spends more money than it collects in taxes, Americans will wind up paying the tab in some other way, e.g., via inflation that reduces the value of their savings.
It follows, we believe, that a practice of systematically balancing the budget – by limiting spending programs to the amount of taxes Americans are willing to pay for them – would leave the country better off than a boom/bust type of fiscal management. See SAFE’s letter to the members of Congress, 6/3/13.
#AMOUNT OF TAXES – There may be some who are willing to pay whatever amount of taxes may be imposed, but most people feel otherwise. Accordingly, government spending programs are far more popular than the tax payments required to pay for them.
When chronic budget deficits are in vogue, as has been true in this country for nearly 20 years, one might think there should be a presumption in favor of any tax increases that might be proposed. All too often, however, proposed tax increases are paired with even larger spending increases rather than reserving the incremental revenues for deficit reduction. No fiscal plan can be properly judged without considering both sides of the equation.
#WHO PAYS - When proposing government spending programs, politicians are typically reluctant to explain how the spending involved will be funded. Even if the prospect of tax increases is acknowledged, moreover, it’s typically added that big corporations, the wealthy, or whoever will bear the resulting burden versus, say, “ordinary” Americans.
A typical reaction is that people in my class or category are paying plenty of taxes already, but if big corporations and the wealthy have to pay a bit more that’s OK. Or as an inside-the-Beltway expression goes, “don’t tax you, don’t tax me, tax that fellow behind the tree.”
To minimize this type of self-centered thinking, it’s desirable that the tax burden be spread broadly over the population. Many millions of working Americans currently pay hardly any income taxes (or even receive net income tax refunds due to the availability of “refundable” tax credits like the Earned Income Tax Credit). And the payroll taxes they pay only partially cover the cost of their own Social Security and Medicare benefits, so in effect they are not contributing anything to the general cost of the federal government.
Non-payers have no incentive to question spending increases, whether wasteful or not, because the money doesn’t seem to be coming out of their own pockets (even if they unwittingly wind up bearing part of the burden for corporate tax increases and/or inflation). For better results, SAFE would repeal the refundable tax credits, minimize other tax preferences, and restructure the tax tables so essentially all workers will be required to pay some taxes (even if it’s a very modest amount in the lower brackets.) For a sample of what such a system might look like, see SAFE’s SimpleTax proposal, October 2010.
Even if it’s too late for such an overhaul at this point, there would be no excuse for making the current situation worse by increasing the already disproportionate share of the total tax burden that is borne by the affluent. No, rich Americans don’t pay lower tax rates than poor Americans, Andrew Wilford, federalist.com, 11/4/19.
TAX SIMPLICITY – A viable tax system should efficiently collect the desired amount of revenues with a minimum of effort and angst on the part of both taxpayers and the Internal Revenue Service. We need a broad-based tax system with clear-cut rules, relatively low tax rates, and a minimum of tax preferences (deductions or credits designed to achieve social or economic purposes, e.g., wealth redistribution, fostering “renewable” energy, etc.). Furthermore, the tax system should not be in perpetual flux as a result of enacting temporary tax provisions and putting up with constant battling between the two political parties as to what’s going to happen next.
D. Assessment – Neither side has offered a “perfect” tax plan, far from it, but it does seem to us that the Republican plan would do considerably less damage – particularly if it was tweaked in accordance with our suggestions. Consider the following:
#TRUMP ADMINISTRATION – The tax cuts enacted in 2017 were a mixed bag, although we endorsed them overall. The business tax changes were the best part in our view, e.g., it made sense to slash the US corporate income tax rate to an internationally competitive level and thereby eliminate one of the motives for offshoring US business operations. The individual tax cuts may have been necessary for political reasons, but there wasn’t much true tax reform or simplification involved.
The tax revenue loss from the TCJA was exacerbated by stealthily reinstating a host of special tax breaks for individuals and business interests; said tax breaks could and should have been allowed to expire. Shame on you, congressional Republicans! And while there was some apparent boost in US economic activity after the tax cut, the boast that the US will grow its way out of the reduction in projected tax revenues has yet to be realized.
Republicans want to continue supporting the military, border security, resisting demands to defund the police, investing in infrastructure, etc. There has been no clear-cut expression of concern about budget deficits, let alone proposals to reduce them. Still, if the economy rebounded strongly in 2021 as the coronavirus pandemic played out, the budget gap hopefully would begin to narrow.
Proposals for further GOP tax cuts have seemed unimpressive. See, e.g., Mid-term issues: Taxes, Section C, 9/3/18.
The idea of reducing payroll taxes is particularly unappealing, as it would not only squander needed tax revenue but further reduce the incentive for lower income Americans to pay attention to the cost of government programs. See Section C, Who Pays, infra.
The best bet for Republicans at this point, in our opinion, would be to capitalize on and preserve the tax cuts that have been achieved versus promising additional cuts that simply aren’t warranted under the circumstances.
In particular, we would suggest making the “temporary” provisions of the TCJA permanent, e.g., by permitting corporations to continue “current expensing” of certain capital outlays. To this end, SAFE joined in a coalition letter to the Senate on 8/4/20 urging passage of the CREATE JOBS Act.
Also, we would urge the repeal of as many special tax breaks for individuals and business interests as possible and a ban on creating any new ones (such as to reward companies that bring back manufacturing operations to the US that were previously offshored to China). Better to keep overall tax rates low and roll back unduly burdensome regulations so the US will be an attractive place to invest without tax subsidies.
#BIDEN CAMPAIGN – Do the proposed tax increases demonstrate fiscal responsibility? Not really, as proposed spending increases are even higher and the net effect would be to increase future deficits rather than reducing them. Don’t take our word for it, either, because this conclusion was recently confirmed – with the campaign’s approval - by a Moody Analytics study. Biden campaign touts analysis showing his policies would cost $7.3 trillion and add $3.2 trillion to deficits, Philip Klein, Washington Examiner, 9/24/20.
Consistent with the precepts of Keynesian economics, government deficits are often supported as a beneficial way to stimulate the economy. But this sort of thinking reflects a naive trust in the purported benefits of fiscal stimulus, which has rarely been vindicated by real world experience. See, e.g., When puff, the magic multiplier goes poof, Veronique de Rugy, townhall.com, 8/13/20.
There are always economists, journalists and pundits willing to assume that this time will be different and government spending will deliver on the promises made on its behalf by pro-spending advocates. Unfortunately, this is wishful thinking. It is also a dangerous game to play. If spending doesn't deliver on the promised economic growth, what it will undoubtedly achieve is more debt. That, sadly, is a scenario where future growth goes up in a puff of smoke.
The Biden tax plan is also deficient in other respects:
•Far from ensuring that the affluent will pay their “fair share” of the tax burden, it would actually reduce the already insufficient portion of taxes being paid by lower income Americans.
•Tax complexity wouldn’t be reduced, it would be increased by launching a host of new special interest tax preferences – not to mention creating confusion by reversing most of the changes that the Republicans just put in place without giving them the benefit of a fair trial.
#Tax hikes are not appropriate now. Taxes only add price increases for corporations as they are simply costs. Tax cuts would help but the Fed is flooding the economy with liquidity. Dems still want to punish capitalism. Not looking good. Dems will ruin economy. – SAFE director
#Thanks for following these stories. – Family connection