Let’s Talk Taxes…

The Republicans have finally passed a tax cut, and liberalism is going nuts.  Let’s talk taxes, and try to get some truth out there.

This article discusses the actual tax bills passed by the house and senate.  Before delving into it, it may help to read a brief primer on how tax policy works, which can be found here.

The House and Senate tax bills differ and will have to be reconciled.  That said, they both cut the corporate tax rate from 30% to 20%.  Democrats are calling this a gift to big businesses, but it is long overdue, and if we are honest, businesses don’t pay taxes anyway.  Only people pay taxes.  Businesses pass taxes along to customers, in the form of higher prices; employees, in the form of lower wages; and shareholders, in the form of lower returns.

Businesses may not pay taxes, but taxes do affect their decision making.  Corporations are more apt to keep cash overseas when tax rates are high – and sure enough, corporations have trillions of dollars parked overseas, where it cannot grow our economy.  We also have had, for the past few years, more businesses closing than opening.  This is the first time in the history of our country that we have been losing businesses at a faster rate than we have been gaining them, and that’s a trend that cannot continue.  Lower tax rates on businesses will lead to more business creation, which in turn will create more jobs.

The House bill would cut the corporate tax rate immediately.  The Senate bill does not cut the corporate tax rate until 2019.

Both bills reduce individual tax rates, but the House bill would cut the number of tax brackets to four, whereas the Senate bill keeps seven tax brackets.  Both lower rates for low-to medium earning households, and both increase the thresholds needed to move into higher brackets.  The House bill actually keeps the top rate at 39.6% – which is where it is today.

Deductions will be reduced significantly in both bills, but personal exemptions will almost double.  Those who do not itemize will enjoy the higher personal exemptions.

Both bills increase the child tax credit.  The House bill raises it to $1,600, and the Senate bill to $2,000.  That’s a credit rather than a deduction, so families with children will benefit significantly, even if they do not pay federal income taxes.

The House bill caps the mortgage deduction at $500,000.  The Senate bill keeps it where it currently is, at $1 million.

Currently, anyone who has medical expenses that cost more than 10% of their income can deduct it.  The House bill repeals this and the Senate bill actually expands it.

The House bill repeals student loan deductions.  The Senate bill does not.

The House bill eliminates the estate tax.  The Senate bill raises the inheritance exemption but keeps the estate tax.

The House bill keeps the ACA’s individual mandate.  The Senate bill repeals the mandate.

Republicans have a harder time getting things through the Senate than the House, so expect most of the Senate’s differences to make it into the final bill.  If I were a betting man, I would expect the four individual rates the House wants, but I think the Senate will get everything else it wants.  The ACA mandate for example will be removed.

Democrats will scream about the individual mandate leading to an estimated 13 million Americans ‘losing’ their health insurance, and that’s true, but those 13 million Americans will be choosing to forgo insurance.  Nothing in the Senate bill forces anyone to lose insurance, and I don’t know how anyone can rightfully complain about expanding choices.

The 47% of Americans who do not pay federal income taxes won’t see much of a difference from the tax bill, unless they have children, in which case they’ll get a more generous stipend.  Families making over $1 million a year will benefit, as will families making less than $500,000.  The higher standardized deductions will raise the percentage of Americans that pay no federal income taxes at all.  The only group that will suffer will be those making between $500,000 and $1 million a year.  It might be fair to quibble that those making over $1 million a year should suffer more than those making $500,000 to $1 million, but very few Americans make $500,000 a year, so while this is a fair complaint, the tax bill is still heads and shoulders better than what we have today.

Some Democrats have noticed similarities between the Senate tax bill and a tax bill that was passed in 1929.  These Democrats are saying that the Republican tax plan will cause a recession or a depression.  This may be the most hair-brained thing I have ever heard.  Yes – there was a tax cut in 1929, and we did go into a depression afterwards, but that does not mean the tax cut caused the depression.  Those who are interested in knowing what did cause the Great Depression can get a brief write up here (spoiler:  It had nothing to do with tax policy).  The tax cut not cause a recession.  It will do the opposite, causing business expansion, which is a good thing for our economy.  Cutting the business tax in particular will be an enormous boost for businesses.  I’d repeal all business taxes.

Democrats are pointing to executives who say they are going to pass the tax savings on to shareholders as proof that the tax cut will benefit the rich.  Yes it will.  It will also help anyone who has a pension, or a 401K.  It will be an enormous shot in the arm for government pensions, many of which will go bankrupt without faster growth.

The fact of the matter however is that businesses don’t really get to decide what they will do with lower taxes.  Competitive pressures will lead to lower prices.  Economic expansion will fuel job growth, forcing businesses to pay higher wages to get the workers they need.  Higher wages will cause more automation to occur, which will allow our economy to produce more with fewer people.  Rather than causing unemployment, this will allow people to move into higher value-adding activities, where they can earn more.  There is a correlation between the number of work-hours it takes to produce something, and the cost of that thing in terms of the number of hours one needs to work to buy it.  As a result, automation makes things less expensive.

You may have read that the tax cut will cost $1.4 trillion over ten years.  It won’t.  The Congressional Budget Office does not count additional revenue from economic growth when making it’s predictions.  The tax cuts may cost something over ten years, but imagine the difference in taxes collected when you have 1% annual growth, and when you have 3% annual growth.  Our economy is currently $19.3 trillion.  If we grow at 1% a year for ten years, we will have a $21.76 trillion dollar economy in ten years.  If we grow at three percent, we will have a $26.48 trillion dollar economy in ten years.  It does not take a rocket scientist to figure out that you can raise more tax revenue from a $26.48 trillion dollar economy than from a $21.76 trillion dollar economy.  If we tax 18% of our economy (which is about right), in ten years we’ll have another $850 billion in tax revenues based solely on the higher rate of growth, just in that one year.

For some reason, the relationship between economic growth and tax revenues is contentious, with people saying such preposterous things as ‘austerity does not work.’  You know what?  Austerity DOES work as long as one understands when austerity is necessary, and what austerity is for.  For those who are interested in austerity, you can read more about it here.

I’m not jumping for joy over either the House nor the Senate tax bills.  Neither is anywhere near as ambitious as the Reagan tax cuts were.  I wish the Republicans could have been more ambitious rather than less.  I wish the Republicans could have eliminated all deductions, and reduced rates further.  Unfortunately, doing so was politically infeasible.  The tax law the House and Senate reconcile won’t be perfect, but it will be a vast improvement over current law.  We should all support it.

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