Wealthy pay the most taxes, deserve their fair share of tax cuts
By BOB MARTIN
At the time of this writing, it appears we may get a new tax law before Christmas. It will contain a sprinkle of tax reform, a dash of tax cuts, and a liberal (pun intended) dose of grandstanding. There are some special interest provisions in the bill, as there are with every piece of legislation passed by congress. Transparency would suggest that whoever pushed for the special interest provisions should own those provisions and be required to explain them.
I prefer not to spend any time on the details for two reasons. The details just aren’t pretty, as they say about sausage making, and it’s easy to get lost, confused and dazzled. Rather, I’ll stick with some basic ideas about taxation.
Both income tax reform and income tax cuts are about offering relief to those who support the government with their taxes. Currently, 45 percent of American households do not pay any income taxes. Low-income households do not pay income taxes in America. They obtain their “tax benefits” by being exempt from taxes.
The purpose of tax cuts/reform goes beyond the benefits received by those who might have their taxes cut. The economic purpose is to stimulate job growth for low income and middle-class Americans. Any transfer benefit to those who do not pay taxes must represent a future tax liability for someone. As such, it must have a negative effect on job growth. If benefits, beyond job growth, to low-income Americans are in order, they should be considered on their own merits.
When someone says, “the wealthy get most of the benefits from tax cuts,” it is difficult for that not to be true, since 45 percent of households don’t pay taxes and the top 10 percent of the wealthiest taxpayers pay over 70 percent of all income taxes. If 70 percent of the tax refund does not go to the wealthy, then they are subsidizing the other tax cut recipients. No matter how onerous the tax burden is on middle-income Americans, they provide only 30 percent of the income tax revenues the country needs to run the government.
The top 10 percent of American taxpayers are the most mobile of all U.S. taxpayers. They can live securely and comfortably in other countries. Indeed, many of them hold dual citizenships. If they are mistreated, they can move and take their tax payments with them. The bottom line is we need to treat those who pay 70 percent of our taxes fairly.
Democrats argue tax cuts do not stimulate the economy, as they claimed during the Obama presidency. However, the economy is growing at a 4-percent rate during the current quarter, the stock market reaches new highs each week, and business optimism is at a two-year high. Obviously, the business community thinks tax cuts stimulate the economy.
The Democrats systemically underestimate expectations and its role in economic growth. Hence, Obama never achieved a growth rate equivalent to the average growth rate for the post-war era — because he regularly hammered the business community.
What the Democrats fear most is that Trump’s plan will be validated by the tax cuts leading to a Republican victory in the 2018 election. If he builds the “wall” and passes immigration reform, he may be unbeatable in 2022.
I’m going to root for the country. I expect the cuts in corporate taxes will bring a lot of new investment into the economy and significant re-patriation of foreign profits into the U.S. If we also get the job growth (I expect we will), the tax cuts will have paid for themselves. Trump is a “cheerleader” for the economy and as he continues in this role, the economy will grow and tax revenues will rise. You cannot expect tax revenues to rise if the president is talking the economy down.
Bob Martin is Emeritus Boles Professor of Economics at Centre College.
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