You and I don’t deserve a tax cut

Yahoo Finance

You and I don’t deserve a tax cut

Rick Newman     September 14, 2017
Most people want to pay less in taxes. I sure do. But believe it or not, taxes in the United States are relatively low, and the case for cutting them is pretty weak.

President Donald Trump has started to barnstorm the country to drum up support for tax cuts. Republicans in Congress say they’ll release a blueprint soon, with the goal of passing a bill within months. Treasury Secretary Steven Mnuchin says tax cuts might even be retroactive to Jan. 1, 2017, meaning some of us will get rebates for taxes already paid.

The presumption is that Americans are overtaxed and deserve relief. But if anything, Americans are undertaxed. This isn’t an argument for raising taxes or expanding a government that’s probably too big already. It’s just simple math.

There are two basic types of taxes: Those on individuals and those on businesses. Republicans plan to cut taxes for most individuals, to put more money in people’s pockets. There’s a fundamental problem with doing that, however. The federal government will take in about $3.6 trillion in taxes this year, but it will spend $4.1 trillion. Spending will exceed revenue by 17%, with the Treasury financing the deficit by issuing debt. By definition, Americans are already getting more in government spending than they’re paying for. So why should we pay even less?

Yeah, I know: Some supply-siders think cutting taxes will magically make the economy grow faster, generating more tax revenue, on net. If only. That was the idea when George W. Bush cut taxes in 2001 and 2003. It didn’t happen then and it won’t happen now.

Compared with other developed countries, the U.S. tax burden is low. The total tax burden — including federal, state, local and payroll taxes — on a typical American family with two kids is 14.1% of gross income, according to the Organization for Economic Cooperation and Development. That’s lower than the tax burden in 24 out of 33 other countries surveyed by the OECD. By comparison, the tax burden is 18.3% in Canada, 21.3% in Germany and 22.7% in the United Kingdom. Where are taxes lower? In Chile, the Czech Republic, Estonia, Ireland, South Korea, Mexico, the Slovak Republic, and Switzerland. In Spain, the tax burden is the same as in the U.S.

A real life example

I’ll make this personal. Last year, federal income taxes accounted for 20.5% of my total pay. Social Security and Medicare contributions raised the federal cut to 25.4%. Add in state and local taxes and my total income tax burden (not including property taxes!) was 32.5% of my gross pay. That’s a lot. Would I like it to be lower? Hell yeah.

Problem is, I can’t easily identify a big chunk of federal spending that should be slashed so I can keep more of my money. Social Security and Medicare benefit people like my mom. I’ve known people who relied on Medicaid and other relief programs while in between jobs or enduring some kind of hardship. With a nuclear North Korea, a bellicose Russia and all the other global problems, it doesn’t seem like a good time to slash defense spending. The rest of the federal budget is peanuts compared with these big programs. And I don’t think Washington should add even more to the national debt —which my kids and grandkids will have to pay off — so that I can spend a bit more borrowed money today.

Tax burden has eased over the years, but Americans still struggle

Americans tend to think taxes have drifted up over time, but the opposite is true. The average federal tax burden for the middle 60% of earners is 13.8% of income, according to the latest data from the Congressional Budget Office. That’s 2.8 percentage points lower than the historical average of 16.6%. So overall, American taxpayers already get more than they pay for, they pay less than most citizens elsewhere, and the tax burden has dropped over time. This is a weak case for tax cuts. Arguably, no case.

American taxpayers do have some legitimate gripes, however. First, they are not getting good government for the taxes they do pay. Congress can barely accomplish its most basic job — funding the government — and it seems incapable of addressing major problems such as illegal immigration, soaring health care costs, and worsening income inequality. If the government offered a money-back guarantee, no doubt millions of taxpayers would demand a full refund.

A lot of Americans are falling behind, as well. There’s voluminous evidence showing the rich are getting richer while much of the rest struggle to keep up with inflation. This isn’t happening because taxes are too high. It’s happening because a global, digitized economy heavily favors people with certain skills while punishing those who are less-educated. The solution to this is complicated, involving better education, more effective job training and probably also more grit and determination among the disaffected. Lowering taxes won’t do much, if anything, to help people who aren’t prospering prosper.

Corporate taxes are the real problem

There’s a better case for fixing the business tax code, which is riddled with distortions that create incentives for companies to stash money overseas and spend on the wrong things. The top corporate rate, 35%, needs to come down, if only because rates are now lower in most other developed countries. Most U.S. companies pay far less than the 35% rate, thanks to dozens of loopholes bought with lobbyist money. That produces this paradox: The United States has the highest corporate tax rate of any developed nation — 14.5 percentage points higher than the average for Europe — yet corporate taxes have dropped from 17% of federal revenue in 1970 to 10.5% today. Something is seriously broken.

There should probably also be lower rates for small and medium-sized businesses, which often pay taxes at individual rates that can be two or three times higher than the discounted rates corporations with armies of tax lawyers typically pay. In general, lower rates with fewer loopholes are better than high rates with all kinds of workarounds, even if there’s no net difference in the revenue raised. The best thing Congress could probably do is make the U.S. tax code as efficient as possible — the envy of companies everywhere — without cutting any tax revenue or adding to the national debt. And if Congress actually accomplished something, maybe we wouldn’t feel so bitter about the taxes we do pay.

Confidential tip line:   Encrypted communication available.

Author: John Hanno

Born and raised in Chicago, Illinois. Bogan High School. Worked in Alaska after the earthquake. Joined U.S. Army at 17. Sergeant, B Battery, 3rd Battalion, 84th Artillery, 7th Army. Member of 12 different unions, including 4 different locals of the I.B.E.W. Worked for fortune 50, 100 and 200 companies as an industrial electrician, electrical/electronic technician.

Leave a Reply

Your email address will not be published. Required fields are marked *