The Tax-Cut Framework Won’t Create Jobs and Digs the Inequality Ditch even Deeper

October 11, 2017
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Marcus Ryu, a self-described Silicon Valley entrepreneur who created, with others, a company now worth $5 billion on the New York Stock Exchange, argues in today’s Op-Ed section of the New York Times that “Tax Cuts Won’t Create Jobs“, NY Times (Oct. 9, 2017), at A23 (the title in the digital edition is different from the print title:  Why Corporate Tax Cuts Won’t Create Jobs).  He is right.

The tax cuts proposed in the framework set out by the Trump administration and Republican leaders in Congress claims to be pursuing economic growth that will benefit ordinary people (Trump’s purported base).  These claims are based in part on claims that  U.S. taxpayers (individual, corporate and individual who owns businesses through partnerships) are much more heavily taxed than taxpayers in other advanced countries.  Trump often points to the statutory tax rate for corporations (35%), which is higher than the statutory rate in most other advanced countries. But Trump usually ignores the fact that the vast majority of corporations (including very profitable U.S. multinationals) pay no or much lower taxes, in part because of the many loopholes and deductions that reduce the income that is taxed.  When one considers the nation’s GDP and the percentage of GDP paid in taxes, it is quite clear that the U.S. is actually one of the lowest taxed of developed countries, which often have income taxes, corproate income taxes and value-added taxes (which the U.S. does not have), as well as specialty taxes such as financial transaction taxes (which the U.S. does not have).  See, e.g., Business Insider, Is the U.S. the highest taxed country? (Sept. 6, 2017).

“[T]he most comprehensive measure by which to judge Trump’s claim, combining corporate and individual taxes paid, is tax burden as a percentage of gross domestic product. It compares how much money in a country is put toward taxes with the economic output of the country.  By this measure, the US has the fourth-lowest tax burden of any OECD country, with only South Korea, Chile, and Mexico ranking lower.” [emphasis added]

Trump has claimed that the proposed cuts in the Trump tax-cut “reform” framework don’t benefit the wealthy and don’t benefit him but are for the middle class and those with less wealth and income.  The only way that claim would work would be if tax cuts that are clearly targeted at the rich (elimination of the estate tax, elimination of the AMT, drastic cut in the rate at which wealthy partners pay taxes on partnership income shares, drastic cut in the corporate tax rate  when most of the benefit of tax cuts to corporations is used to pay dividends or do share buybacks for the wealthy managers and shareholders) had such a dramatic impact on overall economic growth and on sharing of the benefit of the tax cuts with ordinary workers that it made up for the fact that almost all of the benefit goes directly to the very wealthy and almost all of the negative impact (via additional borrowing and deficits) will result in fewer benefits from the poor.  That positive balance is so unlikely from these tax-cuts-for-the-rich that they appear to be just another of the many Trump lies intended to mislead the American people.  See, e.g., Business Insider, Trump tax reform plan just got its first brutal review showing how it would benefit the rich and almost no one else (Sept.  2017) (noting that “Americans among the top 1% of earners would see the bulk of the plan’s benefits, while lower- and middle-class Americans — even most upper-class people — would see few benefits,” citing the Tax Policy Center’s study of the framework).

Marcus Rye sets out a number of key ideas in his op-ed.

First, “lower tax rates will not motivate more people to start companies.”  That is because most people who start a company do so because they have an idea, they want to strike out on their own, or they are ambitious for fame and fortune generally.  Research on the 1986 significant changes to marginal tax rates shows that those changes did not induce higher-income people to work longer hours.

Second, existing companies won’t shy away from a promising investment because of the tax rate on potential gain.  Company leaders are motivated to expand if possible, and “lowering the corporate tax rate isn’t going to make us create jobs any faster.”

Third, tax cuts just “increase our post-tax profitability, which effectively transfers money from the federal government to our shareholders.”  The result is a bump in the share prices but no long-term impact on operations or employment plans.  It doesn’t even make it easier to raise cash for expansion, since companies are having no trouble getting capital now because of low interest rates.

Fourth, the tax-cut proposal demonstrates shoddy business reasoning.  It “wish[es] away huge tax-revenue shortfalls with stupendous growth projections.”  No well-run business would do that kind of shoddy planning.

Fifth, “by 2027, when [the tax cuts] are fully phased in, four out of every five dollars … will flow to the top 1 percent, an egregious wealth transfer to those who least need it.”

Finally, “tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy. Extreme inequality is corroding our civil society, poisoning our politics, and undermining our effectiveness as a nation.  This is an extremely hard problem to solve, but when you’re in a deep ditch, the first thing to do is to stop digging.”

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