Yves here. While this article does a great high level job of debunking the supposed benefits of tax cuts, and also prominently flags that that Trump will be constrained by deficit hawks (both Democrat and Republican), this piece is out of step in some key ways in where the professional tax policy watchers think the tax “reform” fight will go.
It is a given that pretty much everything the Republicans want to do is a sop to the rich, and they will flog every change they get through as a Big Deal. However, the reality is they are unlikely to do anywhere near as much damage as they’d like. The US already has cut the size of Federal tax income tax collection as a percent of GDP and has low taxes by advanced economy standards. There’s just not that much more budget cutting that can be done. And the bogus fixation on deficits means that any tax cuts have to be matched either by tax increases elsewhere or budget cuts. Finding the money to “pay for” tax cuts will not be easy.
Corresponding to the focus of this article, the tax mavens don’t expect much in the way of changes in individual taxes. The big focus is corporate taxes, where the Republicans have been promising “simplification” for years. But like Obamacare, despite having a pet hobbyhorse, they don’t appear to have a coherent plan or consensus within the party. However, tax reform doesn’t have the danger of creating big losers as Obamacare reform did, plus Republican Congresscritters desperately need to have some accomplishments to report before the 2018 midterms.
Stiglitz is not quite right on the offshore profits issue. The profits are “offshore” only for tax reporting purposes. They are held in the US. There is no evidence whatsoever that having profits booked offshore (as in not reporting them in the US and therefore not paying taxes on them) has led to a higher cost for investing in the US, to the extent that the companies that play this game (tech and Big Pharma) actually have any interest in investing in the US. However, these companies have been whinging for years, successfully getting the press to take up the bogus line that the money is somehow sequestered overseas and these companies are being hurt by their own tax gamesmanship. They want a repeat of the 2004 tax holiday granted by Bush, in which the formerly offshore profits were taxed at a one-off special low rate. The result was no additional investing. The higher reported earnings led to bigger executive bonuses and in some cases, special dividends.
My tax watcher contacts don’t see going to territorial taxation as on the map, even though (per Ryan’s fondness for it) it may get more air time than it warrant. More likely is lowering the corporate tax rate. But the big impediment here is that would be done by getting rid of loopholes. All those loopholes have constituencies. And if the Republicans can’t get rid of enough of them, the overall reduction may fall too far short of the 15% level that’s been promised that whatever new level results will be seen as a disappointment, even a failure.
By Joseph Stiglitz, Professor of Economics, Columbia University. Originally published at Project Syndicate; cross posted from the Institute for New Economic Thinking
Although America’s right-wing plutocrats may disagree about how to rank the country’s major problems — for example, inequality, slow growth, low productivity, opioid addiction, poor schools, and deteriorating infrastructure — the solution is always the same: lower taxes and deregulation, to “incentivize” investors and “free up” the economy.
President Donald Trump is counting on this package to make America great again.
It won’t, because it never has. When President Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. Instead, growth slowed, tax revenues fell, and workers suffered. The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates.
A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense. Trump is not that leader.
Trump has yet to advance a specific tax proposal. But, unlike his administration’s approach to health-care legislation, lack of transparency will not help him. While many of the 32 million people projected to lose health insurance under the current proposal don’t yet know what’s coming, that is not true of the companies that will get the short end of the stick from Trump’s tax reform.
Here’s Trump’s dilemma. His tax reform must be revenue neutral. That’s a political imperative: with corporations sitting on trillions of dollars in cash while ordinary Americans are suffering, lowering the average amount of corporate taxation would be unconscionable — and more so if taxes were lowered for the financial sector, which brought on the 2008 crisis and never paid for the economic damage.
Moreover, Senate procedures dictate that to enact tax reform with a simple majority, rather than the three-fifths supermajority required to defeat an almost-certain filibuster by opposition Democrats, the reform must be budget-neutral for 10 years.
This requirement means that average corporate-tax revenue must remain the same, which implies that there will be winners and losers: some will pay less than they do now, and others will pay more. One might get away with this in the case of personal income tax, because even if the losers notice, they are not sufficiently organized. By contrast, even small businesses in the United States lobby Congress.
Most economists would agree that America’s current tax structure is inefficient and unfair. Some firms pay a far higher rate than others. Perhaps innovative firms that create jobs should be rewarded, in part, by a tax break. But the only rhyme or reason to who gets tax breaks appears to be the effectiveness of supplicants’ lobbyists.
One of the most significant problems concerns taxation of U.S. corporations’ foreign-earned income. Democrats believe that, because U.S. corporations, wherever they operate, benefit from America’s rule of law and power to ensure that they are not mistreated (often guaranteed by treaty), they ought to pay for these and other advantages.
But a sense of fairness and reciprocity, much less national loyalty, is not deeply ingrained in many U.S. companies, which respond by threatening to move their headquarters abroad.
Republicans, partly out of sensitivity to this threat, advocate a territorial tax system, like that used in most countries: taxes should be imposed on economic activity only in the country where it occurs. The concern is that, after imposing a one-off levy on the untaxed profits that U.S. firms hold abroad, introducing a territorial system would generate a tax loss.
To offset this, Paul Ryan, the speaker of the House of Representatives, has proposed adding a tax on net imports (imports minus exports). Because net imports lead to job destruction, they should be discouraged. At the same time, so long as U.S. net imports are as high as they are now, the tax would raise enormous revenues.
But there’s the rub: the money must come from someone’s pocket. Import prices will go up. Consumers of cheap clothing from China will be worse off. To Trump’s team, this is collateral damage, the inevitable price that must be paid to give America’s plutocrats more money.
But retailers such as Wal-Mart, not just its customers, are part of the collateral damage, too. Wal-Mart knows this — and won’t let it happen.
Other corporate tax reforms might make sense; but they, too, imply winners and losers. And so long as the losers are numerous and organized enough, they are likely to have the power to stop the reform.
A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense. Trump is not that leader.
If corporate tax reform happens at all, it will be a hodge-podge brokered behind closed doors. More likely is a token across-the-board tax cut: the losers will be future generations, out-lobbied by today’s avaricious moguls, the greediest of whom include those who owe their fortunes to scummy activities, like gambling.
The sordidness of all of this will be sugarcoated with the hoary claim that lower tax rates will spur growth. There is simply no theoretical or empirical basis for this, especially in countries like the U.S., where most investment (at the margin) is financed by debt and interest is tax deductible. The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged.
In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.
Small countries are the sole exception, because they can pursue beggar-thy-neighbor policies aimed at poaching corporations from their neighbors. But global growth is largely unchanged — the distributive effects actually impede it slightly — as one gains at the expense of the other. (And this assumes that the other does not respond and fuel a race to the bottom.)
In a country with so many problems — especially inequality — tax cuts for rich corporations will not solve any of them. This is a lesson for all countries contemplating corporate tax breaks — even those without the misfortune of being led by a callow, craven plutocrat.
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Perhaps the Republicans will suddenly become MMT’ers and appreciate that the government cannot run out of money and that a larger deficit is no problem. That, in fact, a larger deficit is the only solution to improve the US economy. Such a revelation would of course only be used to benefit the rich. Let’s forget about any sensible talk about (not) ‘solving’ the problems of the US economy and society. The Republicans and the Democrats are not working to solve this. They are working for the corporate owners. Period. – Talking sense is a waste of time. The ruling class (and their economic mainstreamers) must be attacked for its insane greed and destruction of our civilization. As Pierre Bourdieu and Warren Mosler so clearly have diagnosed our/the neoliberal misere.
They put on deficit-hawk, Austrian airs, but that’s all for show. Behind closed doors, it’s a different story. Cheney said, “Deficits don’t matter,” and most of the chuckleheads in Congress would admit the same if they knew it was off-record.
..”quantitative easing” was not “all for show”…and we all know who is-was taxpayer $ubsidized…
(bears repetition): “Stiglitz is not quite right on the offshore profits issue. The profits are “offshore” only for tax reporting purposes. They are held in the US. There is no evidence whatsoever that having profits booked offshore (as in not reporting them in the US and therefore not paying taxes on them) has led to a higher cost for investing in the US, to the extent that the companies that play this game (tech and Big Pharma) actually have any interest in investing in the US. However, these companies have been whinging for years, successfully getting the press to take up the bogus line that the money is somehow sequestered overseas and these companies are being hurt by their own tax gamesmanship. They want a repeat of the 2004 tax holiday granted by Bush, in which the formerly offshore profits were taxed at a one-off special low rate. The result was no additional investing. The higher reported earnings led to bigger executive bonuses and in some cases, special dividends.”
They do not give a shit about the deficit. That is, as long as the deficit is driven by the right causes: such as military spending, subsidies, tax-breaks and bail-outs for their friends etc…
Apparently there is no shortage of money when you decide to wreak havoc in whole countries and bomb the shit out of random muslim people all over the world. But having state-provided health-care and free higher education would open the pandoras-deficit box.
Aren’t you ashamed that the infant moratlity rate is lower in CUBA than in the US? Just asking out of curiosity.
Texas now has higher infant mortality than China or Egypt thanks to their bible-thumping war on Planned Parenthood.
Lars, are you going to actually respond to any of the criticism of your comment? I have noticed MMT proponents doing this for years, making factually inaccurate statements and then failing to explain them if challenged.
First, the Republicans will not suddenly become MMTers. They already are. USFG budgeting is premised upon deficit spending.
Second, a larger deficit is not a solution to improve the US economy. The issue we face is distribution, not aggregate size. There is no evidence whatsoever that moar deficits = good. None. Zero. I challenge you to make a logical argument rather than spouting an ideological belief. Deficits are irrelevant to the US economy. Moreover, it is particularly odd that you leave this comment on a post from Stiglitz. One of the great books Stiglitz wrote was The Three Trillion Dollar War, a plain-English examination of one way that waste in federal budgeting makes us worse off, not better off. It’s a concrete example of where budget deficits were bad, not good. MMT advocacy is notably absent from criticizing waste in government spending.
Third, it’s odd that you talk about attacking the ruling class. Raising taxes on the rich and cutting subsidies to the rich are two great policy options for doing so. It is politically popular and technically easy to implement. Of course, one side effect is that it shrinks the deficit. So MMT advocates don’t talk much about these policy options.
You are rapidly accumulating troll points. You’ve made a personal and gratuitous attack and have also given an assignment. Both are against site rules, as is clearly stated in our site Policies.
In addition, you are straw manning MMT big time. And people should not be required to explain again and again and again their theories and evidence to those who make it clear they are too lazy to do their own homework. Dealing with constant trolling is tiresome.
As Marshall Auerback said via e-mail:
“A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense. Obama is not that leader.”
Eight wasted years….
Maybe president Trump should know that taxes should be used to inhibit damaging activity…to place a burden on those things that do harm to the economy, environment and our republic.
Obviously, if you tax labor you will burden it….make it more expensive and thereby have less of it. By the same token, if you tax speculative investment that is non-productive…..stock buy backs, asset stripping, secondary high speed trading, polluting …….you will have less of it.
As for business complaining about taxes….they are only a pass through, a conduit for taxes paid by the end user, this fact is supported by virtue that taxes are added to the price of the good or service by the producer.
So if you look at it that way, Google and other corporations are stealing tax dollars from the consumer and cheating the government out of that which has been paid by the consumer…..secondary…if indeed the taxes were set to deter some activity, by avoiding it they undermine competitors who must comply.
Apparently, here Stiglitz is restricting himself to almost off-hand comments on current Republican offerings.
He is a well-known advocate of same rate taxation of income from wages and capital. Not to mention muscular treatment of inherited wealth (especially canning the step-up cost in basis of capital gains).
Self-reliance is not only for the poor.
One point that I wish the media and the left would spend more time talking about when talking about tax rates is that cutting taxes on the lowest tax bracket gives the same tax cut for the wealthy as the poor, since it’s incremental. If only the lowest tax bracket gets a tax cut that saves them $1,000 dollars a year, the richest people get the same tax cut and also save $1,000 a year. The people with the highest income are not paying 40% on their whole income, only the amount that is over $460,000. They pay 10% on the first $10,000 they make a year. Focusing on these amounts and not the percentages would give people a more realistic picture of what is at stake.
That only applies to earned income and there is also a lot of chicanery that goes on with shifting earned income into other types of income as you go up the tax brackets.
I wish more people understood marginal rates and brackets period. If the top rate (for say, $1,000,000 or more in wage income) went to 90%, no one I know will feel that. But how many people will vote against someone who proposes that? No, your poor beleaguered CEO won’t pay 9 out every 10 cents to the tax man, only on the amount over that threshold and rest assured, she has a tax planner on speed dial and compensation structure that will make sure she keeps as much of that as possible.
Exactly. But who will think about the poor beleagured CEO who works so hard for all of that filthy lucre!
The other “excuse” I hear about not raising marginal tax rates is that the filthy rich will find ways to wriggle out of paying their taxes via loopholes and such. Well sure, that’s true, but why give up the ship based on that premise. Raise the marginal tax rates and make those filthy rich accountants earn their filthy lucre, too! Some of those taxes will still be collected. Get on with it.
Yes, a lot of people don’t understand marginal rates. This reminds me of a Naked Capitalism article last month:
https://www.nakedcapitalism.com/2017/07/aiding-abetting-trump-tweeter-chief.html
In the preface, Yves quotes a hairdresser who said:
Canadians have marginal rates, so this was simply wrong. People often say similar things about U.S. taxes, and they are similarly wrong.
People don’t understand marginal tax rates. The first thing they don’t understand is that high marginal tax rates have historically been paired with very generous deductions for investing in certain industries, such as real estate and oil and gas. This is how the United States ended up with twenty times the per capita retail space of France. High marginal tax rates mean politicians, rather than markets, determine where capital will be allocated. High marginal rates make tax deductions–and all the effort that goes into tax planning–much more profitable.
The hairdresser is actually describing not a hypothetical situation, but an actual one in the United States. Taxes, including payroll taxes, on entrepreneurs are not quite 50% at a taxable income of $15,000, but they’re close. This is why small business has not been carrying its weight as a job creator this economic cycle.
Bernie Sanders’ proposals were for high marginal tax rates without corresponding deductions. We’ve never had effective tax rates that high before. No one knows what that would’ve done to the economy.
I don’t believe that the taxes on an income of $15,000 would be close to 50%. I’m willing to be corrected, but I’ll have to see some specific numbers. The standard deduction, personal exemption, and very low tax rates on lower incomes would more than offset increases caused by the FICA and Medicare taxes. Okay, never mind the last sentence, since you said “taxable income”. I’ll still need to see specific numbers, though.
Okay, I looked it up. In the United States, a taxable income of $15,000 for tax year 2016 has a tax of $1,790 for a single person. For a married couple filing jointly, it’s $1,503. That’s not remotely close to 50%, even with 6.2% FICA and 1.45% Medicare added on. You can even include the employer contribution of 6.2% plus 1.45%, and it’s still far below 50%. Since the person’s gross income would be over $20,000, we see that claims of a tax rate close to 50% are really in the realm of fantasy.
Another problem is that there are a lot of people who think that somehow they are going to be the next bill gates. So why taxing the rich if they themselves are just “rich in the waiting list”.
Sad but true.
You are correct, of course; some people have vivid imaginations. If I were to start receiving an income comparable to that of Bill Gates, I think I would be able to afford to pay a very high marginal rate of taxes. Of course, the billionaire wannabees never seem to think of this.
Your point is a good one. I’m often amazed by the ignorance on this issue. Tax whiners love to talk about how they’re paying half of their 200k income to the government because they pay the top marginal rate. It reminds me of another tax fallacy, tax on investment. Tax whiners love to pretend that they are paying capital gains taxes on their entire investment, when in truth, they pay taxes only on the gains, not the principle, and they can deduct any losses. Its a sweetheart deal for anyone who has the spare income to invest.
I hate to be Proudhon-ish (Property is theft), because for most of industrial capitals history, it was not totally theft, but had expansive effects for the whole economy and its wage earners. However, now it has become true to Proudhons meaning, and we can’t afford any halfway house of reform that allows room for these class warriors to exercise their “authority” and its goal, which is theft. A rethink along social economic lines is crucial.
Tax policy now is transfer of wealth to owners of critical and “responsible” property, and the complaints of the rich are only to ensure the fastest transfer possible. The basis of this economy is to facilitate and reward those regarded as guarantors of that system and its reward methods. Cannot remake it without an evaluation of the values that form the basis of value-driven private property and its legal rights under the Constitution.
A “transvaluation of values”? Maybe without the religious overtones, as we have enough religion in this society, and not enough Golden Rule (a point of hatred for “neocons” and religious institutions of any era). How long would any Congress last who had to take an oath to uphold the Golden Rule before legislative votes?
Any philosophers out there who’d like to tackle this better than I?
For property taxes, i like to consider it as paying for the privilege of exuding others from a particular piece of GOD’s earth.
Passing these tax cuts will help endow the next generation of superwealth.
One windfall beneficiary of these tax cuts will be hedge funds. Apparently the largest U.S. hedge funds have been deferring taxes on their management fees, an annual percentage of the billions in assets they invest, for over a decade in offshore companies. Now hedge fund owners, and some of their employees, will have to pay accumulated taxes estimated to be between $25-$100 billion when their tax deferral expires in April 2018. This deadline is a likely motivation behind the legislative urgency to repeal the Alternative Minimum Tax ( in the 2018 Budget ), and the Net Investment Income Surtax ( the biggest Tax in Obamacare that expands Medicaid ) which both contribute to this $25-$100 billion hedge funds will owe next year. Repealing both tax laws will retroactively remove years of taxes that hedge funds owe the government.
A second potential windfall for the super wealthy is the suggested Tax Holiday on overseas profits. In 2004 we had a Tax Holiday which allowed companies to unconditionally repatriate $362 billion back to the U.S. This year Microsoft paid a one-time dividend to shareholders with their repatriated profits totaling $32 billion. Bill Gates their largest shareholder received $3.3 billion of this amount (which he donated to his charitable foundation), and his deputy Steve Ballmer received $1.2 billion. That same year the maximum tax rate for dividends was reduced to 15% (from 35%) so stockholders would’t be too burdened by personal taxes on this windfall. A Tax Holiday this year would allow companies to unconditionally repatriate $2.5 trillion back to the U.S. while paying some similarly minimum tax rate. The unrepatriated profits of Apple and Pfizer alone would exceed the entire amount repatriated by all companies in 2004. This would be a multi-trillion dollar payday for the largest stockholders of the largest firms in the U.S. The largest shareholders who in some cases approved dubious tax strategies which accumulated these unrepatriated profits would now be able to personally collect a share of these amounts.
Is this a Constitutional rule, or just one of the Senate’s silly agreements like the filibuster?
It’s just a myth created by some Repubs who conveniently ignore it when it comes to “defense” spending, “foreign aid” and corporate handouts.
Thanks ;)
Silly agreement, aka Byrd Rule.
https://en.wikipedia.org/wiki/Reconciliation_(United_States_Congress)#Byrd_Rule
What you miss about tax and immigration policy is that they are targeting higher taxes and more labor competition for the remaining middle and upper middle class. Primarily they are going after those who make between $100k and $500k or urban professionals. This is the last group with savings and work ethic to extract wealth. The oligarchs want a total plantation economy–99.5% of the population are slaves that bear all costs and risk and the economy. Trade, tax and other regulatory policy has crushed innovation, small business formation and owners and the middle and lower classes.
The major parties are fascists that want to plant their boots on everyone’s heads. Trump reads the teleprompter just like Obama and is doing the globalists bidding.
Yves said-
“The US already has cut the size of Federal tax income tax collection as a percent of GDP and has low taxes by advanced economy standards.”
What she (and all of us) don’t say – and what needs to be said- is how compared to other advanced economies which have healthcare and educational benefits built into their societies, an effective federal tax rate of as high as 43% or more gets you squat in the good ol’ USA.