Fake Tax News

Wall Street Journal editors claim that Trump’s tax cut framework will boost economic growth and lift wages.

BY JOHN MILLER | | November/December 2017

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the November/December 2017 issue.

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That the Wall Street Journal editors are once again trotting out the canard that showering the rich with tax cuts will revitalize economic growth and lift wages is hardly news.

What is news is that they have stooped to endorsing such an ill-specified, fraudulent tax plan that will benefit Trump, his cabinet, and rest of the rich at our expense without promoting growth.

Pro-Rich Not Pro-growth

That’s surely the case for the Trump proposal to cut personal income tax rates, eliminate the alternative minimum tax, and repeal the estate tax.

Reducing the current seven tax brackets to just three, including lowering the top tax rates from 39.6% to 35%, will do little to rejuvenate economic growth. For starters, the U.S. economy has logged its fastest economic growth when income taxes on the rich were high, not low. During the 1960s, the only decade in which the annual economic growth rate averaged 4%, the top income tax rate was as high as 91% and never lower than 70%. And over the last fifteen years, with a far lower 39.6% top income tax rate, the U.S. economy grew more slowly than during any of the five decades from 1950 to 2000.

International comparisons also fail to show that cutting taxes on the wealthy is the key to increasing economic growth. For instance, when economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva compared economic growth rates and changes in the top marginal income tax rate of 18 OECD countries, (which includes most of the world’s large, high-income economies) during the 1960–2010 time period, they found that, “cuts in top tax rates do not lead to higher economic growth.”

Eliminating the alternative minimum income tax (AMT)—a provision put in place to prevent high-income taxpayers from taking advantage of so many deductions and credits that they would pay little or no income taxes—is another tax giveaway for the rich. Currently more than seven out of eight taxpayers who pay the AMT have incomes greater than $500,000 per year. And the AMT has forced some of the super-rich to pay substantial income taxes, including the President. In 2005, Donald Trump paid $38.4 million in federal taxes on $153 million of income, with $31.3 million going to cover his AMT bill.

The benefits or repealing the estate tax go almost exclusively to the super-rich. The tax is levied on estates with taxable assets greater than $5.5 million for individuals ($11 million for couples). The top 10% of income earners pay nearly 90% of the tax, with over one-fourth paid by the richest 0.1%, with annual incomes in excess of $3.9 million. Using net worth estimates compiled by Bloomberg Business Week, the Center for American Progress calculates that eliminating the estate tax would save Trump and his cabinet (and their families) $3.5 billion, with a $1.2 billion tax cut for the Trump family alone.

Nor is there is credible evidence that eliminating the estate tax would promote economic growth. For economists, the effect of estate taxes on economic growth is uncertain. On one hand, a lower estate tax makes it cheaper for people to leave money to their heirs. That might encourage them to work harder and save more. On the other hand, a lower estate tax allows people to make the same after-tax bequest with a smaller amount of savings, which might persuade them to work and save less. What’s more, Congressional Research Service economist Jane Gravelle reports that “there is virtually no empirical evidence” that the estate tax hinders economic growth.

Hardly in Need of Tax Relief

Despite the Wall Street Journal editors’ claim, cutting tax cuts on corporate profits from 35% to 20% is unlikely to boost economic growth or lift wages.

One reason is that U.S. corporations are far from hurting. After-tax corporate profits relative to Gross Domestic Product (GDP) continue to hover near the record-setting levels posted in 2013.

Nor is it the case that prohibitively high corporate taxes have compromised the international competitiveness of U.S. corporations as the editors insist. The U.S. statutory corporate tax rate is in fact the highest of any of the 34 OECD member countries. But because the U.S. corporate income tax is littered with loopholes, U.S. corporations pay out far less of their profits in taxes than those statutory rates suggest. And the effective tax rate, the proportion of total profits paid in taxes, faced by U.S. corporations is quite similar to that paid by corporations elsewhere. A study conducted by PricewaterhouseCoopers, for instance, found that the effective U.S. corporate tax rate in 2008 was 27.1%, a bit lower than the 27.7% average of the other OECD countries (weighted by GDP). More recently, the U.S. Treasury Department found that, in 2014, the 23.9% effective U.S. corporate tax rate was modestly higher than the 20.7% weighted average of that of the other six G-7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom).

The Trump framework also promises a discounted tax rate for U.S. based corporations that bring their profits stockpiled overseas back to the United States. U.S. corporations can defer paying taxing on their foreign income until it is “repatriated,” or sent back to the parent corporation from abroad. And as of June 2017, U.S.-based corporations had accumulated $2.6 trillion of corporate profits overseas, with Apple’s $256 billion at the top of the list.

But there are plenty of reasons a tax holiday is unlikely to boost investment. To begin with, it’s not the case that a shortage of profits is holding back corporate investment. Almost all the corporations with large cash holdings outside the United States also have substantial cash holdings in the United States. In June 2017, for instance, the 15 corporations with the largest holdings abroad also held $282.2 billion of cash and marketable securities in the United States. In addition, corporations can borrow at near-record-low interest rates in the United States and use their profits held abroad as collateral.

On top of that, we’ve already tried a tax holiday for repatriated corporate profits, and it failed to increase domestic investment and employment. In 2004, under the George W. Bush Administration, a maximum tax of 5.25% on repatriated profits managed to lure about $300 billion back to the United States. But corporations did not use those repatriated profits to “increase domestic investment, employment, or R&D,” according to a National Bureau of Economic Research study conducted by economists Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes. Rather their study found that “a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders.”

A Bonanza for Business Owners

But not to worry, Trump’s Treasury Secretary Steven Mnuchin assures us that workers, not shareholders and the investment class, are the chief beneficiaries of these tax giveaways to corporations. Workers bear “over 80%” of the burden of business taxes (in the form of lower wages than they would have received in the absence of the tax), says Mnuchin. Mnuchin’s assertion, however, is at odds with most mainstream studies. Even a 2012 study conducted by the Office of Tax Analysis of the Bush Treasury Department found that 82% of the corporate tax burden falls on the owners of capital, and 45% of the benefit of a corporate income tax cut goes to the richest 1% of taxpayers. On top of that, a recent study conducted by the Economic Policy Institute found “no obvious correlation between corporate rate changes and wages” in OECD countries from 2000 to 2016.

Today, the majority of businesses in the United States do not pay corporate income taxes on their profits. Rather, the profits of these sole-proprietorships, partnerships, and s-corporations (which afford up to 100 owners limited liability) are simply “passed through” to their owners’ income and taxed by the personal income tax. In the name of providing tax relief to small businesses, the Trump proposal would reduce the maximum income tax rate on business profits from 39.6% to 25%. But that lower top tax bracket benefits exclusively business owners with more than $250,000 per year in business income, or just 3% of taxpayers with business income. They are typically professionals, including doctors, lawyers and even partners in investment firms and hedge funds.

The Tax Policy Center estimates that about two-thirds of the benefits of proposals like Trump’s end up going to millionaires. As a result, this tax break for wealthy business owners is no more likely to promote economic growth or lift wages than the other pro-rich tax cuts that make up the Trump tax proposal.

Not Made for You and Me

Trump’s tax proposal falls absurdly short of providing the “tax relief for middle-class families” it promises. The Tax Policy Center estimates that over the next decade a whopping 79.7% of Trump’s tax cuts would go to the richest 1% of taxpayers with annual incomes in excess of $732,800. That’s an average tax cut of $207,060 for the top 1%, while the bottom 60% of taxpayers get an average tax cut of just $233.

Massachusetts Senator Elizabeth Warren got it right, when she said, “Trump’s tax plan is simple. The rich get richer, and everyone else gets left behind.” But that’s music to the ears of the Wall Street Journal editors.

JOHN MILLER is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

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