Wednesday, January 17, 2018

Tax Reform Myths and Realities

The recently enacted tax reform/tax reduction is possibly the most misinterpreted and misrepresented policy change in the history of policy changes. For example, it has been accused of benefiting only the wealthy and of adding $1.5 trillion to the federal debt. There are numerous reasons to be highly skeptical of both these assertions.

The issue in the tax reform drawing the strongest criticism from Democrats is the reduction of the federal corporate tax rate. Democrats want you to believe that all the benefits of reduced corporate taxes flow to the wealthiest members of the population. Nancy Pelosi claims all the benefits go to “the wealthiest one-percent.” Knee-jerk reactions to reducing corporate taxes are a classic example of ignorance-based hysteria.

To say that cutting corporate taxes benefits only the wealthy is a gross oversimplification of economic reality. A major part of the damage done by the corporate tax is the profound dishonesty it is based on. The corporate tax is a charlatan’s playground.

It’s unfortunate that the misbegotten term “trickle-down economics” was ever invented. It’s been one of the terms used to demean cutting corporate income taxes. In an advanced, complex, free-market economy money flows in many directions. It goes down, up, sideways, backwards, and forwards. Trickle-down is a concept that does much more to obfuscate than illuminate. No reputable economist considers it a useful term.

Much of the opposition to cutting corporate income taxes is based on the popular myth that corporations are capable of paying taxes. Corporations do write checks payable to the IRS but corporations cannot bear the “burden” of a tax any more than cows or horses can bear the burden of a tax.

If you work for a corporation you pay the tax by having a reduced wage or salary. If you purchase goods or services produced and sold by corporations you pay the tax by paying a higher price for those goods and services. If you own shares of corporations you pay the tax through reduced dividends and lower share prices. It’s silly to think that all these people are wealthy.

No one can possibly know how much he is paying in corporate income tax. That’s one of the reasons a corporate income is a bad tax. There’s no way to know if the tax is progressive, regressive, or proportional. The tax is reducing someone’s real income; it’s just hard to know who that someone is. It’s what Milton Friedman used to refer to as, “Don’t tax me, don’t tax thee, tax that fellow behind the tree.” The corporate tax is the best way to pretend there’s someone behind the tree.

It would no doubt surprise Democrats that a study by William C. Randolph of the Congressional Budget Office estimated that “Domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.” Other studies have come to similar conclusions. In other words, most of the payoff of lowered corporate tax rates would accrue to employees. Ideally the corporate income tax should be reduced to zero, but reducing it by two fifths (from 35 percent to 21 percent) is a major step forward and is already generating substantial positive changes.

Assume, for the sake of discussion, that the entire burden of the corporate income tax is borne by corporate owners. Are all of the owners of corporate shares wealthy? Of course not.

Trillions of dollars of corporate stock are owned by pension plans, which are owned by employees in all income levels. If a reduction of the corporate tax results in a higher level of stock prices and increased dividends, millions of Americans will enjoy more prosperous and worry-free retirement years.

All indications so far are that tax reform is stimulating faster economic growth. Even before tax reform became law, the anticipation of it was one of the causes of faster GDP growth, lower unemployment, and a booming stock market. Black and Hispanic unemployment rates are the lowest they’ve been since they’ve been measured.

In a single masterful stroke Trump and his fellow Republicans have increased the net profits of virtually every corporation in America. That is going to set off an economic chain reaction.

How are lower taxes connected to economic growth? When incentives change, behavior changes. If corporate owners benefit from increased after-tax returns they will have increased incentives to invest and grow their companies. They can’t do that without more employees. The demand curve for labor will shift to the right resulting in a higher equilibrium wage.

Some of the liberated corporate profits will be invested in capital, which will also eventually benefit employees. A higher capital/labor ratio increases average productivity and makes labor more valuable. The much discussed wage stagnation could well be coming to an end.

Both parties are self-identifying. Trump’s policy initiatives have increased the transparency of what each party stands for. It’s becoming clear that there is fundamental difference between the goals and objectives of the two parties.

Democrats are making a high-stakes bet that tax reform will not result in greater economic growth. They have put themselves in the awkward position of rooting against a booming economy. If there is robust growth, Democrats will find themselves in a world of hurt.

The difference between the two sides of the tax cut issue is supporters are optimistic and positive, opponents are pessimistic, defeatist, and negative. The Democrats not only do not believe that faster economic growth is possible, they do not want faster economic growth.

If the pace of economic growth increases, which income groups benefit most? It clearly is not just the wealthy. In fact, the benefits from robust economic growth accrue to all income levels. In a sense, wealthy people don’t need economic growth. They’re already wealthy. Robust growth gives more people the opportunity to become wealthy.

Also, contrast the difference between Obama’s Obamacare and Trump’s tax reform. Obamacare was a transfer of power from individuals to government. Cutting taxes is a transfer of power from government to individuals and private businesses. Not surprisingly, Obamacare failed to achieve most of its promises and has never been popular. Obamacare made government bigger, tax cuts make government smaller.

Furthermore, consider the vast differences between the results of this tax reduction and Obama’s trillion dollar “stimulus.” The stimulus never showed up on the economic radar screen. Tax reform is already showing substantial and measurable effects. Walmart has already increased its starting wage to $11 an hour, plans to lower prices, increase dividends, buy back stock, and increase employee training. All that and the tax reform is barely a month old!

Obama’s stimulus added a trillion dollars to the federal debt with nothing to show for it. In selling the stimulus Obama promised that it would all be spent on “shovel ready” projects. A year later he admitted that there were no shovel ready projects.

The outcomes of the 2018 and 2020 elections will be largely determined by the success or failure of tax reform. If voters feel they’re measurably better off Trump and the Republicans will be richly rewarded. The Democrat Party will be left wandering in the wilderness even more than it is now.

Critics of tax reduction also predict that it will increase the nation’s debt by as much as $1.5 trillion over ten years. That estimate assumes that lower taxes and fewer regulations will have no stimulative impact on the economy. However, if it increases the economy’s growth rate by as little as .6 percent, there will be no increase in the national debt. GDP growth has already increased by much more than .6 percent.

Consider the implications of what could well happen. Lower taxes, a healthier economy, more wealth, all accomplished with absolutely no help from the Democrat Party. Optimism wins, pessimism loses. If the tax cuts and reduced regulations continue to stimulate the economy, there is bound to be increased enthusiasm in the future for doing more of the same. That will be a body blow to everything the Democrats stand for.

Victor Davis Hansen recently described this point in history as “The Great Experiment.” Hansen writes we are going to see the outcome of a test between two competing economic and political philosophies: “the unapologetic progressivism under Obama… and the unregretful conservatism under Trump.… We have been given a great gift in seeing two ideologically opposed solutions back to back, and both may end up adjudicating rhetoric through deeds.”

What a wonderful opportunity we’ve been given. Thank you, Donald!


Tax Reform Myths and Realities January 17, 2018

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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