Tax Reform

Yesterday, congress passed a budget, setting the stage for tax reform that has been long overdue. The Democrats argue that their concern is now budget deficits (that's rich, given their profligate spending over the past eight years), coupled with their vacuous, yet predictable claim that the tax cuts will only benefit"the rich." They refuse to participate. Fine.

James Freeman comments:

Democrats are so frustrated at their inability to stop tax cuts that they have adopted a disturbing new message in their latest factually challenged attack on the Republican reform effort. The attack isn’t succeeding—the House adopted a budget Thursday that clears the way for $1.5 trillion in tax relief over 10 years. But the ugly turn in rhetoric provides a window into the stakes of this debate for the economic left.

The ironically titled Affordable Care Act is rightly seen as the signature policy of former President Barack Obama. But also at the heart of the Obama legacy are the eight years of historically slow growth that Americans endured while he occupied the White House.

In trying to persuade Americans that this was a record of success—rather than the failure it was by traditional metrics like GDP growth—Obama Administration veterans like Larry Summers and leftist pundits like Paul Krugman have argued that it’s very unlikely that the economy can grow as fast as it used to do. If pro-growth tax cuts now become law and the economy shifts into a higher gear, the Obama legacy will be tarnished even more and the slow-growth crowd will be discredited.

I have lamented the growing national debt on numerous occasions, but it appears that neither the GOP nor the Dems are either willing or able to make the necessary spending cuts or entitlement reforms. That leaves only one option, spur economic growth above the pathetic 2 percent level that blue governance has given us over the past eight years. That growth can only be achieved if more money remains in the pockets of small and large companies and individual citizens at all income levels. Ironically, a meaningful increase in growth (GDP) always results in increased government revenue—history proves that every single time.

The Dems continue to use the tired argument that tax cuts and reform benefit only "the rich." They demagogue this issue endlessly, even though the facts contradict their position at every turn. Economic research indicates that the middle class would, in fact, get two raises if the current effort at tax reform succeeds: (1) from the money that remains in their pockets after a direct tax cut, and (2) from a cut in corporate taxes. Kevin A. Hassett and Aparna Mathur, researchers who study economic tends, write:

In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. In another 2009 paper, Ms. Felix and co-author James R. Hines of the University of Michigan discovered that the effects of lower tax rates are especially strong for union workers.

Confirmation has come in a number of additional settings. Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions, and a study by Clemens Fuest, Andreas Peichl and Sebastian Siegloch found the same across German municipalities.

The most recent paper to find significant effects on wages was released in May and will soon be published by Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar. Similar patterns have been identified when Canadian economists have studied individual-level income data.

These studies and others convincingly demonstrate that higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

But the Dems refuse to accept this information because they fear that big government just might loose some influence if it doesn't control us via taxation. And for the Dems, it appears that Big Intrusive Government is all that really matters. So Chuck Schumer, Liz Warren et al tell us that high taxes are a good thing, even though (as usual) they hurt the very people who the Dems purport to care so much about.

The Democrats also dust off the "fair share" meme whenever tax reform is discussed. They mantra is that "the rich don't pay their fair share." Ari Fleischer comments:

The top ten percent of earners, those making more than $138,000 in 2015, made 47 percent of the nation’s income, but they paid 71 percent of the nation’s income tax. The top 1 percent, the people former President Obama decried the most, made 21 percent of the nation’s income in 2015, but they paid 39 percent of the nation’s income tax.

Not only are these people paying their fair share, they’re picking up other people’s shares as well.

Roughly half the taxpayers in the U.S. pay no income taxes. As a practical matter, most taxpayers need to make around $39,000 before they’re hit by the income tax. All taxpayers pay the payroll tax, but according to a recent study by the Urban Institute, when workers retire, Social Security and Medicare give taxpayers their money back. The less money you make, the more likely you are to get all your payroll taxes back, and then some.

So the "fair share" argument, like almost every other Democrat objection to tax reform, isn't based on fact or reason, but rather on an emotional demand that we redistribute income even more than we currently do.

Tax reform is not a done deal, but if it does occur, the country and the people who live in it will be far better off (literally and figuratively) than they have been over the past eight years.