Trumpian Tax Triumph?

GLobal Corporate Tax Rate distribution

Mr. Trump unveiled his tax plan earlier this week, and there was something for almost every conservative to like.  Our current obscene corporate tax rate of 39% is the highest among industrial nations (only exceeded by Chad and the UAE), but doesn’t yield all that much revenue, so Mr. Trump proposes drastically reducing it to 15%.   As shown in the figure above, that would put the U.S. slightly more competitive than the average country, instead of being the most uncompetitive.  Mr. Trump has many other parts of the proposal that should garner support–lowering and reducing the number of individual tax rates, doubling the standard deduction, getting rid of the estate and alternative minimum tax, among others.

Now from an economics perspective, I think this is all good.  If you believe that our country’s slow growth is due to lack of demand, and that we’re in a new normal of slower growth, then you probably disagree with Mr. Trump (or maybe you just react negatively to anything that Mr. Trump says).  But if you think we’ve tried working on the demand side of the economy for a decade now, and we’ve throttled the supply side, then maybe its time for a supply side approach.  But there is never a time to stimulate the private sector, at least according to our progressive provocateurs:

Trump tax plan is Voodoo Economics on steroids. If you believe in magic, unicorns or Batman, this plan is for you.

Now I would prefer a corporate tax rate of zero, but alas, that would never happen.  Let’s first remember that corporations really don’t pay taxes–they are a legal fiction–people pay taxes.  If a corporation makes money, it can only go to one of three places–either retain the earnings for future investment, or distribute to the employees, or pay it out to the owners (shareholders).  Economists generally seek to gain the maximum revenue from the minimum amount of underlying economic distortion.  So the best way to tax corporate revenue would be to tax it once.  I used to be in favor of taxing it at the source–the firm (the most efficient, since firms have to have accountants already)–and then eliminating taxes on dividends, but have now gone the other way, preferring a zero tax on corporations and treating dividend income as ordinary income.  I believe this would significantly reduce the K-street crony capitalism we see so much of.  Of course, this is precisely why it can never go to zero: Congress has too much interest in being able to continually threaten to raise it higher (if lowered by Mr. Trump) and thus eliciting (or you could say extorting) campaign contributions from corporate America.

But on to the issue for Bereans to really consider.  The progressive left led by Ms. Pelosi calls this plan a “giveaway to the rich.”

The same Trickle Down Economics that undermined the middle class are alive and well in the President’s tax plan,” she said in a statement. “True to form, President Trump’s tax plan is short on details and long on giveaways to big corporations and billionaires.”

A giveaway to the rich.  This is the key moral issue, and leads to the key moral question.  Every public policy is going to affect groups differentially.  But does this mean that if any group will be made worse from the current status quo that they have been wronged? Only if the current status quo is morally right.  Progressives understand this, after all, that is their whole point of reparations movements, land redistribution schemes, etc.  Now its a hard case to make that anybody is made worse by this particular plan, except in the sense that some part of the population won’t get to see the wealthy “pay their fair share” i.e., while they might not be financially harmed, they will suffer a harm in that they will feel the system is “less just.”  But back to the question on taxes: whose property is the income that is earned (produced)? For the progressive left, the income you earned is simply what we collectively allow you to keep.  Income is produced from a social process, and we decide collectively how to distribute.  The other perspective is that that the product of a person’s labor is the property of the producer, and taxes are simply what each individual must pay to support the government.  If we collectively agree to not take as much from one group as we did previously, if it was the product of their labor, how can that be called a giveaway?  It really just depends on whether there is a concept of private property.

We can take this further in the comments.  What do you think?

16 thoughts on “Trumpian Tax Triumph?”

  1. It really depends on whether or not you think that society or the government has a hand in creating that income.

    But more importantly. You said no one is worse off. If the corporate tax rate is lowered there are two options. It could be revenue neutral, in which case that money has to at least partially come from someone else (business profits won’t suddenly jump 300%). Or we increase the deficit.

    A tax cut will always hurt someone. As will a tax increase or anything else the government does :)

    1. “It really depends on whether or not you think that society or the government has a hand in creating that income.”
      Not really. Of course there are all sorts of embedded systemic contributions to anybody’s success. But that in no way means that the government or anyone else has a moral claim on earnings. It is easy to argue that in fact, the successful contribute far more to society than they ever get. Should we have paid Steve Jobs for his contributions to the broader social group? He died w/a net worth of ~$6B, while Apple’s market capitalization at the time was ~$350B.

      “But more importantly. You said no one is worse off. If the corporate tax rate is lowered there are two options. It could be revenue neutral, in which case that money has to at least partially come from someone else (business profits won’t suddenly jump 300%). Or we increase the deficit.”
      Well, as you say, the tax could be revenue neutral. Given how little we collect, if we also cut loopholes (lower the rate, broaden the base), I could easily see this cut being revenue neutral–perhaps actually revenue enhancing.

      “A tax cut will always hurt someone.” I’m often accused of sweeping a broad brush (with some justification), but this is a pretty broad claim. You’ll need to expand what you mean by “hurt someone.” I think I can think of many situations where a tax cut hurts no one (in the sense that there is a legitimate harm done to others).

  2. Tax cuts make no sense considering the federal government is scrambling for income and has to raise the deficit ceiling (plus the president wants to increased defense spending by some $50 billion). No sense whatsoever.

    This kind of fiscal three-card monte reminds me of informercials that sell miracle cures (snake-oil!) by promising dieters they can eat what they want and keep sitting on the couch while losing weight and having six-pack abs.

    That said, I would be for lowering the corporate income tax incrementally while increasing inheritance taxes. Few things are more reprehensible than wealth without work. Those who work should pay lower taxes; those who do not should pay much higher taxes. It is called incentivizing good behavior.

  3. It makes sense to lower the corporate tax rate, considering how high America’s is relative to other countries, and how it can be contributing to lower growth, and even lower tax revenues. I’m curious though, would a corporate tax rate of zero produce a loophole in which individuals could keep their money in corporations’ retained earnings (which could be used to make investments), keeping it untaxed indefinitely, until it is taken out to be spent? In other words, the interest made would be untaxed, whereas it would be taxed in if personally invested. I’m not sure about the details of this hypothetical situation, but I’ve heard it as an argument against a corporate tax rate of zero.

    1. First, I doubt shareholders would take that forever. They will eventually want a return on their investment; usually when the company’s return on retained earnings is less than they believe they can get in alternative investments at the latest. Second, if the firm has exceptional investment opportunities, the concomitant economic growth will yield add’l tax revenue so not all bad.

  4. I think cutting the tax rate could be beneficial since it is currently so high and not really generating that much revenue. Would it ever be possible for the corporate tax rate to be zero or is that completely out of the picture?

  5. I think Trump is definitely on the right track here. Corporate tax rates are way too high. It makes perfect sense to lower them since doing so is likely to get more corporations and businesses either started or returned back to the US. If it works as it should, that means increased employment, which means more people making taxable incomes, which means more revenue. The chief obstacle is getting around those who either can’t, or refuse, understand that lower corporate taxes is generally a good thing for an economy and what is good for the economy is generally good for the government too. I hope such opposition can be overcome.

  6. Can’t he just reduce the tax to 15% and if that isn’t helping the economy he would just increase it again?

  7. It seems to me the supply side isn’t working too well. Corporations are hording cash and or buying back their own shares, not investing in the business, not producing more.

  8. I would be elated to see this tax plan pass, however I would propose a followup objective for Mr. Trump. It’s great if we can have a low tax rate, but I would also like to have a simple tax code. The last time I checked, we were spending billions of dollars on compliance costs related to taxation, not to mention the millions of labor hours spent doing taxes. Let’s simplify the tax code, eliminate loopholes and needless deductions, and keep the tax rate low. The lawyers won’t like it, but I’m willing tot take that trade.

  9. I thought this article was very interesting. I like that they are cutting the tax rate especially because we aren’t even creating much revenue while it is so high. Hopefully if this works more people will be employed and we will generate more revenue. It will be interesting to see how it unfolds.

  10. I would agree with Matt Beal a few comments above this one. As we’ve discussed in Macro, a reduction in the corporate tax is great for many reasons, however, some of the benefits will not be obtained if the tax cut is implemented in the current tax system. If the tax code is simplified, a tax cut and additional revenue would not be mutually exclusive goals.

  11. I also think Trump is on the right track here. By lowering the tax rate, that could help the economy in a significant way. Our corporate tax rate is very high when compared to other nations, and like we’ve talked about in class, I don’t think we should believe there is a “new normal” for growth. Also, interesting to see this in the real world as we have been discussing it in Macroeconomics for awhile now.

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