Congressional Tax Overhaul Relies on Mythology

By Neil Cosgrove

Regardless of what shape the Republicans’ tax overhaul finally takes, the House members and Senators pushing it through Congress have clearly established that they are passionately committed to large, permanent cuts in the taxes paid by corporations and the wealthy, while they are largely indifferent to the benefits low-income and middle-class Americans might gain from their efforts.

The process by which members of both chambers have sought to keep the bills within the rules of “budget reconciliation,” thus allowing passage by a one-vote majority in the Senate, have established this clarity. In the House, the proposed legislation must not contribute more than $1.5 trillion to the deficit, while in the Senate the “Byrd rule” applies, stipulating that a budget bill cannot add to the deficit 10 years after its passage.

Not once has a Republican leader suggested that maybe they could keep within the reconciliation limits by dropping plans to repeal or cut the estate tax, which now only applies to family estates of $11.2 million and above, or to possibly lower the corporate tax rate by, let’s say, 10% instead of 15%. Rather, those leaders have laser-focused on provisions that would limit their plans benefits any cuts for those who are less than wealthy. (See the accompanying chart.)

The House and Senate bills propose to reduce the deficit amounts by eliminating, after a period of time, various cuts benefiting lower-income and middle-class taxpayers. In addition, they prefer eliminating the deduction of paid state and local taxes, or deductions for medical expenses and student loan interest, or taxing graduate student scholarships, or eliminating the individual mandate in the Affordable Care Act. Just about any such provision that puts the touch on middle- or lower-income citizens has been considered, but not retention of the current Alternative Minimum Tax, which insures that wealthy individuals pay at least some tax each year, regardless of their various accountants’ creativity.

Is it a free-market ideology that is motivating the congressional majority? Or is it, as David Pepper of the Ohio Democratic Party claims, “CEOs in rooms saying, ‘This is important to us’ and donors saying, ‘If you don’t do this again, we’ll never support you’?”

Hard to say, but what we do know is that Republicans have been consistently justifying their tax project by resorting to myth-making—that is, to uttering demonstrably false explanations of how the worlds of finance and economics actually work.

President Trump claims, for instance, that the United States is the most highly-taxed nation in the world, which is just not true. According to International Monetary Fund data, the share of US gross domestic product (GDP) raised in taxes is 30.9%, making our country the 71st most taxed. The Organization for Economic Cooperation and Development (OECD) found the US ranked 26th out of 36 “mainly developed countries” in the amount of taxes contributed to total labor costs. That same data showed the US ranked last in the percentage of GDP that went to consumption taxes.

As for corporate taxes, the US rate of 35% is the highest among OECD-analyzed countries, as our politicians keep reminding us. However, after various allowances and deductions are factored in, the Congressional Budget Office has found the effective rate to be 18.6%, considerably lower than in the 1960s and 1970s. Moreover, US corporate income tax as a percentage of GDP is less than that for the United Kingdom, Japan, and even that alleged tax haven Ireland.

A more plausible argument for lowering corporate taxes is that companies will then reinvest their additional capital, expand operations, hire more workers, and raise wages. Unfortunately, according to John W. Schoen of CNBC, the available evidence doesn’t support this claim either. He points to research by the Institute for Policy Studies that examined “92 publicly held US corporations that posted profits every year from 2008 through 2015 and paid less than 20% of those earnings in federal income tax.”

It turns out that more than half of those corporations actually reduced the number of their employees over that eight-year span, with “a median change in payrolls of minus one percent.” Where did the excess capital go instead? To buying back shares, in order to increase investors’ share prices, and to CEO pay, which went up 18%.

In 2014 two New York University economists found that “differences in state corporate tax rates,had little impact on job creation.” What did make a difference were reductions in individual income tax rates, if “they don’t increase federal borrowing to make up the difference.” (That federal borrowing will skyrocket under the Republican tax plan is a sure thing.)

In short, what would create jobs are tax cuts for people other than the wealthy, and higher wages, but neither step is a priority in the Republican tax plan. Despite being woefully unpopular, party leaders have convinced themselves that turning this plan into law will ensure they keep their congressional majorities in the 2018 election. Could it be that this surmise will also turn out to be a myth?

Neil Cosgrove is member of the Editorial Collective and the Merton Center Board.

Categories: News

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