Trump’s tax reform

President Trump’s announcement of ‘tax reform’ plans that he intends to get the US Congress to pass can only mean less tax on the richest segment of income earners and less tax on the profits of large multi-national corporations.  But it won’t boost investment or growth.

Let’s take the planned cuts in corporation tax first.  Trump claims that US corporations have the highest tax rate in the world and this needs to be cut to boost investment and growth.  This is nonsense.  The official US federal tax rate on corporate profits is 35% and when you add in state taxes, the top rate rises to 39%.  Even on that measure, the US is actually third highest out of 188, behind the United Arab Emirates and Puerto Rico.  Trump wants to cut the federal rate of 20%. But the official rate is an illusion.  Once various exemptions and allowances are taken into account, plus the provision to pass on losses in one year to deduct against profits in another year, the effective tax burden on US corporation averages out at about 27%, which puts the US rate near the global average.

Moreover, the burden of corporate tax on US companies has steadily been reduced over the last 50 years, from providing from 32% of federal tax revenue in 1952 to 10% in 2013. Indeed, total revenues from corporation tax are just 1.6% of US GDP, well below the OECD average of 2.8%.  In other words, the contribution that the top US corporations make to government spending on services etc is tiny.  Some smaller US companies avoid corporation tax altogether and instead pay ‘income tax’ as owners.  Trump is one of these:  his companies pay no corporation tax but just tax on whatever he takes as ‘income’ from his companies.  That is taxed at a top rate of 39.6%.  Trump wants to cut this to a 15% rate.

In the recession years of 2008-12, many large companies paid no corporation tax at all. General Electric, Boeing, Verizon and 23 other profitable Fortune 500 firms paid no federal income taxesfrom 2008 to 2012. General Electric, one of the most notorious corporate tax dodgers, got $3.1 billion in refunds on $27.5 billion in profits from 2008 to 2012. The company paid less in federal income taxes in five years than a single American family pays in one year. These companies were, in effect, being bailed out by the taxpayer – that’s us, who instead saw a sharp rise in taxes on income, cuts in government services and rises in sales taxes to pay for these bailouts.

The other trick to avoid tax was to shift profits on company accounts to foreign subsidiaries.  U.S. corporations dodge $90 billion a year in income taxes by shifting profits to subsidiaries — often no more than post office boxes — in tax havens. Now US corporations officially hold roughly $2.6trn offshore, a figure cited by Congress’s Joint Committee on Taxation. The top five in order of overseas cash holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111 Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet Inc. ($48 billion).— much of it in tax havens — that have not yet been taxed here. Trump plans to offer these companies a reduced tax rate of 10% to repatriate these profits.

The planned income tax reforms (cuts) will also help the rich the most. The individual tax rates would be 12%, 25% and 35% – and the plan recommends a surcharge for the very wealthy. But it does not set the income levels at which the rates would apply, so it is unclear just how much of a tax cut would go to a typical family. There will be a cut in taxes on capital gains, 70 percent of which flow to the top 1 percent.  The  estate tax will be eliminated. This applies to a tiny number of people, couples that have estates bigger than $10.8 million.   Trump himself would make a big windfall from this. Trump’s estate would save $564m, the review found, based on his estimated net worth of $3bn; Trump’s commerce secretary, Wilbur Ross, roughly $545m and potentially result in more than $900m in savings for Richard DeVos, the father-in-law of Betsy DeVos, Trump’s education secretary.

The nonpartisan Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, found “high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income… Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers,” if the plan were put into effect this year, it said. The highest-income households — the top 0.1 percent — would get “an average tax cut of about $1.3 million, 16.9 percent of after-tax income.” Those in the middle fifth of incomes would get a tax cut of almost $260, or 0.5 percent, while the poorest would get about $50. That split would worsen down the road, the Tax Policy Center says: “In 2025 the top 1 percent of households would receive nearly 100 percent of the total tax reduction.”  Even the conservative-leaning Tax Foundation concluded that those in the top 1 percent of the income scale would save at least 10 times as much, or 5.3 percent. That’s nearly $40,000 extra for those at the top, compared to $67 for those smack dab in the middle of the income scale.

Overall, the tax cuts would reducing tax revenue to the federal government by $160bn, or 0.8% of GDP.  In other words, that would halve the corporate tax contribution to the government, which would seek to make the rest of us pay for the gap.  Mainstream economist Marin Feldstein from Harvard University claims that “A lower corporate tax rate and the shift to a territorial system would increase the flow of capital to investment in US corporations from abroad and from capital investments in owner-occupied housing and in agriculture. This would raise productivity and GDP, leading to increases in tax revenue that would partly offset the direct effect of the corporate rate reduction.”  JP Morgan economists beg to differ: they see a boost, if any, to US economic growth at no more than 0.4% over two years, at most.

And there is no empirical relationship between cutting corporate tax rates and job growth, according to a recent study by the Center for Effective Government. Twenty-two of the 30 profitable Fortune 500 companies that paid the highest tax rates (30% or more) from 2008 to 2010 created almost 200,000 jobs between 2008 and 2012. The 30 profitable corporations that paid little or no taxes over the three years collectively shed 51,289 jobs between 2008 and 2012.

What these corporations did with the extra profit from less tax was to buy back their own shares to boost the stock price or issue bonds at very low rates to enable them to take over other companies.  Thus the tax shortfall merely led to a boom in fictitious capital (debt and shares) not real investment.

It’s also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding ten years.

The Trump tax ‘reform’ is yet another attempt to kick-start an economy by providing handouts to corporations and the rich (like Trump) at the expense of the rest of us, in the vain hope that the capitalist sector will invest more.  But it’s a vain hope.  Business investment is falling in the US.

5 Responses to “Trump’s tax reform”

  1. PotomacOracle Says:

    Mr. Roberts, An otherwise excellent article. However, you’re still analyzing monetary and fiscal policies as if we were still functioning (operationally) with a gold standard rubrics. Treasury and he Fed abandoned those practices when Nixon default on convertibility in 1971 and before him, FDR scrapped the domestic and international gold standard until Bretton Woods and the resumption of an international gold standard. Today, in fiat currency systems for sovereign currency issuers federal taxes for revenue are obsolete.

    In day-to-day operations tax receipts are destroyed. Our government simply issues new IOUs. In reality, there are no taxpayers funding federal government expenditures. Today that is a fiction/myth. Unfortunately too many believe it but not the operational folks at the Fed and Treasury.

    The following is a must read from a former Chairman of the Fed. Res.Bank of NY.

    “April 15th has come and gone, but the issue of taxation remains the course de jour. I was recently forwarded an article entitled Taxes For Revenue Are Obsolete, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York and published in a periodical named American Affairs.

    While Ruml was writing about the merits of corporate taxes, it is his discussion about how the function of taxes changed after the nation exited the gold standard in 1933 that makes this a must-read. As Ruml’s stated, with an “…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue…

    It follows that our Federal Government has final freedom from the money market in meeting its financial requirements… All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”

    He goes on to explain how, with Federal spending, not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation.

    The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ is categorically inapplicable.

    The operative CBO ‘scoring’ is the inflationary effect, rather than simply a revenue forecast. And while Social Security and Medicare may turn out to be inflationary, they are not ‘bankrupting the nation’ as most believe, including a Democratic Congress (2010) that cut Medicare spending with the recent health care bill and has all entitlements ‘on the table.’

    Professor Ellis Winningham’s presentation of “Federal Taxpayers Do Not Fund the Federal Government; The Federal Government Funds Federal Taxpayers” is also essential reading.

  2. Peter van Pelt Says:

    I haven’t received a blog from Michael Roberts since the 28th of September. Is there a reason for that?

    Yours sincerely,

    Peter van Pelt

    2017-09-28 12:53 GMT+02:00 Michael Roberts Blog :

    > michael roberts posted: “President Trump’s announcement of ‘tax reform’ > plans that he intends to get the US Congress to pass can only mean less tax > on the richest segment of income earners and less tax on the profits of > large multi-national corporations. But it won’t boost inves” >

  3. Chris Paul Says:

    Michael, will you have a new post about the current American tax bill? Will the cut in corporate tax delay the inevitable next recession?

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