The Popular Myths of Tax Policy

The duality of proposed tax policy consists is the Republican model of lower taxes to generate increased revenue based on a greater volume of economic activity, and the Democrats propose a higher tax on the wealthy to increase revenue to fund programs to create progress towards decreasing wealth inequality. The action of the democrats deviate greatly from their promises, but the premise of both parties is false.

Republicans are for lower tax rates based on a few different pretexts. 1: Lower tax rates lead to greater economic investment by the “job creator” class. 2: Lower tax rates allow the United States to be more competitive internationally creating an incentive for corporations to create jobs in the United States as opposed to over seas. 3: Lower tax rates allow ordinary Americans to keep more of their money which they will spend, and this spending stimulates the economy.

1st, lower tax rates do not have an impact on investment and economic growth. The logical evidence is anyone who has money will invest that money to make a profit whenever there is an opportunity to do so. There is no one sitting on a million dollars with an opportunity to make a lucrative investment on who will decide to make no money at all to avoid paying a higher tax rate. The tax rate is irrelevant to decisions of investment.

The highest marginal tax rate existed from WWII up until the 1980s, which is the tax rate on the richest 1% and .1%. Emmanual Saez found no correlation between economic growth during this period and economic growth during the period from the 1980s to present where the rate was substantially reduced.(1) If reducing or raising the marginal tax rate effected economic growth it would signal causation in the marginal tax rate and investment , as investment is an aspect of economic growth; being that you typically do not increase production, services, products, and sales, without increased investment.

2nd, the idea that lower tax rates cause America to be more competitive in the global market in terms of investment has no basis in reality. The reason is corporations possessing the resources to offshore production already pay little to negative taxes in the United States. Amazon was taxed at a rate of negative 1%. Meaning not only did Amazon not pay any taxes on 11.2 billion dollars in profit, Amazon received a tax rebate of 129 million dollars. (2) There are many other large corporations with billions in profits who pay no taxes or have negative tax rates. The obvious point is lowering corporate taxes has no effect on American competiveness in the global market when under the current rate they already pay little to nothing.

US manufacturing is uncompetitive because of free trade agreements and desperate labor markets, many of which are desperate due to imposition by the United States. Free trade agreements 1st because they allow the free importation of products into the largest consumer market in the world. The second reason is the nature of free trade agreements which basically allows corporations to circumvent the laws of nations in the interest of investment. Free trade agreements are primarily created to protect the investment of US corporations in nations they want to invest in. Another reason is the great deal of influence US corporations have in other countries including applying pressure through the US government.(3) The bottom line is production costs as a whole are substantially less in countries the US has made ripe for exploitation at the behest of its directors, and the tax rate has 0 effect on American competitiveness globally in terms of investment and job creation.

3rd, Lower tax rates for the middle class (50 to 80% of income earners) does stimulate the economy and improve the lives of those people by giving them more money to spend. For the bottom 50% the relief they see is minimal as their incomes are hardly taxable regardless of the plan. For the middle class it is one of the few tangible benefits they have from government. It is encouragement to support the party that promises tax relief, even if that relief for them is minimal and the tax policy works primarily to benefit the affluent classes. The middle class interest in tax policy is often over stated and under attended, but again, for the bottom 50% the tax rate is of minimal significance. At the same time, neither party is for raising middle class taxes, at least not overtly.

The rhetoric of the democrats would lead people to believe they are for a high marginal tax rate, and even a high tax rate on the upper classes. Of course when Obama was elected in 2008 on a platform that included raising the taxes on the wealthy, he extended the bush tax cuts. When he did adjust tax policy his raises were insignificant.(4)

This article is not the subject of policy enacted, instead it is the subject of party platform and the effects of the achievement of that platform. Bernie Sanders is running on increasing the estate tax. Elizabeth Warren has proposed a tax levy on Americans with a net worth exceeding 50 million dollars and 1 billion dollars. Alexandria Ocasio-Cortez supports a tax of 70 percent on income earned over 10 million dollars. Polls suggest that Americans support these taxes.(5)

What is the actual effect? As I mentioned, Saez study concerning the marginal tax rates found there is a correlation between higher marginal tax rates and rising income by the underclasses. However, the correlation is not causation because in his study he found the tax rate did not did not increase redistribution. (6) Meaning the correlation likely reflects a cause related to other policy. Which means the tax rate itself is more reflective of class assertion, as control over the direction of policy by wealth and industry domestically becomes evident by a decrease in the marginal tax rate. At the same time, the period of a higher marginal tax rate also corresponds to the great increase in US industrial capacity following WWII and the role of US dominance in the world. There are a lot of factors in play and I don’t think the subject has been adequately studied in light of Saez research. Something I mention because my conjecture above suggests a better represented underclass from the 50s through the 70s which I don’t believe is substantially accurate.

Federally, taxes collected and whatever bump in revenue generated from the fulfillment of democrats ideas is insignificant. Insignificant because the United States as the world reserve currency is afforded annual increased demand for dollars globally. The United States can borrow consequence free, in perpetuity to fund the federal government. Something I will elaborate on in proceeding commentary. The revenue bump which will likely be hardly perceivable is going to what? Are they going to cut a check to the poorest Americans in the additional amount collected? Of course not.

I’m not saying I don’t support a fair tax rate on the wealthy, and I recognize that as the rich get richer, the middle class struggle increases, and the poor get poorer, and taxing the rich is satisfying action to most Americans. However, taxing the rich does nothing in terms of improving the lives of most people.

On the state, county, and city levels taxing the rich is more consequential as the smaller governmental bodies have actual budgets. On these levels taxing can have a deeper redistributive effect in terms of social spending. On the federal level it is popular but not very significant, and again, without ideas to allocate those dollars to, it serves no purpose as a policy in a vacuum. Yes I understand politicans like Alexandria Ocasio Cortez and Elizebeth Warren are proposing taxes with ideas like the vague generalization called the Green New Deal from Cortez and Warren’s child care assistance program (corporate welfare bill), but tax policy has been peddled in isolation that higher taxes on the wealthy is the key to underclass prosperity.

Republicans argue taxing the rich is a tax on their success. The long held myth of the self made man. The reality is the success of any individual is a product of the collective. On the individual, it relates to the collective forces that molded him or her which extends beyond his immediate family and peers into all the impressions left upon him or her. Rippling out to all the impressions that molded those who molded the subject, and so on and so forth. The value of that reality is limited in the minds of many. Beyond this, regardless of an individual’s ability to innovate, invent, work ethic, or decisions of investment, no one person can fulfill all the functions that lead to a great level of success. The workers, shippers, distributors, marketers, and even the consumers that were led or chose to purchase the goods or services provided by the individual have contributed to that success.

There are arguments republicans attempt to push forward using statistics to show that the wealthy are already unfairly taxed. I don’t know if these numbers are accurate or not but I caught a piece of a Rush Limbaugh show while changing channels on the radio. Limbaugh said that in New York City, the top 1% paid 49% of the overall taxes but received only 31% of the income distribution. On the face of it, some could look at those numbers in terms of a percentage and think they are paying their fair share.

Nationally, the bottom 50% have roughly 12% of income distribution. Say there are 100 people on an island. 1 person has 31 dollars and 50 people have only 12 dollars. The total amount of dollars collected for taxes is 17 dollars. Is it disproportionate if the bottom 50 people sharing 12 dollars contributed only about 33 cents leaving them with only about a quarter each, and the 1 person with 31 dollars contributed 8.50, leaving him with 22.50? Is it unfair the one with 31 dollars contributed 8.50, half of the total taxes, but still he has 22.50 while the bottom 50 have less than a quarter per person if their share was distributed evenly?

In some crazy world where a dramatically higher marginal tax rate could be achieved, where the deciding interests of wealth conceded to a higher rate what does this mean for most people? To reiterate, aside from the fact that the increase in overall revenue compared to present budgets will be insignificant, what it means is there will be more money for industry to divide among each other.

I think everyone aside from the top .01 percent of income earners and those who profit from advancing their agenda is for an increase in the top marginal tax rate, but a tax rate is not an idea to improve the lives of people. Still there is no shortage of people holding tax the rich signs or politicians whose appeal stems from this position. Tax policy becomes relevant when funds are required to pay for an idea when those funds do not exist. In the United States, the federal government does not have a problem paying for programs, it has a problem with creating programs in the interest of the bottom 70% of the country. In conclusion neither the position of the democrats or the republicans on the issue of taxation is very meaningful to the bottom 80% of income earners in this country.

Elizabeth Warren claims on her website that by taxing the 75,000 richest Americans this will create trillions of dollars in tax revenue to fund government programs aimed at helping the middle class, although much of what she proposes is unconstitutional, unfeasible, and detrimental to liberty and the economy. The details of those assertions elude the scope of this article focused on tax policy.

Her assertion implies that it will produce trillions annually, otherwise anything substantially less is insignificant in terms of the overall budget. Warren has proposed a wealth tax which is paid from the existing worth of households, and it is estimated to raise about 200 billion dollars per year.

Alexandria Ocasio Cortez is for raising the top tax rate to 70%. Annually how much will these taxes bring in? The top .01 percent of income earners is 15,000 households who earn an average of 26 million dollars per year. Even if you taxed their income at 70%, the total amount collected is 273 billion.

The overall budget annually is over 4 trillion dollars. We borrow a trillion dollars per year to fund the current budget. Even if you combine the most ambitious and unpassable taxes, you still cannot pay for half the amount we borrow to meet the costs of the current budget.

There are two things to understand about the position of the republicans and the democrats concerning taxation. 1st, lowering taxes has no impact on economic investment and economic growth. 2nd, there is no tax rate high enough for the government to tax the rich and produce any meaningful redistributive effect. For clarification on the second point, income and wealth inequality cannot be solved through taxation. #FACTS

What no candidate from either party is proposing increasing the corporate tax rate of 21% on the 2.3 trillion dollars of annual corporate profits. Obviously a significant increase on corporate profits would not pass, but neither will the more extreme taxes proposed by Cortez and Warren; but corporate profits serve as the greatest untapped potential source for tax revenue. A higher corporate tax rate also has the effect of making small businesses, sole proprieters and small partnerships more competitive if corporations paid a rate higher than non-corporate enterprises.

As mentioned previously, the largest corporations pay no taxes, with some paying no taxes and receiving tax rebates. The corporate tax rate recently reduced to 21% is actually only 9% effective on average. Corporations have numerous ways to prevent profits from becoming profits. 1 popular tool is stock buy backs, where a company purchases stock issued to the public, which has the effect of increasing the price of shares as well as the profit not being taxed as profit. Another is offshoring profits by inflating the cost of business subsidaries owned in other countries. The point is that the corporate tax rate is largely avoidable.

How do you tax corporate profits? Just to reiterate the main point, a significant tax increase on corporate profits cannot be achieved in a two party system where candidates rely on the support of industry to be competitive. If you could, you don’t tax their profits to tax their profits because they have too many tools to avoid profits from becoming profits. To tax corporate profits you must tax an aspect of the service or production process, but it has to be a tax related to volume so it isn’t applicable to small businessess.

It may have to be broken into several taxes where the tax specifically targets an industry. Because I mentioned Amazon above, we can use Amazon as an example. Amazon is similar to an online flea market more than it is a retailer since most of the products available for purchase through Amazon are shipped direct by the seller which in some cases is the manufactuer. To tax Amazon you apply a sales tax to forum fees to any company that collects fees in excess of 50 million dollars. The tax is collected on the process of business and excludes small businesses.

Another example of an industry based tax would be a tax on ad revenue to tax companies like Google and Facebook which would also spill over into the media itself. An ad revenue sales tax where a percentage of ad sales is paid for any company with X amount sales from advertising. Tax is collected before the sales revenue becomes profit so the profit cannot be transformed into something like stock buy backs or channeled into a subsidiary where it ceases to be taxable.

1: Contempoary Economic Policy. Vol. 35 No.1 January 2017 “Income and Wealth Inequality: Evidence and Policy Implications” Emmanual Saez. page 23 “While it is clear that there is a strong correlation between top tax rates and the share of pre-tax income going to the top 1% income earners (as we have seen in Figures 16 and 17), it is much harder to see any link between top tax rates and economic growth.”

2: Fortune “Amazon Will Pay a Whopping $0 in Federal Taxes on $11.2 Billion in Profit”. By Laura Stampler, February 15th 2019.

3: The Nation. “WikiLeaks Haiti: Let Them Live on $3 a Day”. By Dan Coughlin and Kim Ives, June 1st, 2011. The Haitian government passed an increase in the minimum wage for textile workers which was going to increase the minimum wage from 22 cents per hour to 61 centers per hour. Levis, Fruit of the Loom, Hanes and others lobbied the Obama adminstration which applied pressure on the Haitian government which promptly reduced the increase to 31 cents per hour.

4: Center on Budget and Policy Priorities “Budget Deal Make Permanent 82% of President Bush Tax Cuts.” By Chye Ching Huang, January 3rd 2013

5: Washington Post “Ocasio Cortez Wants Higher Taxes on Very Rich Americans. Here’s How Much Money that Could Raise”. By Jeff Stein, January 5th 2019.

6: Contempoary Economic Policy, Saez (2017) pp 13, and 14 Figure 7. Pretax income is shown along side post tax income for the bottom 90%. The post tax income deducts taxes and adds back “transfers they receive”. The difference between the two illustrates the redistributive effect. In the period from 1946 to 1982 when the top tax rates were higher there is actually a smaller effect of redistribution. The first reason is because the bottom 90 percent earned better wages relative to the top 10% from 1982 to present and there were likely few transfers and fewer people who were dependent on government assistance. However, it still demonstrates that higher top tax rates did cause income inequality to be lower due to a redistributive effect. A higher top tax rate did not reduce inequality because the taxes paid were supplimenting the incomes of the general population, the difference was smaller due to the overall amount of income paid by the top income earners. What is interesting is not the overall difference in inequality, but the fact the bottom 90% seen a steady rise in real wages over the period when the top tax rates were higher, and this increase declined for the top 90% and disappeared for the bottom 50% when tax rates were reduced from the 80s to the present.