Corporate Taxes

Here’s a letter in the NY Times from a small business owner about the Republican corporate tax break. He doesn’t need it. He challenges the Republican mantra that reducing corporate taxes will encourage new growth. “That’s simply not the case.” He makes the point that no one starts a business because tax rates are low or hesitates because tax rates are too high. Lots of reasons to start or expand a business, but taxes are not on the list.
Yes, lowering the corporate tax rate would bring more income to businesses. However, most businesses (particularly large ones) are already sitting on piles of cash. If they had a reason to build a factory or hire more workers, they would already have done so. What’s needed is more money circulating. More money to people who will spend it. Corporte tax money will go as dividends to stockholders (generaly wealthy) or mutual funds who will not apend it. Money to companies will be used to buy back shares, making existing shares more valuable, a benefit to existing shareholders. None of this goes to workers, old or new. What’s needed is large government spending, like WWII or the Interstate highway system. Such projects would pass money to workers who would spend it.

Recession Revisited

In the 2 Nov W. Post,Matt O’Brien reviews an article by Lawrence Summers and Olivier Blanchard comparing the recessions of 1930 with 2008. One point is that the recovery has been slower this time. Recovery in 1930 was prompted by two factors:
1. We retreated from the gold standard. The dollar was allowed to float, and inflation increased. People who had money spent it quickly before it lost value. Others paid off debt with cheaper dollars. A little inflation can be a good thing, but 2% is too little.
2. The federal government began spending huge amounts of money in the buildup to WWII. This increased the debt (remember war bonds?) but stimulated the economy.
Today, the federal reserve has worked hard to contain inflation below 2%. That may not be a good thing. Also, Republicans are working hard to decrease government spending. Also not a good thing. We certainly have things that need money! Infrastructure, healthcare, energy, and research come to mind, but there are other prorities. How about restoring the budget for the National Park Service.
True, we had some stimulus funding after 2009, but not nearly enough.

Tax Bill, revised

Income tax cuts for anyone earning more that about $400K a year. Increased taxes for everyone else.
Probably eliminate the deduction for state income tax, and perhaps the mortgae deduction. Maybe just limit the mortgage deduction to $500,000 loans.
They have abandoned plans to decrease the amount you can contribute to your 401k plan–down to $2,400 from $18,000 a year.

The estate tax will be eliminated. That will benefit only the very small number of very rich (presumabley Republican) individuals who may have to pay it. Although not many individuals pay the estate tax, the loss of revenue is estimated at 172 billion. That loss will be made up by the rest of us and by our grandchildren, because another effect of tax cuts is to increase the deficit.

Gone also is the ability to deduct medical expenses that amount to more than 10% of your income. People with large medical expenses are typically over 50 and earn less than $75,000 a year. In other words, this tax cut will affect the poor and middle class in order to provide benefits to the very rich. Among those currently using thisdeduction are families paying for long term care. Remember, Medciare doesn’t pay for long term care. At one time, a lot of companies jumped into the long term care insurance business. Most of them have gone bankrupt or given up for other reasons. People receiving long term care just don’t die. Medicaid pays for some long term care, but patients must be devoid of assets to qualifyThis issue is a huge problem for the US that goes beyond this tax bill. Anyone wanting more info should start with the movie, “Still Alice.” Taking away the ability to deduct large medical expenses will make this problem worse for people who can’t afford it.

And by the way, deductions for student loans will also disappear.

CNBC has listed winners and losers under the Republican tax plan. there are lots of details, but the big picture is that those earning above $400,000 will benefit. Others will see their taxes go up. In addition, the deficit will go up. A lot. That means more money spent on paying interest on the debt. If interest rates generally go up, that will have a multiplier effect on the cost of raising the debt.

The ability to dedcut state taxes from your income before calculating the federal tax will also go. That means those living in blue (Democratic) states will lose a bigger deduction because of higher local taxes.

Almost everything about the bill is bad for ordinary folks and good for the super-rich.

 

TAX CUTS

Last time, I wrote about the absurdity of ideas like tax cuts and trickle-down economics, ideas that had been disparaged by econimists and disproven by trials. The state of Kansas is the poster child example. Six years of tax cuts by Republicans there led to bankruptcy until taxes were restored. Kevin Hassett, the White House economist, supported the Republican budget, with included tax cuts for the wealthy and corporations. However, Lawrence Summers, past president of Harvard and former Secretary of Treasury, referred to the tax cut proposal as “some combination of dishonest, incompetent, and absurd.” In her column of 29 Oct, Ruth Marcus refers to tax cuts as “worse than unwarranted. They are dangerous.” The Congressional Budget Office (CBO) declared last week that the deficiy has grown sharply during this Republican administration and would constitute the largest deficit since 2013. The basic reason cited for this increase in the deficit is that the federal government has been collecting less in taxes. And Republicans want to cut taxes more. This makes no sense at all, except that it does, sort of. Cutting taxes will bring a large windfall to the wealthiest Americans. They, in turn, will be so grateful to Republicans that they will donate to Republican causes. You have to make over $300K a year to expect any benefits from the proposed tax cuts, and the more you make, the larger the benefit. The rest of us pay for it.

So, if tax cuts don’t help the economy, why do Republicans focus on a failed strategy? Partly, I think, it comes from ignorance. They just never bothered to study the subject. Partly, it may come from the “facts don’t matter” approach of current Republicans. Mostly, however, the fault lies with voters who fail to read or listen to what candidates are saying before pulling the levers on election day.

Even at an individual family level, if you have a big expense (deficit), that’s not the time to quit your job and reduce your income. For the economy as a whole, a true stimulus would come from an infusion of cash, primarily to the lower income segment, because they will spend it. The stuff they buy will increase business for factories, who will hire more workers, who will buy more stuff. Injecting too much cash into the economy will bring inflation, so you need to balance that with higher taxes for the wealthy.

Corporations, for their part, don’t currently need a tax cut. They are sitting on loads of cash. More money for corporations would just go into the bank or into the CEO’s pocket. In a recent letter from a small company CEO, he said that he would hire more workers or start a new factory when people started buying more of his product. Reducing the corporate tax rate would not be a factor in that decision. He added that no one builds a factory because taxes are low.

What we need in this country is not lower taxes but leaders with common sense. Voters must elect them..

 

KANSAS

Six years ago, KS voters elected a Republican governor and a Republican legislature on a platform of austerity and tax cuts. Republican state senator Dinah Sykes outlines what hapened in the 20 October Washington Post. As promised, they eliminated 3,000 state employee positions, froze salaries, delayed payments to the state employee retirement system, used up savings accounts, canceled road projects, and issued $2 Billion in new bonds to pay for obligatory expenses that taxes would have paid for. Here’s what happened: education was neglected, road maintenance and repair didn’t happen, the state’s credit rating fell–making borrowing more expensive, and the local economy tanked. Analysis of the current Republican proposal for tax cuts concluded that “effects appear to be limited in size and possibly negtive.” That’s what KS found. State GDP growth fell behind US GDP growth. Employment grew 5.0 % as opposed to the US rate of 9.1 %. Most of the economic benefits went to the most wealthy residents. Eventually, state legislators recognized their mistake and raised taxes (over the governor’s veto). Most of the politicians who voted for the tax cuts are now doing something else for a living. Still, Republicans tout tax cuts and trickle down economics. And still, voters continue to elect them. Don’t confuse me with facts.

401 k

Republicans are now talking about taxing your 401k plan contributions. This is the system that llows you to decrease your total income by contributing pre-tax money into a 401k plan for retirement. The present system is of greatest benefit to those who pay the most in taxes. A low wage earner cares little about a tax-free savings vehicle. Indeed, the 401k concept has been called a cruel hoax for the poor who don’t have anyting left over after rent and food to contribute. It’s not really tax-free, just tax-deferred, because you must eventually take the money out of that plan and pay taxes on it when you do. However, Republicans want that money NOW to finance tax breaks for the wealthy.
No concrete proposals yet, but an idea floated to test the waters. If there is no protest, it may become a law.
Under the present system, any contribution to a 401k decreases your taxable income and may push you down into a lower tax bracket. The net effect could reduce your total tax burden enough to almost compensate for your contribution, making it almost free money. When you add an employer match to the pot, it becomes, indeed, free money. But stay tuned, it may disappear.

Taxes

No one likes to pay taxes. Well, that’s not entirely true. Some, like my father, don’t mind taxes. His location even had a separate school tax that he was happy to pay, even tho he had no kids in school. “Good schools run my property values up,” he said. Perhaps it would be better to say that most people would smile if their taxes went down a bit. So, how would that go? We had that experience locally a few years ago and nationally in the past year. First, there is a trickle down with tax revenue. Money sent to the State trickles down to the counties. If state taxes are lowered, there is less trickle down money for the county, so the county cuts back on services. Teachers get laid off. Art and music programs in the schools are cancelled. Employees in the county government are laid off. I called the county offices and the county executive answered the phone. Lots of services that touch lots of county residents just aren’t there anymore. The overall quality of life suffers.
There is a point, of course where citizens don’t want to pay for this or that and ask their representatives to take it out of the budget. These days, representatives generally don’t listen to constituents, but that’s the way it’s supposed to work. Some representatives don’t hold town halls or refuse to meet with constituents. That’s one of the problems with gerrymandering-election to office is assured for the party candidate, so there’s no need to campaign or pay attention to constituents.
There was a question in the Post recently about living with only SS income. SS benefits varied between about $500 and $1,000 a month. Most had free or subsidized housing. Note that not having a mortgage doesn’t make housing free. You still have to pay real estate taxes, and that’s the primary source of revenue at the county level. An increase of $100 in real estate taxes would be a serious blow to someone with $800 a month in SS benefits. For others, it would not be noticed.
There is this myth that lowering taxes stimulates the economy, but quite the opposite is the case. Economies thrive when governments spend money. Too much of this, however, leads to inflation, so governments need to have a mechanism for taking money off the table. One mechanism is higher taxes on the wealthy.
Lowering corporate taxes might induce companies to bring money back to the US, but they won’t spend it. No company will build a new factory unless/until there is demand for the products they would make. Just having money won’t induce any company to build a new factory or hire more employees.