Читать книгу How America was Tricked on Tax Policy - Bret N. Bogenschneider - Страница 6
ОглавлениеINTRODUCTION: THE CLASSIC DECEPTIONS IN TAX POLICY
You’ve probably been told many things about tax policy:
•That the wealthy pay a surplus of tax into the system and that workers somehow draw out these funds disproportionately to receive a net benefit.
•That the economy will grow quickly because of tax cuts for large corporations that supposedly give those companies enough free cash to make investments into new business lines.
•That if the wealthy were asked to pay taxes they might simply pack up and leave, creating a loss to the economy.
Of course, none of these claims are true. The truth is, what you have been told about tax policy is a trick designed to deceive you into working ever longer hours and paying taxes at ever higher effective rates. Many of these and other ideas about taxes and tax policy, especially those that you hear on television, are inconsistent with each other and make little or no logical sense. For example, if the first idea were true, that the wealthy pay copious amounts of surplus tax into the system, then it cannot also be true that the wealthy would leave if they were forced to pay any tax.
At this early stage, you should be at least suspicious that something is amiss with what you’ve been told about tax policy. The truth is that tax policy is formed by and through a series of deceptions. The foremost deception, which is the premise of both economic and philosophical thinking on taxation, is that it is always better for society that workers pay the bulk of taxes and that the wealthy and large corporations pay as little as possible. Economists claim that this type of tax policy is efficient for society. However, any supposed efficiency gains could arise only if the wealthy have very special plans for capital that they could achieve if they were not required to pay taxes. In fact, there are good reasons to believe that workers are better able to efficiently allocate small amounts of capital they have earned through work. The act of engaging in productive work is strong evidence that a person should be able to find a productive use for some capital. This means that it would be better and more efficient for society if taxes on the persons that engage in productive work were reduced from current levels so workers could invest their own capital, derived from their own work, in various productive pursuits. The productive pursuits of workers might be expected to yield efficiency gains for the economy including enhanced small business formation. Such productive efforts are encouraged where workers are not forced to pay nearly all of their surplus capital over to the government in the form of high rates of labor taxes and small business taxation. Some might even go further and call that a “fair” approach to tax policy.
Notably, the Social Security Trust Fund, as accumulated over the years from withholding taxes on prior generations of workers, was used to fund the federal budget, until even it ran out of money. All the while, politicians claimed, preposterously, that workers don’t pay taxes and that the wealthy pay a disproportionate amount of taxes because of the progressivity of the income tax system. Even a cursory glance at the federal budget reveals that such a claim is sheer nonsense, however. If we look to cash flows, the reality is that workers remit the bulk of the taxes through income taxes, employment taxes, sales taxes, gasoline taxes, property taxes, excise taxes, governmental fees for licenses and on and on. Since most of these tax types are either regressive (such as employment taxes) or not progressively indexed (such as property taxes), the overall system of taxation is regressive as workers pay a higher proportion of their earnings into tax types other than income taxes. The wealthy do not pay proportionate amounts largely because capital income is not taxed currently and the non-indexed tax types, such as sales taxes, are simply not as material to the wealthy in dollar terms as they are to workers. If we apply a more reasonable accounting method to tax policy and take into accounting holding gains on capital assets as tracked by the Federal Reserve, for example, then the effective tax rates on the wealthy are about one-third (1/3rd) those paid by the working classes. As will be explained in further detail later, it turns out that effective tax rates are more important than statutory tax rates or marginal tax rates and even the underlying methods of calculating an effective tax rate have been manipulated to deceive working taxpayers.
Yet, the progressivity of the income tax is the issue of tax policy that you see most often discussed on television. Of course, the wealthy as a class are indeed most concerned about the progressivity of income taxation because that is the tax which they predominantly pay. Yet, that hyper focus on income taxation is an illustration of a type of trick or, in some cases, may represent even a bona fide mistake, such as where the television tax commentator may fail to realize that employment or property taxes, as examples, are onerous to persons that do not have high incomes by which to pay these sorts of taxes. In any case, the Social Security Trust Fund cash so accumulated by the toil and sweat of generations of past workers has now been depleted, which will lead eventually to a governmental cash flow crisis as current workers cannot realistically be expected to pay any more in taxes than they already do.
Partly as a result of tax policies designed not to tax capital very much, the fortunes of the wealthy today are so vast that it requires a stretching of the imagination to see how any one person could efficiently allocate so much capital into productive investments. The allocation of large amounts of capital—say, a billion dollars—into productive investments is a very difficult task, so difficult that many wealthy individuals do not even attempt to allocate capital efficiently. Rather, the wealthy often channel largely untaxed capital into huge mansions or palaces, yachts, private aircraft and so on. Jeff Bezos was recently reported to have built a mansion with 25 bathrooms, as a prime example.1 These sort of expenditures are not productive investments and are designed merely to maximize creature comforts; they do not generate any economic return to society besides the initial act of production, and this enhancement of comfort means very little in economic terms. Contrary to what you may have been led to believe, it is not economically “efficient” for society to simply produce and consume comfort items that do not yield any economic return.
If taxes on workers and small business were reduced to more manageable levels, some workers would be clever enough to allocate small amounts of capital into productive activities like farms, restaurants or other small businesses that would generate an ongoing economic return and make society better off. I used to think that the diffusion of small amounts of capital among lots of Americans was a key aspect of the American dream and that capital diffusion helped to explain why the United States was such a successful and prosperous nation. The politicians who have designed the tax system, though, clearly don’t share these ideas about capital diffusion and economic policy. Tax policy more and more is meant to force workers to pay most of the taxes in order to concentrate capital into a few hands and thereby facilitate the accumulation of vast fortunes by the wealthy. As they have always done throughout history, the modern-day wealthy then continue to deploy the capital into building pleasure palaces of various sorts that do not yield any economic return.
Tax proposals to reduce taxes for workers and small businesses, such as that developed later in this book, represent the opposite of current economic and moral theorizing on tax policy. Quite amazingly, however, nearly all the empirical evidence available on tax policy supports a reduction of taxes on work as a means of increasing economic growth. As will be explained further, it is fair to call this the scientific view on tax policy, as it is based on the available evidence. Economic theory is generally not based on evidence. It may surprise you that there is little or no data or other empirical evidence to support the various tax policies proposed by so-called economic experts who call for tax cuts for the wealthy and large corporations. But there isn’t. The deeper you dig into tax policy, the less substance you will find. The object of tax scholarship really is to keep the shovel out of your hands, and thus, to keep you quietly paying taxes through the direct withholding of funds out of your paycheck.
Meanwhile the wealthy and large corporations vociferously complain about taxes but pay almost nothing in relative terms. The corporate share of the tax base prior to the Tax Cuts and Jobs Act of 2017 was 9 percent but was trending sharply downward even before the tax cuts, and may now be as little as 1 percent or 2 percent.2 The downward trend in corporate taxes was due in part to the lack of enforcement of the corporate tax laws by the government. For example, the Internal Revenue Service has adopted a variety of programs designed not to comprehensively audit large corporations as they do other smaller business and individual taxpayers. With further sharp reductions to the corporate statutory tax rate, the corporate share of the tax base has likely been reduced from 9 percent to much less. For comparison, the corporate share of the tax base ranged between 20 percent and 30 percent in prior decades. As the corporate share of the tax base is further reduced, workers will be expected to pay more taxes into the system to make up the difference, either now or in the future; the timing of when that happens depends, of course, on how quickly the federal system becomes insolvent.3
The foremost object of tax policy is accordingly to convince working taxpayers that the tax system is smart, fair and efficient when it is obviously not. The goal of this book is to reveal many of the deceptions that currently exist within tax policy. The deceptions you will read about in these pages are not so different from magic tricks. However, in this case, instead of believing a rabbit came out of a hat, taxpayers are fooled into believing that the tax system is either fair or efficient—it is in reality neither, nor is it intended to be so. The many philosophers who wish to debate the relative fairness of the tax system have missed the important point, which is that only the powerful are interested in debating whether the current tax system may be considered “fair.” The working classes do not find this supposedly philosophical inquiry as to the “fairness” of wage and other types of taxation to be even a valid question and go about their lives under the assumption that the tax system is grossly and abjectly unfair. And, as will be explained, it turns out it is the workers and not the philosophers who are correct that relative fairness has little practical import or relevance to the design of tax policy.
Professional philosophers have largely failed to recognize that a method of accounting, consistently applied, is strictly necessary to reach moral conclusions about the fairness of the tax system. Insofar as many workers are only aware of a cash-basis means of accounting for tax payments, they have, by necessity, consistently applied that accounting method and reached the cogent conclusion that the tax system is not “fair” to them since workers plainly remit most of the taxes measured on a cash basis. Of course, various philosophers have encouraged the wealthy to believe that the tax system should be considered “fair” by creating special accounting methods to be creatively applied on a noncash basis within their own moral frameworks. These special accounting methods make it possible to say that the wealthy should be assumed to have paid a proportionate share of taxes to then allow for a supposed “redistribution” for basic needs in the “welfare state,” as example. In any case, the results are thereby twisted to such a degree that some background in accrual accounting (or even forensic accounting) is helpful in attempting to apply the many special accounting methods of moral philosophy to tax policy. This will be explained further below.
The broader purposes of the overall tax system are better revealed by what is referred to as “postmodern” philosophy and are actually twofold: The first purpose is to collect tax nearly exclusively from workers by withholding directly out of their paychecks. The second purpose is to allow the wealthy to feel powerful by not paying much of anything in tax. This is often achieved as a result of what the wealthy consider “prudent” tax avoidance planning—yet, such means of rational tax avoidance are only made available to relatively wealthy persons under the tax laws. Both of these elements are absolutely necessary to the functioning and design of the current tax system. The American billionaire Leona Helmsley stated it best: “We don’t pay taxes. Only the ‘little people’ pay taxes.”4 That is basically an accurate factual description of the tax system. Helmsley was a real estate heir and for long the richest person in the United States. Similar to Bezos’s 25 bathrooms, Helmsley famously left $11 million in a trust fund for her dog upon her death. She captured in these few words the postmodern view of taxation and tax policy: The wealthy don’t pay much tax relative to either their income or accumulated wealth and that the reason for this is that the wealthy are simply more powerful than the working class. The wealthy further view workers as “little people” and that is how the wealthy classes justify to themselves not paying much tax even though this is both economically inefficient and morally wrong.
THE CLASSIC DECEPTIONS
Now let us proceed to the analysis of the classic deceptions that are used to create tax policy. Please note that not a single one of the claims in this list is accurate or true:
Deception #1. Tax cuts for the wealthy will cause economic growth.
Deception #2. Large corporations are experiencing a cash shortfall that can be alleviated by cutting their taxes.
Deception #3. Capital is like a delicate hummingbird: It is mobile and will leave if subjected to tax.
Deception #4. By inventing a special way to count taxes, we conclude the wealthy pay significant amounts of tax (e.g., the top 1 percent pay roughly half of all taxes).
Deception #5. Statutory tax rates, not effective tax rates, are what’s important to tax policy.
Deception #6. High business tax rates reduce economic growth by reducing the economic return on investment.
Deception #7. The working poor don’t pay taxes because income tax rates are progressive.
Deception #8. There are no social costs to high taxes on workers.
Deception #9. Workers and poor people are cognitively inferior to the wealthy and unable to make rational economic decisions.
Deception #10. Tax cuts for large corporations are the only viable tax policy option and never tax cuts for small business.
Deception #11. Tax cuts for large corporations will reduce prices on consumer products.
The following sections lay out why every one of these statements is a deception, a trick played on taxpayers to ensure that the wealthy and corporations don’t pay anything close to a proportionate share of the tax base.
Deception #1. Tax cuts for the wealthy will cause economic growth
Tax cuts for the wealthy will actually not lead to economic growth. This idea is not novel as it has indeed been tried before, time and time again, throughout human history. In reality, there is no empirical evidence that tax reductions for the wealthy cause economic growth or that lower tax rates for the wealthy foster economic growth. The bulk of the evidence suggests that the opposite is probably true.5 Nearly all the empirical evidence on record indicates that higher levels of per capita gross domestic product (GDP) are associated with higher taxes. This is true both for cross-country comparisons and also over time within individual countries where the taxes have changed.6 A few very small countries have established themselves as tax havens, including, for example, Ireland and Singapore, and these small countries are the exception in international tax policy and cannot be used as a guide to setting tax policy in larger countries; in essence, these tax havens have positioned themselves as parasites of other countries. In all other contexts, the empirical evidence indicates that higher taxes are associated with higher GDP in every country and in every historical period on record. So far, economists have not produced a sliver of evidence—not even a correlation between these variables of tax cuts and economic growth. The empirical evidence is so obviously to the contrary that it is rather silly to search for such a correlation where none exists. However, there are examples of tax increases on capital appearing to have directly caused spurts of economic growth, including in the implementation of the Tax Reform Act of 1986.7
A novel idea that has never really been tried before, except in Switzerland, which taxes wages relatively lightly,8 is not taxing workers at high rates and seeing if that sort of progressive tax policy causes economic growth. I wish to propose that it is plainly obvious based on the available evidence that a tax cut for workers and small businesses would cause sustained economic growth. Ironically, such tax cuts for workers is the very tax policy that economists nearly unanimously counsel against. The wealthy have been able to escape taxes throughout history, and nothing about minimizing taxes for the wealthy and hoping for economic growth is a new policy idea. Exempting the wealthy from paying taxes has been done time and again and it seems to result in the building of lots and lots of fancy palaces and the acquisition of more and more creature comforts but not economic growth.9
Deception #2. Large corporations are experiencing a cash shortfall that can be alleviated by cutting their taxes
Although tax scholars and television and radio commentators constantly repeat the claim that corporate tax cuts cause economic growth, this simply makes no sense. Large corporations have been experiencing a cash surplus, not a cash shortfall.10 In fact, large corporations have accumulated so much cash on their balance sheets that it threatens the stability of the economic system. The total amount of cash held on corporate balance sheets exceeded $3 trillion at the time of the drafting of this book.11 Additional tax incentives to these firms should not be expected to cause economic growth—they should be expected to increase corporations’ hoarding of cash to ever-larger amounts. Many large firms operate their businesses as an annuity, with the goal of drawing out as much cash as possible from the business without reinvesting capital.
If someday there does appear some empirical evidence that corporate tax cuts do cause economic growth, this would be attributable not to the availability of cash, but to how the tax cuts might enhance the optimism of corporate executives to make capital reinvestment. But, lots of economic policies apart from tax cuts could have a positive or negative impact on the optimism of corporate executives. Because nearly all economic activity is linked to consumer spending, tax cuts for consumers would seem more likely to increase consumer spending and to thereby increase the prospects of economic growth12 as business spending might then increase to match the increase in consumer spending. The contrary economic idea that higher consumer spending might arise from corporate tax cuts to companies with ample surpluses of cash seems utterly unrealistic for many reasons. Large corporations have ready access to credit and even if they were short of cash could easily borrow money to fund incremental business investment. If large corporations are not making capital investments into the broader economy it really does not seem plausible to conclude this is a result of the lack of capital that must be alleviated through the tax system—the underlying idea just isn’t plausible.
Deception #3. Capital is like a delicate hummingbird: It is mobile and will leave if subjected to tax
Many large corporations operate by harvesting profits by and through a dominant market position, where the business is operated like an annuity and the maximum amount of cash is drawn out from the operating business with the minimum amount of capital reinvestment. Such profit harvesting is best accomplished when the competition has been eliminated from the local market somehow. In economic terms, this market advantage is known as collecting economic “rents” out of the marketplace, and firms that engage in this are described as rent-seeking market behavior. One way to use tax policy to facilitate rent-seeking market behavior by large businesses is through granting preferential tax treatment to only large corporations. The benefits that the current tax system delivers to large corporations comes at the expense of small businesses in the marketplace by reducing the relative rate of economic return to these competitors. At one point, small businesses were competitors in the marketplace in various lines of business, but now are unable to make a profit after taking into account the relatively higher tax rates charged to small business in comparison to large business. Once the small businesses are out of the picture, the large corporations are positioned to provide a good or service in the absence of any competition and can charge whatever price they determine that consumers might be willing and able to pay.
The term “rents” is helpful here because corporate activity can be thought of like a landlord who wishes to collect rents from tenants. A good example is a Walmart superstore that serves a locality and has no competing local stores. Just like landlords are unlikely to stop being landlords if there is still some rent to be collected—that is, profit to be made, without regard to the tax rate—corporations are the same. This Walmart will leave the locality only when its market position has been eroded in some way and that erosion has reduced available profits (or “rents”) to zero. This might occur if the Walmart is subjected to competition from another large grocery or retail chain, like Target or Kroger. Tax policy could have a negative impact on Walmart if, say, Target stores were exempted from various types of tax but Walmart stores were not. Such an unequal tax treatment would potentially erode the market position of one business at the expense of another. However, this rarely, if ever, happens to large corporations. In contrast, it is nearly always the case that small businesses are subjected to much higher tax rates than large corporations, so the tax system accrues to the benefit of large corporations and at the expense of small business. This makes it unlikely that corporate taxes have any effect on large corporations at all, and they certainly would not cause them to raise prices. Redesigning the tax system to foster competition in the marketplace might even lead to lower prices by increasing competition to large corporations in the marketplace and forcing them to compete with small businesses on price.
Large firms, especially after the Tax Cuts and Jobs Act of 2017, are generally taxed much less than small businesses; this rate differential reduces the after-tax rate of return to small business and ultimately assists large corporations in eliminating small businesses as competitors in the marketplace. Large firms may thus continue to enjoy monopolistic market conditions across the United States and increasingly in Europe and can extract rents from the marketplace to an extraordinary degree. An example is Starbucks, which now operates in many European cities with very low effective tax rates even though many local coffee shops in those same cities are subject to taxation on any profits at hefty European tax rates. Accordingly, it is rather outrageous to suggest that large corporations such as Starbucks might fly away like a delicate hummingbird from these market monopolies because of corporate tax. The hummingbird analogy simply is not as pertinent to large firms as it might be to small ones. Large corporations are more like crocodiles than hummingbirds. Once they move into a body of water, they will stick around until they have completely exhausted all the food sources—that is, profits or rents. Not even levying a tax will make that crocodile move to a new river if there remains even one wildebeest or small coffee shop owner waiting to be consumed.
Deception #4. By inventing a special way to count taxes, we conclude the wealthy pay significant amounts of tax (e.g., the top 1 percent pay roughly half of all income taxes)
Several tax organizations operate tax policy websites that continuously publish reports that the rich pay lots of taxes. Often the claim is that the top 1 percent pay half of all US income taxes.13 Another oft-quoted statistic is that 50 percent of the population pays 97 percent of the income taxes.14 The implication is that because of the progressive tax rate structure of the federal income tax system that workers and lower-income workers do not pay as much in taxes as the wealthy. These organizations do not attempt to determine the source of federal tax receipts apart from current year income taxation that comprise the federal budget, however. Wage taxes, which are levied pursuant to a regressive rate structure (where a ceiling is applied and earnings above the ceiling are exempted from wage tax) are simply ignored by dropping the word wage before taxes and slipping in the word income as if that were a reasonable assumption in the formulation of tax policy. However, it’s not a reasonable assumption. These tax policy organizations claim to be bipartisan—and that’s true to some extent—as perhaps the only thing Republicans and Democrats agree on is that workers should fund as much of the tax base as possible. So, these organizations create misleading statistics that support the idea that the wealthy are remitting a disproportionate amount of the tax base through progressive federal income taxation, which just isn’t true.
The reality of the federal budget is quite different from what you’ve been told by these tax policy organizations. The truth is this: A large portion of receipts arise from wage withholding in the form of Social Security and other taxes levied on workers, not from income taxes levied on the wealthy. The tax organizations that publish the misleading statistics are aware of this reality, so they need to create an explanation as to why only income taxes should count as federal tax receipts, rather than wage tax receipts, or federal government borrowing out of the Social Security trust fund, for example. In tax parlance, the invention of a new system of reporting on tax remittances comprises what is referred to as an “accounting method”; here, an accounting method for counting tax remittances to the Federal government. The misleading aspect of these tax statistics is that they do not consistently apply that special method of accounting. Then, absent consistency in counting taxes paid, it is possible to manipulate the statistical result to reach nearly any result.
One method of accounting applied as justification is to create (or to “book an accrual”) an offsetting amount for hypothetical social benefits solely to workers to be received at some point in the future. However, this special accrual method is applied solely to workers as taxpayers. Anytime an offsetting amount is created or accrued based on a hypothetical for one group and not another group, it creates a fudge. For example, such a corresponding accrual for hypothetical economic benefits is then not accrued for large corporations or wealthy individuals in order to account for the similar benefits they receive from tax remittances. This means there is a mismatch within the application of the accounting for accruals or cash payments depending on whether the taxpayer is a worker versus a wealthy person or a large corporation. The mismatch in the accounting for future benefits represents the fudge, where it is really possible to create any possible result in tax policy by positing a future benefit of a greater or lesser amount. The result is then to say that tax remittances under the wage tax system are $0 (or even negative). The method is illustrated in the table that inserts a question mark to represent the fudge where one group of taxpayers follow one accounting method and another group follow a different accounting method:
| Current Taxes | Future Benefits | Net Gain/(Loss) | |
| Worker | (45) | 45 | 0 |
| High income | (45) | ? | ? |
| Corporation | (9) | ? | ? |
This mismatched method of accounting for wage taxes can be challenged in two ways. First, given the many accruals in the modern tax system, tax policy could instead proceed on what is referred to as a “cash-basis” method of accounting. On a cash basis, the amount of current remittances by workers is very high, and this level of remittance could be compared to payments made by other taxpayers, such as large corporations. This would be used to calculate an effective tax rate based on cash taxes in order to formulate a coherent tax policy by applying one and only one method of accounting in the respective analysis. Second, hypothetical future benefits could be posited to other taxpayers. If similar hypothetical benefits are counted today for both workers and other groups, then the result could or would change as it would be determined that workers are indeed paying net taxes. The failure to consider a cash-basis method of accounting to formulate tax policy is an egregious and astounding omission—no trained accountant could possibly overlook such an omission.
An additional sleight-of-hand is next applied by some television commentators and tax policy wonks to suggest that future benefits to workers will be paid only by high-income or corporate taxpayers in the form of cash taxes levied in the future. This is to suggest that high-income or corporate taxpayers will someday fund the tax base, so this assumption about who might pay taxes in the future should be “booked” today in the formulation of tax policy.15 The method can be illustrated as follows:
| Current Taxes | Future Benefits | Future Taxes | Net Gain Loss | |
| Worker | (45) | 45 | 0 | 0 |
| High income | (45) | ? | (45) | (90) |
| Corporation | (9) | ? | ? | ? |
The source of federal revenue to fund future Social Security benefits is presumed to be federal income taxes from high-income persons, even though the federal government today receives most of its revenue from a combination of wage and income taxation. The assumption makes it possible to discuss transfer payments as relating to hypothetical taxes paid by the wealthy in a future period, even though transfer payments today are made by workers—and will likely always be made by workers. This method also simply ignores the fact that the federal government runs a deficit now and presumably will run a larger deficit at the time future transfer payments should be made. So, even if progressive tax rates meant that the wealthy were funding the tax base, indeed this would not mean that the wealthy were funding the federal budget, since the federal budget might be funded by borrowing from either past or future workers.
Deception #5. Statutory tax rates, not effective tax rates, are what’s important to tax policy
Political debates on tax policy usually center on the level of statutory tax rates. For example, in the lead-up to the passage of the Tax Cuts and Jobs Act of 2017, most of the discourse was related to whether the 35 percent corporate tax rate was too high. None other than the Council on Foreign Relations even claimed that the US corporate tax rate was “one of the highest corporate tax rates in the world.”16 Nearly all news media outlets at the time discussed corporate taxation according to the premise that the taxes paid must be high because the statutory tax rate is high—what a farce!
The misleading aspect of this discourse has to do with the effective tax rate. In tax parlance, the term “effective tax rate” refers to the tax rate after all incentives or reductions are considered. In this case, a large corporation may receive incentives that reduce the effective tax rate from the statutory rate to some lesser amount, and that amount is the corporate tax rate. Of course, the effective tax rate is a function of many different tax deductions from the statutory rate or other incentives. Estimating the effective tax rate requires having knowledge of the amount of income and the amount of deductions and other incentives available to a taxpayer, such as a large corporation. Most of the time, neither of those variables is known by anyone inside or outside the corporation until the time that the corporate tax return is prepared after the close of the tax year. Therefore, it is entirely possible that a high statutory tax rate (e.g., 35 percent) could apply to the corporation but it has a low effective tax rate because of available tax incentives and other deductions. This was broadly true of the US corporate tax system even before the Tax Cuts and Jobs Act of 2017; the effective tax rate on US multinational firms was quite low, most scholars thought no higher than 21 percent.
My view was then that the 21 percent estimate is too high because it failed to reasonably consider the accumulation of a corporation’s overseas profits. An effective tax rate is calculated as follows: Effective Tax Rate = Total Taxes / Total Income.17 Both the taxes paid amount in the numerator and the income amount in the denominator must be accurate in order to calculate the effective tax rate. Increasing the amount of corporate profits would reduce the effective tax rate by increasing the denominator of the fraction or the amount of income which the corporation had earned without changing the amount of taxes it had paid. By more accurately stating the amount of corporate profits, I was previously able to estimate average effective tax rate in 2007 instead at 16 percent, as opposed to 21 percent as others had calculated, but in any case trending sharply downward.18 The downward trend indicated that the average effective tax rate was declining by roughly 0.5 percent per year—so following this trend, as of 2016, the effective tax rate would have been closer to 11 percent. Of course, some large companies pay less than the average rate, especially companies in the pharmaceutical, high tech and automobile industries, where the effective tax rate may be between 0 percent and 5 percent in most years.19
Therefore, the US corporate tax rate was not properly described as high. The average effective tax rate for large corporations was somewhere between 10 percent and 21 percent at the time of the reforms. The effective corporate tax rate in the United States was actually relatively low in comparison to other countries. The relatively low rate was due to various factors, including specific incentives contained within the tax code itself. For example, prior to the corporate tax cuts, the US corporate tax system was structured to allow for three things: (1) broad deferral of large corporations’ offshore earnings until profits were repatriated, if ever, (2) a lack of tax enforcement on intercompany transfer pricing (so firms were freely able to shift profits into tax havens or other favorable jurisdictions) and (3) no enforcement of the accumulated earnings tax for large multinational corporations. All of this meant that corporations were not required to pay dividends, which might have triggered additional tax at the shareholder level. Thus, the system was quite favorable for large corporations because it was unlikely that corporate earnings would be taxed much, if at all.
The pertinent question, then, is why would anyone talk about tax policy in terms of statutory tax rates rather than effective tax rates? Large corporations have smart tax advisors, so ought to be able to estimate the effective tax rate for their potential earnings. Those tax advisors would be aware that the statutory tax rate would not be the rate they would be required to pay on any future profits. Yet most of the discussion at the time was a superficial treatment of statutory tax rates; very little discourse reached an analysis of corporate effective tax rates.
For their part, economists have long recognized that the most important statistic for tax policy is likely the effective tax rate, not the statutory tax rate. The use of effective tax rates is extremely problematic for economic theorizing, however. Data on effective tax rates is not readily available to economists, and it would always be firm-specific anyway. Absent a solution, this makes it nearly impossible to say anything precise about tax policy by way of economic theory.
A solution was nonetheless identified within economic theory to render it relevant to tax policy notwithstanding an inability to know what effective tax rates actually are. Economists simply invented as a solution the “marginal tax rate,” which is nearly always equivalent to the statutory tax rate. The “marginal tax rate” is a hypothetical rate that the firm would pay on an extra dollar of earnings above what the company is expected to earn. In economic theorizing, it is posited that firm-level decisions relate to the marginal tax rate, or the tax rate on “extra” or incremental earnings arising from new investments. The marginal tax rate is generally presumed by economists to be equal to the statutory tax rate. This means that in the formulation of tax policy economists generally posit that large corporations will make decisions based on the full statutory rate rather than the average effective tax rate. So, cutting tax rates for large corporations could therefore be seen as potentially beneficial even where the large corporation is not currently paying much (or any) taxes because corporations might be expected to take investment decisions under the countervailing premise that they would estimate taxes on earnings from that “extra” profit from investment and reduce the expected rate of return by the amount of “extra” taxes to be paid. In any case, economists are comfortable speaking about tax policy in terms of statutory tax rates rather than effective tax rates, because it is simply presumed as a matter of economic theory, without any evidence of course, that firms would expect to pay the statutory tax rate on any incremental earnings from new investment. That view is wrong most of the time because firms typically make decisions about business investments considering the average effective tax rate, not the marginal or statutory tax rate. In actual practice out in the real world, the CEOs of large corporations are infamous for signing the papers on major investment or M&A (Mergers and Acquisitions) decisions without consulting the tax department in advance. The typical example (often discussed by tax professionals with a chuckle or sigh) is the CEO who agrees to do a stock deal rather than an asset deal, and then finds out the next day when the stock deal is disclosed to the tax department, that the depreciation on assets held by the target company does not step up to the price paid on a stock deal but it does an asset deal. And, the difference can amount to many millions for a sizeable target company.
Deception #6. High business tax rates reduce economic growth by reducing the economic return on investment
The income tax is a voluntary tax in the sense that reinvesting profits into the business generally reduces the tax base (or the amount of taxable income) that is subject to tax. Simply put, any income tax is levied on the tax base, which is the amount of profit minus any deductions. Business deductions can be claimed by, for example, reinvesting in or expanding an existing business or business line. Consider a small dry-cleaning business that generates $100,000 of profit each year. If the owners open a new dry-cleaning store, then they can apply various deductions related to expenses and depreciation from the new store against the profits from the existing stores. These expenses might total $60,000, netted against the profit from the other stores, and so reduce the tax base from $100,000 to $40,000. Therefore, the business expansion automatically reduces the tax base from the existing profitable business lines. For this reason, rapidly expanding businesses often pay no income tax at all, even when they have high profits and positive cash flow. Therefore, the income tax on business can be understood as a voluntary tax. Other types of tax, especially earned income tax, are not voluntary in this way because those earnings generally may not be delayed or offset by other deductions.
The companies that are most concerned about income taxes are accordingly those that are not expanding by reinvesting their profits, especially large corporations given the tendency of large firms to operate without capital reinvestment. If a large corporation operates the business as an annuity, to generate economic rent from business lines without having to reinvest profits or expand, then income taxes are likely to apply on profits from existing business lines. In this case, the corporation has not taken advantage of the voluntary nature of the income tax system by reinvesting profits to reduce the tax base. One objective of tax policy in a capitalist society is to encourage capital reinvestment to foster economic growth, and if this does not happen for some reason then capitalism gets sick and does not function as well as it should. Hence, where a company operates its business as an annuity and does not have any capital reinvestment plans, then that company is not as likely to facilitate economic growth. A tax policy expert might say it’s a good time for the company to pay some tax, since there are apparently no plans to expand the business by capital reinvestment. Hence, the remittance of corporate tax by a company that operates its business as an annuity, without plans for capital reinvestment, does not seem harmful to economic growth, because the capital converted into tax was not going to be reinvested anyway.
This lesson regarding the voluntary nature of the tax system can be applied even more broadly to international tax policy. Imagine a multinational corporation that is profitable in many different jurisdictions. The company needs to make some capital reinvestment in the form of research and development or similar capital expenditures. These investments will result in an income tax deduction currently (or going forward into the future in the form of depreciation and amortization), but only in the jurisdiction where the capital is deployed. The company can choose in which jurisdiction it will make these capital reinvestments. So, in which jurisdiction will the company reinvest—a low-tax jurisdiction or a high-tax jurisdiction?
Economic theory says that the company will select a low-tax jurisdiction because any profits arising from the investment will be subject to less tax. However, any tax lawyer or accountant worth their salt would select the high-tax jurisdiction. This is because the investment gives rise to tax deductions immediately, and those deductions have value right away. Tax deductions are also worth more in the higher-tax jurisdiction to the extent that they offset profit in the high-tax jurisdiction; in other words, by reducing taxable income in the jurisdiction with the higher tax rate, the gross amount of taxable income is reduced by more than claiming those tax deductions in, say, a tax haven where the value of tax deductions is $0 (e.g., a 0 percent tax rate). The time value of money further requires that deductions taken today are worth more than deductions tomorrow. Furthermore, because large corporations usually can shift income by transfer-pricing techniques into low-tax jurisdictions, corporate tax planners simply presume the ability to shift income and thereby not pay tax at high rates.20
This technical explanation explains why nearly all capital investment flows into countries with relatively high corporate tax rates, such as Germany, South Korea, Japan, and (previously) the United States. Large corporations nearly always invest into high-tax jurisdictions, contrary to the predictions of economic theory. Corporate tax cuts paradoxically have the effect of reducing the attractiveness of that country for capital reinvestment. A multinational company seeking to maximize the value of present tax deductions would instead choose to reinvest capital into the higher-tax jurisdiction. But this is true only where the multinational firm is already profitable in the higher-tax jurisdiction, but this will nearly always be the case and should be presumed in the design of tax policy.
Another widely held belief about taxes and tax policy is that corporations are subject to two layers of taxation—once at the firm level, and again at the shareholder level—often referred to as double taxation. Tax commentators often refer to the double taxation of corporate profits as harmful to economic growth and as a justification for reducing the corporate rate. This is nonsense. The second layer of shareholder-level tax never has a chance to arise if the corporation continues to grow and reinvest profits into existing business lines, and accordingly, does not elect to pay dividends. As a general matter, large corporations are not forced to pay shareholder dividends because the Internal Revenue Service does not enforce the accumulated earnings tax under IRC §531 et seq. against those corporations, so any shareholder-level tax is simply delayed indefinitely until the corporation chooses to pay dividends, or never. Also, even if dividends are paid by the corporation to shareholders, not all shareholders are taxable on dividends received, such as when shares are held by a pension or sovereign investment fund, in a retirement plan such as a 401(k), or by any other nontaxable shareholder. Tax advisors to large corporations generally do not expect to pay a higher rate of corporate tax irrespective of the corporate statutory tax rate, which is why they choose to operate in corporate form in the first place. The availability of corporate-level tax deductions, lack of tax enforcement by the Internal Revenue Service especially in respect to transfer pricing by multinational firms, and the potential to delay the levy of tax at the shareholder level by not paying dividends represent several reasons why the corporate form is selected by tax experts for the operation of large business irrespective of the corporate statutory tax rate.
Deception #7. The working poor don’t pay taxes because income tax rates are progressive
The tax system that applies to the wealthy and large corporations differs significantly from that which applies to workers who are paid wages and are immediately subject to taxes on that labor income. This is because nearly all earned income is currently subject to tax. Earned income is also generally not offset or reduced by deductions. Any earned income is taxed immediately on the full amount without any reduction. In contrast, the wealthy and large corporations are usually able to delay (or “defer”) tax or not pay tax on the full amount of profits. Earned income is therefore always part of the tax base and almost never reduced by deductions. The progressive rate structure of the income tax does not offset these disadvantages. Labor income may always be disadvantaged under that system of automatic deferral of taxation for capital income but not labor income irrespective of any progressivity in the tax rates if there is the possibility of deferral to capital. For example, if the statutory tax rate on capital were set at 99 percent, and the tax rate on labor at only 10 percent, if deferral was still available to capital, the tax system might still favor capital despite the significant difference in the statutory tax rates. It simply is not possible to coherently discuss tax policy solely in terms of statutory tax rates without knowledge of the availability of deferral to capital under the tax laws.
Taxes are levied on earned income relatively simply: by multiplying the tax rate times the tax base. And, the tax rate on earned income is high. In addition to that high tax rate, the Social Security taxes levied in the United States are not progressively indexed.21 For labor income, a worker may often pay federal income taxes of up to 38 percent, plus state and local income taxes, often 6 percent, plus Social Security and Medicare taxes. That’s roughly 60 percent. And then, once the worker pays the 60 percent in taxes on earned income, lots of other taxes are also required to be paid, like sales taxes (often 6 percent on purchases), property taxes, (typically 3–5 percent of average earnings), gasoline tax (typically 2 percent or more of average earnings), a host of government fees (ranging from 2 percent to 5 percent of average earnings), and on and on. If all these taxes are added up, then nearly everything the worker earns is transferred back to the government in one form or another. If a worker has something left over after paying all these taxes, it should really be considered something of a miracle. One of the most significant deceptions in tax policy is encouraging workers to think that the wealthy and large corporations also pay confiscatory rates of tax similar to how workers pay taxes on their earned income. A second deception is to encourage workers to think that some progressivity in the income tax rates means that they are not paying a rate equal to that of a higher-income person; that is simply false. Wealthy people are wealthy in part because they tend to hold assets that have seen great increases in value, but they are not taxed on those increases as if they were income earned by and through work.
Deception #8. There are no social costs to high taxes on workers
The economic theory of taxation might sound complicated, but it’s simple, really. Economic theory posits that only high-income workers and firms will choose to produce less economic output if they are taxed. This posited reduction in economic output is referred to as the deadweight loss of income taxation.22 The deadweight loss from taxation is a subtraction to economic activity and to tax collections from the taxation of the wealthy only—there is no corresponding deadweight loss from the taxation of working people posited in economic theory. Thus, although evidence for the deadweight loss is lacking, it is posited to accrue only for the wealthy, not for lower-income workers. The assumption is that no matter how much tax workers are required to pay, there is no reduction in economic output from those taxes on workers. In other words, as far as economics is concerned there are no social costs to high taxes on workers. Workers simply don’t count in economic theory—exactly as Thomas Malthus said long ago.
Economics has not changed much since Malthus’s time. We have today really a formal way of applying Malthusian theory through the tax system. A significant problem in the present day is the lack of data to support these economic ideas. Scientists often call data evidence. To see if something is true, scientists like to look at data or evidence. For nearly all economic conclusions about tax policy, the data suggest the opposite result from the one proposed by economic theory. What does that mean? Often those economic conclusions are not supported by empirical evidence, and are sometimes just plain wrong.
It turns out that taxing workers at high rates creates a negative social cost. There should be a subtraction to economic output in economic theory representing a deadweight loss from labor taxation, but there isn’t. These social costs from worker taxation relate to various areas including
•Public health—Workers seem to get sick more often and require costly health care under high-wage tax regimes. The negative economic result occurs because costs of health care are quite high because another person or governmental entity must pay for the incremental health care costs resulting from taxing labor at high rates that might be avoided simply by reducing the tax rates on workers.
•Child outcomes—Workers often have children, and high taxes on workers means they have less to invest in their children. A system designed to tax parents is an expensive design because society must try to remediate any deficits that occur amidst the chaos and uncertainty of parenting on a shoestring budget.
•Reduced or eliminated small business activity—The high tax rates on workers apply also to small businesses, including most types of entrepreneurial activity. Since the tax rates are exceptionally high on small business activity, this is detrimental to the formation of small business and tends to favor large corporations in the marketplace where small business operates in competition with large corporations.
It is very important to note that the point of this book is not that high tax rates on workers are unfair. Rather, the key observation of this book is that high rates of wage taxes are expensive (or inefficient) because taxing workers creates social costs that may even exceed the amount of tax collected.
Deception #9. Workers and poor people are cognitively inferior to the wealthy and unable to make rational economic decisions
The idea of the cognitive inferiority of the poor arose in the subfield of economics referred to as behavioral economics. Although behavioral economists don’t say explicitly that the poor are not as intelligent as the wealthy, their analysis is always premised on that assumption. Rich people are presumed to be smart and able to make rational decisions in the manner economists expect. Of course, the first decision that all presumptively rational and wealthy people make is that they should pay $0 in taxes and that workers should pay all the taxes. The further implication is that the wealthy should make all economic decisions since they are able to think rationally. Notably, this was exactly Thomas Malthus’s view, so today’s economic theory has reverted to an overtly Malthusian ideal.
I wish to challenge here the views both that workers are not rational and that the wealthy are rational or at least more often rational than the poor in decision making. To do so, I need to first disprove the claim that workers or the poor are irrational under the framework of behavioral economics. That’s easy.
To my knowledge, there is no empirical data whatsoever about consumer preferences as applied in the field of behavioral economics related to taxation or tax policy that would allow for the creation of a welfare function. The absence of data means in the context of taxing sugar-sweetened beverages, for example, that it may be true that poor people make a bad decision in drinking sugar beverages, the badness of that decision to consume sugar in economic terms is always relative to cost. Economists call this relativity of cost to choice the welfare function. All economics depends on these welfare functions—they account for much of the field of economics. The basic assertion in behavioral economics is that the poor person spends $0.50 on a sugar beverage and gets back 2 utiles, or some other amount, of welfare. The number of utiles is arbitrary. We only know for sure that it would be irrational for a wealthy person to consume a sugar beverage. We know absolutely nothing about whether it is “rational” (as economists often say) for a poor person to whom price is important to consume a sugar beverage given the respective cost of $0.50. For the wealthy person, the $0.50 is not a material amount of money. A wealthy person could get the same 2 utiles of welfare by choosing a non-sugar-sweetened beverage that costs $4. The difference in price between the $4 and the $0.50 ought to mean nothing to the wealthy person in economic terms. But the difference in price does potentially mean something to the poor person, who might be forced to choose between the $4 beverage and some other consumer item that costs $4 and which also yields welfare of an equivalent amount. To a poorer person, perhaps earning minimum wage, $4 is a lot of money and reflects roughly the value of an hour’s work after tax withholding. Our economist friends have simply never studied the significance of that difference in price relative to cost, so it’s all conjecture. In fact, there is no welfare function, or even any attempt to create a welfare function, for either the wealthy person or the poor person within behavioral economics. All we have in behavioral economics reflects the prejudices of the economists telling us their conclusions without any attempt to provide data. Behavioral economics is essentially economists looking in the mirror and not liking what they see very much.
Second, the wealthy do not seem to act rationally, at least much of the time. The wealthy eat foie gras, collect private jets, build private yachts at ruinous expense, travel by dangerous helicopters, acquire multiple mansions and houses—none of this is rational economic behavior that works toward increasing aggregate wealth. The spending of vast fortunes on personal comforts does not maximize individual utility; personal comforts exist on a broad U-shaped function where some is good and too much begins to yield declining rates of return or even to decrease overall utility. Furthermore, some happiness appears to involve participating in projects with others, or helping other people. As the wealthy are now able to avoid most forms of taxation, and increasingly build walls and retreat into private castles, it seems possible that the government might set out to increase aggregate utility by mandating the idle (and, arguably irrational) wealthy classes to participate in society by helping others and thereby to increase the utility and well-being of the wealthy by mandating some type of public service. Utility gains could accrue to the wealthy by participation in society even if the wealthy did not actually do anything helpful for the rest of us. Alternately, if significant taxes were someday levied on the wealthy classes, the wealthy might even be expected to gain utility if the benefits of social programs derived from tax revenue were earmarked and reported back to individual taxpayers, such that each person could be given examples of what their tax revenue actually purchased (i.e., your tax remittance paid for 20 children to receive Head Start education, or your tax remittance purchased one F-22 fighter jet, and so on).
Deception #10. Tax cuts for large corporations are the only viable tax policy option and never tax cuts for small business
The design of the tax system also requires at times selective amnesia. For example, everyone seems to agree that small businesses are the engine of economic growth in capitalism. So, why do OECD (Organization for Economic Cooperation and Development) nations so often choose to tax small businesses at rates of roughly 60 percent and more but large corporations at effective rates often 10 percent or less? It seems that in the course of setting tax policy economists and politicians seem to suddenly forget something that has already been determined by everyone concerned and essentially agreed to be true: that small businesses are the engine of economic growth. If small businesses cause economic growth, and lower taxes are helpful to small businesses, then no tax policy expert should ever talk about anything other than cutting taxes for small business.
In addition, policymakers seem to show selective amnesia about many other important matters of tax policy analysis, such as the value of tax deferral to the owners of capital. After the Tax Cuts and Jobs Act of 2017, which reduced the statutory corporate tax rate from 35 percent to 21 percent, one tax organization was still calling for further tax cuts for large corporations on the ridiculous premise that the US corporate tax system was not “competitive” based on a comparison of statutory tax rates, alone.23 The approach is to switch the policy discourse to inquiry regarding whether the statutory tax rate for large corporations as just too high or too low. That’s another way of saying that the topic of conversation simply switches back to the normative idea that large corporations should not pay taxes. But, large corporations pay tax at the effective tax rate, not the statutory tax rate; and, the availability of tax deferral to the wealthy and large corporations is more important than the statutory tax rate.
Deception #11. Tax cuts for large corporations will reduce prices on consumer products
Many economists have proposed that corporate tax cuts result in lower consumer prices. Yet, this simply isn’t true and represents probably the most obvious attempt at outright deception of all the deceptions discussed thus far in this book. The taxing authority in the United Kingdom even published a white paper along these lines suggesting that there are “dynamic effects” of corporate tax cuts with all sorts of potential benefits that ripple through the economy, although the benefits are never and have never been observed in all prior instances of corporate tax cuts.24 In nearly every field of human inquiry apart from economic theory, scholars at least try to use evidence to determine whether a policy claim should be accepted as true. The question then arises: What is the evidence that corporate tax cuts cause price reductions on consumer products?
If you were conscious in the latter part of 2017 and early 2018, then you might be able to answer that question based on experience. In November 2017, the Tax Cuts and Jobs Act of 2017 was negotiated and passed by Congress and sent to the president for signature. The act involved one of the most significant corporate tax cuts in the history of the United States, reducing the rate from 35 percent to 21 percent. In addition, the system of international taxation was changed such that large corporations no longer had to try so hard to avoid paying tax on overseas profits. Partly because of the reduction in statutory tax rates, the actual amounts of corporate tax remitted by large corporations were significantly reduced. Although no one knows for sure by how much, the Congressional Budget Office initially estimated that the reduction would cost $1.456 trillion. I suspect the amount of taxes payable will be reduced by more than half; that is, on average, I expect that companies that were paying some amount of tax are now paying less than half of what they were paying. And, those tax benefits were booked by the large corporations immediately under the applicable accounting rules. Many corporate executives got huge bonuses for doing such a good job in boosting corporate profits by paying less corporate tax.
But, did the prices of consumer products decrease after the corporate tax cuts as economists predicted? Obviously not. Not even a little bit. The fact is that consumer prices continued to increase after the massive corporate tax cuts. In other words, prices failed to decline even after one of the largest corporate tax cuts in human history. Simply put, corporate taxes dropped by roughly half, but the price of a new car did not drop from $35,000 to $17,500, or even to $34,000. In nearly all cases the prices of consumer products did not decline to any measureable degree and even went up. So, we might ask: What does that say about economic theory on taxes and tax policy?
As will be explained in the next chapter, economic theory regarding taxes is not premised on evidence or data. So, no economist has ever gone back to the drawing board because his or her predictions on tax policy did not turn out to be true. Economic ideas about taxes are almost never revised when better evidence or data becomes available. This is because corporate tax theory is a justification along the lines of moral philosophy; it is not a causal theory. But it is also true that no economist ever said that corporate tax cuts should be expected to cause price reductions. The formalization of some causal hypothesis in advance of testing by observation would be considered necessary in any field of actual science apart from economics as applied to tax policy. The lack of any causal theory in economics means there is no true “science”—and accordingly, no testing of predictions made by economists—about corporate tax cuts or other matters of tax policy. Rather, tax policy is all a magic show put on to trick you.
So, how does this magic trick on corporate tax cuts and consumer prices work? Why do corporate tax cuts not lead to lower consumer prices? Well, perhaps for lots of reasons, but I suspect the most important one is that large corporations set the price for their products based on what the customer is willing and able to pay, not by an anticipated level of after-tax profits. Prices and profits are not the same thing. Profits are not fixed such that a corporate tax cut means that the price for the product can and should be reduced. This is also to say that the universe economists live in is not the same universe we consumers live in. In fact, if a corporate executive set prices in the manner that economists propose, he or she would probably be fired. Corporations are tasked with maximizing profit, not with maximizing fairness to consumers in the relative prices of products. Furthermore, the markets in which large corporations operate are not efficient. Many large corporations compete in markets where small businesses have been bankrupted over the past decade or so by both the tax system and trade policy, so there is little or no price competition for the large corporations. The simple fact is that consumer prices did not noticeably decrease after the passage of the Tax Cuts and Jobs Act of 2017. Accordingly, it is not necessary to debate back and forth why this is so or might be so. We have strong and essentially incontrovertible evidence now that corporate tax cuts do not lower consumer prices. Furthermore, it would be a relatively easy task for economists to gather evidence about consumer prices in relation to corporate tax cuts and put their theories to the test. Since this has not been done (and will likely never be done unless some objection is raised) it is appropriate to now begin to reject the predictions of economic theory on the imaginary pass-through of corporate tax reductions to consumers in the form of price reductions, at least until some empirical evidence is collected on consumer prices and correlative tests performed on these supposed dynamic effects of corporate tax cuts.
THE TAXATION OF WORKERS
Justifications for why workers should always pay the taxes in society are easily found in libertarian, economic or liberal writings on tax and the supposed philosophy thereof. However, the conclusions of these philosophical writings are essentially all the same: it is right, good, fair, efficient or essential that workers pay all the taxes. Indeed, the conclusions are all so much the same that tax scholars no longer even attempt to distinguish the various types of philosophy relevant to taxation. No matter what you read, it will contain justifications for tax policy that are always premised on taxing workers.
In the first, place, by the actual numbers, it is unrealistic to expect that workers could really pay any more in taxes than they already do. Although the respective terminology has not been widely adopted in the United States, in Europe tax scholars would say that workers lack the “ability to pay” any more in taxes than they already do because they lack the disposable funds to pay incremental taxes. Further taxes on workers would entail larger portions of American society becoming insolvent even while working multiple jobs. The taxation of workers has essentially been maximized to allow for the wealthy to accumulate the largest possible hordes of capital. Yet, the prior tax literature does not say, that tax policy is a trick designed to allow for the accumulations of capital that is premised on an illusion of progressivity, fairness and efficiency. These concepts actually have been created as a means to keep the workers paying unreasonable amounts of tax into the system. The truth is, the tax system is regressive, unfair and inefficient. One objective of this book is to attempt to shift tax discourse from discussions primarily among the wealthy about how to best justify an oppressive, inefficient and unfair tax system to various realistic discussions about how to improve the system for the benefit of the working people that comprise a democratic society.
Existing tax policy literature is aimed at the wealthy—both individuals and corporations—and its purpose is to justify their accumulation of huge fortunes. This is to justify the concentration of wealth rather than a diffusion of wealth that is achieved primarily through the tax system. Some wealthy persons do feel guilty about not paying much in taxes while workers do. And moreover, the wealthy are able to complain loudly about tax policy to policymakers in government and the news media. Furthermore, many outspoken moral philosophers and economists claim to be experts in tax policy, but they often have little or no training in taxation and thus no idea about how the tax system works in actual practice. This combination of vociferous complaining by the wealthy about taxation and lay commentary on tax policy makes it possible for regular people who are trying to understand the tax system to believe that the wealthy pay taxes when they actually do not.
The recent tax cuts targeted for large corporations have not been matched to any spending cuts, so tax policy wonks say they are not “revenue neutral.” Notably, the Tax Reform Act of 1986 was at least ostensibly revenue neutral, so it was not funded by increased deficits. The recent tax cuts are instead funded by increased government debt today, along with targeted tax increases on the middle class and tax increases on the working class, to be collected at some point either now or in the future. Therefore, the term “tax cuts” is not the right term to describe this state of affairs of tax cuts for large corporations funded by increased deficits; instead, this latter push toward increased deficits should be referred to as tax increases for workers either now or in the future. Sometime since the Reagan administration, the actual meaning of the words tax cuts has shifted so as to not include any offsets or future taxes necessary to repay additional debt incurred today. Future workers will be asked to pay interest and principal on the government debt taken on to fund today’s tax cuts for large corporations. The actual meaning of the words tax cuts has thereby been altered in the political discourse. The result is an Orwellian version of tax policy such that words no longer mean what they used to mean, even to politicians of the same political party.
As to the second element of postmodernism in tax policy—that the wealthy view workers as the “little people”— it may seem hard to believe that the wealthy hold such a view. Yet, famous economic scholars assert that the poor are generally unable to make rational economic decisions by their own terms.25 This is essentially Thomas Malthus’s view brought back to life and into the mainstream. Tax research by scholars all over the world—from England, to Singapore, to Austria and to the United States—have proceeded enthusiastically to argue for new regressive types of Pigouvian taxes to be levied on the working class. Here, Pigouvian taxes refer to taxes levied on specific goods and products with externalities thought to be harmful to the people that consume the product. Scholars are seemingly coming out of the woodwork, even from nontax disciplines, to argue in favor of special taxes on any product that is used predominantly by the poor and also thought to be harmful. The levy of these taxes is intended always to correct the irrational behavior of the poor as a class—but never the wealthy! Of course, no economist has ever discussed the irrational behavior of the wealthy and proposed addressing it through the tax system. Rather, the economic analysis is always presupposed on levying taxes on the poor and also on workers.
An overwhelming problem with this methodology is that workers cannot and should not be lumped into a class with the poor. The only reason to do so is that the wealthy view the world in this weird way where the categories of working and poor are understood as synonymous. The wealthy often view nonworkers (existing on government transfer payments, for example) as essentially the same as persons working but not earning much due to low wages. For their part, the blue-collar workers of America have no idea that the wealthy draw this false equivalency and view them in the same category as nonworkers. Furthermore, no economist has ever acknowledged the problem that the workers already pay the maximum amount of taxes they could possibly be expected to pay, via all sorts of different categories of taxation: wage withholding, income tax, sales tax, property tax, gasoline tax and a host of government fees. As such, it is practically impossible for additional taxes to be levied on workers without canceling out a supposed efficiency gain from new Pigouvian tax types that economists say arises from some other regressive tax already in force. In other words, Pigouvian taxes that cancel out other Pigouvian taxes cannot yield an efficiency gain because workers do not have an unlimited pool of funds from which to pay all of these taxes. In fact, there are limits on the taxes that workers can ultimately pay whether economists set out to identify those limits or not.
NOTES
1See Arthur Villasanta, Jeff Bezos’ DC Mansion Has 25 Bathrooms and Reddit Was Not Having It, International Business Times (Nov. 7, 2019), https://www.ibtimes.com/jeff-bezos-dc-mansion-has-25-bathrooms-reddit-was-not-having-it-2861437. Accessed Nov. 10, 2019.
2Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97. References to data on federal tax revenues and the corporate share of the tax base are from the U.S. Treasury Department data (Fiscal Year 2017) and Congressional Budget Office (CBO) estimates; CBO, Options for Reducing the Deficit (Dec. 2016), https://www.cbo.gov/publication/52142. Accessed Nov. 10, 2019.
3Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97. References to data on federal tax revenues and the corporate share of the tax base are from the U.S. Treasury Department data (Fiscal Year 2017) and Congressional Budget Office (CBO) estimates; CBO, Options for Reducing the Deficit (Dec. 2016), https://www.cbo.gov/publication/52142. Accessed Nov. 10, 2019.
Federal income tax revenues derived from labor in comparison to business or investment, see: Jay Soled & Kathleen DeLaney Thomas, Automation and the Income Tax, 10:1 Columbia J. of Tax Law, 1, 7–17 (2019).
4Richard Hammer, The Helmsleys: The Rise and Fall of Harry & Leona (New York: NAL Books, 1990).
5Matt Egan, Just 4% of Companies Boosted Hiring Because of Tax Cuts, CNN Business (Jan. 29, 2019) https://www.cnn.com/2019/01/28/business/tax-cuts-jobs-business-spending-nabe/index.html. Accessed Nov. 10, 2019 (“The expensive 2017 tax law failed to encourage Corporate America to embark on a boom in hiring or job-creating investment. Just 4% of business economists say their companies accelerated hiring because of the tax overhaul, according to a survey released Monday by the National Association for Business Economics.”). And only 10% of business economists said their firms stepped up investments like building factories, buying equipment and purchasing software because of the tax law.
6Data are available on the relation between tax base and GDP per capita. See Organization for Economic Cooperation and Development (OECD), http://www.oecd.org/tax/revenue-statistics-2522770x.htm; World Bank Data on GDP Levels Per Capita https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?view=chart. I have previously compiled and published charts to illustrate the lack of any correlation between tax cuts and GDP per capita. See, e.g., Bret N. Bogenschneider, Causation, Science & Taxation, 10:1 Elon L. Rev. 1 (2017); Bret N. Bogenschneider, The Tax Paradox of Capital Investment, 33:1 J. Taxation of Inv. 59, 79 (2015).
7Bret Bogenschneider & Ruth Heilmeier, Income Elasticity and Inequality, 5:1 Int. J. Econ. & Bus. Law 34 (2016).
8Switzerland has a federal tax, a cantonal tax and some municipal taxes, which when combined are relatively low. For an explanation and tax rates on the individual tax system in Swiss localities, see Federal Government of Switzerland, The Swiss Tax System (Dec. 2018), https://www.efd.admin.ch/efd/en/home/themen/steuern/steuern-national/the-swiss-tax-system/fb-schweizer-steuersystem.html. Accessed Nov. 10, 2019.
9An interesting illustration is the deceased multimillionaire, Jeffrey Epstein, who was once a scion of the investment banking scene. See generally, Greg Norman, Jeffrey Epstein’s Private Caribbean Island Had Mysterious Safe, Former Employee Claims, Fox News (July 12, 2019), https://www.foxnews.com/us/jeffrey-epstein-caribbean-island-mystery. Accessed Nov. 10, 2019. Obviously, Epstein’s capital investments into his various sex palaces in the Caribbean and New York City were not efficient investments for broader society.
10St. Louis Federal Reserve, Why Are Corporations Holding So Much Cash? (Jan. 1, 2013), https://www.stlouisfed.org/publications/regional-economist/january-2013/why-are-corporations-holding-so-much-cash. Accessed Nov. 10, 2019.
11See Jeffry Bartash, Repatriated Profits Total $465 Billion After Trump Tax Cuts, Leaving $2.5 Trillion Overseas, MarketWatch (Sept. 19, 2018), http://www.marketwatch.com/story/repatriated-profits-total-nearly-500-billion-after-trump-tax-cuts-2018-09-19. Accessed Nov. 10, 2019.
12For a general discussion of this idea, see: Benjamin Willis, Fool Me Twice: Trump’s Payroll Tax Cuts, Tax Notes (Aug. 22, 2019) (“On August 20 President Trump said regarding tax cuts that the ‘payroll tax is something that we think about, and a lot of people would like to see that, and that very much affects the workers of our country.’ Such a strategy is based on the economic belief that reducing taxes on low- and middle-income Americans is the best way to ensure that consumers continue spending money and the economy is stimulated.”), https://www.taxnotes.com/opinions/fool-me-twice-trumps-payroll-tax-cuts/2019/08/22/29vv7. Accessed Nov. 10, 2019.
13Robert Frank, Top 1% Pay Nearly Half of Federal Income Taxes, CNBC (Apr. 14, 2015), https://www.cnbc.com/2015/04/13/top-1-pay-nearly-half-of-federal-income-taxes.html, citing Tax Policy Center, https://www.taxpolicycenter.org/research-commentary. Accessed Nov. 10, 2019
14See, e.g., Stephen Moore, Do the Rich Pay Their Fair Share?, Heritage Foundation (Mar. 3, 2015), https://www.heritage.org/budget-and-spending/commentary/do-the-rich-pay-their-fair-share. Accessed Nov. 10, 2019 (“Suppose there were a banquet for 100 people and at the end of the night it was time to split the bill of $50 per person. If that bill were paid for the way we pay our income taxes, here is how it would work. Those in the top half of income would pay roughly $97 each and those in the bottom half of the income would pay an average of $3 each. Almost 40 people would pay nothing.”); Adam Michel, The New York Times Is Wrong. The Rich Pay More Taxes Than You Do. The Heritage Foundation (Oct. 15, 2019), https://www.heritage.org/taxes/commentary/the-new-york-times-wrong-the-rich-pay-more-taxes-you-do. Accessed Nov. 10, 2019.
15For an illustration of this method in the news media, see Michael R. Strain, The Rich Really Do Pay Higher Taxes Than You, Bloomberg Opinion (Oct. 10, 2019), https://www.bloombergquint.com/gadfly/the-rich-really-do-pay-higher-taxes-than-you (“This is half the story. When assessing the progressivity of the U.S. Federal system, it makes sense to look at both taxes and the means-tested transfer payments—Medicaid, Food stamps and Supplemental Security Income—that those taxes fund. If you subtract these payments from federal taxes paid.”) (emphasis added).
16See Council on Foreign Relations, U.S. Corporate Tax Reform (Nov. 3, 2017), https://www.cfr.org/backgrounder/us-corporate-tax-reform. Accessed Nov. 10, 2019.
17See Brian Spilker et al. Taxation of Individuals and Business Entities (New York: McGraw Hill, 2020), at 1–9.
18See Bret Bogenschneider, The Effective Tax Rates of U.S. Firms with Permanent Deferral, 145 Tax Notes 1391 (2015).
19Megan Cerullo, 60 of America’s Biggest Companies Paid No Federal Income Tax in 2018, CBS News (Apr. 12, 2019), https://www.cbsnews.com/news/2018-taxes-some-of-americas-biggest-companies-paid-little-to-no-federal-income-tax-last-year/. Accessed Nov. 10, 2019.
20See Kimberly A. Clausing, In Search of Corporate Tax Incidence, 65 Tax L. Rev. 433, 438–45 (2012).
21See Sean Williams, The Rich Are Costing Social Security Almost $150 Billion a Year, The Motley Fool (Feb. 14, 2009), https://www.fool.com/retirement/2019/02/14/the-rich-are-costing-social-security-almost-150-bi.aspx. Accessed Nov. 10, 2019.
22Martin Feldstein, Tax Avoidance and the Deadweight Loss of the Income Tax, 81:4 Rev. Econ. & Stat. 674 (1999).
23Laura Davison, U.S. Corporate Tax Code Still Ranks Below Average, Study Finds, Bloomberg Tax (Oct.3, 2019), https://news.bloombergtax.com/daily-tax-report/u-s-corporate-tax-code-still-ranks-below-average-study-finds. Accessed Nov. 10, 2019, citing Statements of Daniel Bunn, Tax Foundation Director of Global Projects (“The U.S. is slightly more competitive partially because we have moved slightly toward a territorial system, but the rules that we use to tax profits overseas are still kind of middle-of-the-road if not lower half of the distribution”).
24HM Revenue & Customs, Analysis of the Dynamic Effects of Corporation Tax Reductions 19–30 (Dec. 5, 2013), http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/263560/4069_CT_Dynamic_effects_paper_20130312_IW_v2.pdf. Accessed Nov. 10, 2019.
25Richard Thaler & Cass Sunstein, Libertarian Paternalism, 93 American Econ. Rev. 175 (2003).
