Half of Americans currently pay no federal income tax at all!
Opinion: This tax cut isn’t for the middle class, which only pays 2.5% now
Republicans falsely advertising big tax cut for rich as help for struggling workers
Donald Trump and the Republican leaders in Washington have rolled out a plan for another big tax cut, but most Americans wonder why they are bothering with taxes when there are so many other more pressing problems.
There may have been a time, a generation ago, when cutting tax rates was the most popular thing a politician could do. But that day is long gone. I guess you might say Americans are tired of tax cuts, there have been so many.
Today, most Americans aren’t clamoring for lower taxes, probably because most of us don’t pay very much in federal income taxes. Our tax burden has rarely been lower. The latest data show that the 60% of families in the middle of the income distribution — those between about $32,000 and about $140,000 — pay an average of just 2.5% of their income in federal income taxes.
Nearly half of Americans owe no federal income tax at all, but they do pay taxes: payroll taxes to fund Social Security and Medicare, tariffs, excise taxes, corporate taxes, property taxes, sales taxes, state and local income taxes, and so on. If they have a problem with taxes, it’s not with the federal income tax.
A bill that cuts federal income taxes for middle-class families makes absolutely no sense, except as a sad way of camouflaging the real intent of the bill: Giving millions of dollars to the very wealthy, who happen to be the only people who are really benefiting from our uneven economic growth.
The pollsters at Gallup periodically ask people what they think is the most important problem in America. Taxes don’t make the top 10 list; only 2% of Americans mention taxes as a big problem.
In real America — outside the closed doors on Capitol Hill and at corporate boardrooms — the most pressing issues are distrust in the government, racism, immigration, national unity, tensions with North Korea, health care, the economy and jobs, disaster relief, the environment and crime. Even the media is mentioned more often as a major problem than taxes are.
But in Washington, cutting taxes is the most important thing on the agenda. Why? Because the Republican Party apparently is a wholly owned subsidiary of large multinational corporations and the richest 0.1% of Americans.
The people get it. In an NBC/ Wall Street Journal poll, 62% of those polled said taxes should go up on the wealthy, and 55% said taxes should rise for corporations. Meanwhile, 53% said their own taxes should stay where they are.
So, the American people don’t need a tax cut (they pay 2.5%) and they don’t want it, but perhaps a tax cut would be good for them? That’s the argument being pushed by Trump and his advisers: They say cutting taxes, especially on businesses, will unleash the economy, create jobs, and boost incomes.
The problem, they say, is that corporate taxes are too high in the U.S. Our companies can’t compete with foreign-based firms. It’s true that the statutory rate is very high —35% federal corporate tax rate (plus varying levels of state income taxes, plus individual income taxes paid by shareholders).
But nobody pays retail, and nobody pays the statutory rate. Corporations take advantage of lots of special provisions in the tax code to lower their taxes. The effective marginal tax rate on new investments is 19.7%, “very much line with our major trading partners,” according to a paper published by the Obama Treasury Department in January.
Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross say simplifying and lowering corporate taxes could add 1 percentage point or more to the nation’s sustainable growth rate. So, instead of 2% growth, we could have 3% or maybe even 4%.
Trump says we could get to 6% growth, but why not just say 100%? There is no support — empirical or theoretical — for such a statement. The best economic evidence shows that tax reform could add about 0.1% to 0.3% to annual growth rates. That’s only about one-tenth of the impact promised by the Trump administration.
And that’s if tax reform is revenue-neutral (meaning it won’t add to the deficit).
Unfortunately, the Republicans are relying on those implausible growth rates to argue that their $2.2 trillion tax cut will largely pay for itself. But if we don’t get the growth, then the deficits will climb.
Higher government deficits in a time of full employment can lead to slower economic growth, because they reduce national savings, forcing the nation to rely even more from foreigners for savings, increasing the current-account deficit and leading to a higher trade deficit. Which is exactly what these tax cuts are trying to prevent.
Trump says cutting taxes is all about creating jobs. But the tax cuts in 2001, 2003, and 2004 were designed to funnel money to the “job creators,” who would in turn hire millions of people. But, as it turned out, the rich got the money, but hiring didn’t accelerate.
The real constraint on the economy right now isn’t the number of jobs being created, but productivity. We need to invest much more in technology, equipment, buildings and workers. However, there’s little that cutting taxes can do about that problem, because companies have plenty of capital to invest, if they wanted to.
Profits are near record levels, while net investment is near record low levels. Giving corporations more cash won’t lead to more investment unless companies see a positive return.
The Trump-Ryan tax cuts don’t solve any of our problems, unless you believe that the wealthy don’t have quite enough money yet. But the latest figures from the Federal Reserve show that the top 1% is capturing a greater share of both national income and wealth.
House Speaker Paul Ryan calls tax cuts the “secret sauce” for a better economy. But that the secret sauce is just the same old ketchup and mayo.