Today’s news outlets carry the story that public polling for the Republican leadership’s tax bills, now headed to a joint Congressional Committee to work out the differences between the House and Senate versions, is tepid to angry.
Taxes are a pragmatic necessity wrapped in a moral dilemma.
Of course it is. It looks like the innards of sausage made with no skin. It’s a mess.
The brain-dead Republican leadership only had eight years to prepare a pro-growth, pro-job tax bill—in between working out a replacement for Obamacare. And we know how that debacle ended up.
Nothing arouses the passions of the nation like taxes. The reason is simple; at its heart income taxes levied by one group of citizens on another group of citizens—taking the production from some to give to others—is a “rubber meets the road” test of how each citizen sees their place in the Republic.
Also, there is no other area in the public life that better demonstrates the utter economic illiteracy of our elected representatives and much of the public, frankly.
Taxes are a pragmatic necessity wrapped in a moral dilemma.
The government exists to provide for the common defense, and to secure the various rights and liberties of the individual. The need for funding that was granted to the Federal government in the Constitution in 1789 was though tariffs and fees. By the early twentieth century the complications of the “equal apportionment” clause came to a political head, and in 1913 the Sixteenth Amendment was passed by the various states, granting the Federal government the authority to levy individual taxes without regard to apportionment between the states.
Later that same year, the first national income tax was passed by Congress. The rates started at 1% of income beginning at $20,000—something like $400,000 in current dollars—to a combined 7% over $500,000.
From its beginning, the national income tax embraced a progressive, Marxist precept, and taking from some because “they had too much” was grafted into the system—the fables like “The Little Red Hen” and “The Ant and the Grasshopper” notwithstanding. That precept is alive and well today (and why I’ve always supported a flat tax).
Then and now, Congress plays off the basest human instincts of envy and greed, on purpose of course.For some perspective, only fifty years after the 1% rate was enacted, a Democratic President, John Kennedy, realizing that the income tax system was primarily responsible for the stagnating economy and the loss of American jobs—hurting the poor and middle income citizens the most—proposed large income tax cuts. Following his assassination in 1963, Congress passed his proposal, cutting the top marginal rate from 90% to 70%, the lowest bracket from 20% to 14%, and business taxes from 52% to 47%.
Even though taxes remained too high, the Kennedy tax cuts revitalized that sluggish economy and that economic growth provided increased revenues to the treasury, not less as the “experts” had predicted. And the cuts empirically proved the relationship between economic growth and re-capitalizing the larger economy through tax policy.
In 1978—in the middle of the worst inflation and economic quagmire in post-War America—I ran for Congress, and was one of a handful of candidates across the country who endorsed and campaigned on the “Kemp-Roth” tax proposal to radically reduce the expanding and crushing tax rates. I argued at the time the high taxes were punitive and inflationary (less private money competing for the same goods) and destroyed business productivity and capitalization—the latter tied to extreme rates on capital gains, the source of much investment income.
[It was in this campaign that I learned how many otherwise smart people missed their classes in “Economics 101.” Businesses don’t pay taxes as such. Taxes are part of their costs, regardless of the hysterical belief of Bernie Sanders and his supporters. If a company must earn a 5%-7% net, after tax profit margin (generally typical for public companies) to generate enough income and capital to continue operations, the “taxes” must be figured into that calculation, regardless of the “tax rate.” Raise the corporate tax rate to 50% and those companies will have to raise prices, reduce or cut production, or cut employment and other expenses on the same volume to remain profitable. Or move to a country where the tax rate is more competitive.]
By 1980, Ronald Reagan incorporated the Kemp-Roth concept into his campaign. When he became President, the Reagan tax cuts set off an incredible twenty-five year expansion of jobs, capital formation, and productivity—while breaking the back of inflation.
As with the Kennedy tax cuts, President Reagan’s tax cuts substantially increased tax receipts, not reduced them as prophesied by the chattering class. Sadly, Congress did not—does it ever?—control spending, but used the new inflow of tax money to spend like drunken sailors, proving that our budget problems are not caused by too little taxes, but too much spending.
The absolute, iron-hard truth is that excessive taxation is a black hole; it sucks in money, expansion, innovation, jobs, and opportunity, and from it nothing ever comes.
The current version of the tax bills that have passed Congress are not really what President Trump wanted, but they are a creation of the corruption of Washington’s ruling class.
Evidently, we will end up with seven, not three tax rates the President wanted, all the way up to just over 40% for top earners. The real meat in the proposals is that the corporate rate will fall to 20 or 22% from 35% (not the 15% the President wanted), which is currently the highest in the industrialized world. More importantly, it will end corporate double taxation, where earnings made inside a foreign economy, and taxes paid to that country, are taxed again at the current U.S. tax rate if they are brought home. This policy has resulted in several trillion dollars of assets sitting overseas, not available to the economy. The U.S. is the only industrialized country that double taxes its own businesses for repatriating foreign earned profits.
Regardless of how the tax bill ends up on personal rates, the hysteria and lies from the left, and not a few Republicans, have already begun. It’s the usual refrain: the terrible rich are going to get richer and the noble poor are going to get poorer—and the middle income folks are going to get creamed too.
However, since almost 50% of wage earners don’t pay taxes now, how are they going to be hurt? The answer, of course, is that they can’t.
The rich? The top 1% of earners already pay 38% of the entire tax burden, and the top 10% pay 70%—so it’s hard to see how this is going to change, based on the retained tax rates we already know about.
For middle income earners under $75,000 per year, it appears the changes are a modest benefit to most, depending on the state in which one lives. So, again it’s hard to see a huge change. Which is too bad.
The stock market however has already voted. The market understands that the tax reduction of the corporate rate and end of double taxation on foreign earned profits are a huge deal. It means that U.S. corporations will have an incentive to stay in the U.S., and have the ability to be much more competitive with foreign competitors.
It means lower costs, more jobs, and increased wages. And with that, it means that 2018 and 2020 elections could be defined not by tweets, but by a roaring U.S. economy.
All in spite of our politicians.