https://www.forbes.com/sites/johntharvey/2017/11/08/disastrous-trump-tax-plan/#230b5e244dd3
Nov 8, 2017 @ 12:37 PM
The Disastrous Trump Tax Plan
Designing a tax plan that will actually increase spending and therefore employment is really not all that difficult. All you have to do is meet two criteria:
1. The tax cuts must not be offset by spending cuts (or tax increases elsewhere).
2. The tax cuts must increase the incomes of those who will actually spend the money.
That’s it, that’s the whole story. And these give very clear guidelines regarding what to do in practice. For example, if you are cutting taxes, do it for the poorest people in the economy. Any increase in their income is guaranteed to create jobs because they will absolutely spend it.
As evidence, consider the fact that in 2015, the top 20% of all income earners spent 78% of their income. Meanwhile, the bottom 80% spent 106%. Who to target could not be easier to see. How do the bottom 80% spend in excess of 100% of their after-tax income? They borrow and some receive government assistance. And lest someone try to twist this into a morality tale about lazy spendthrifts vs decent, frugal people, consider the following. The bottom 80% spend a larger percentage of their income than the top 20% in these categories (data from
BLS Consumer Expenditure Survey):
• food (the absolute lowest 20% spend the highest at 15%)
• housing (for the lowest 20%, this represents 40% of their expenditures)
• utilities (for the lowest 20%, this is another 10%)
• healthcare (for the lowest 20% this is 8%)
Notice that for the poorest 20%, the above four items represent 73% of their total income. For the wealthiest, it is 52%.
Meanwhile, the top 20% outspend (in terms of the share of their after-tax income) the bottom 80% on:
• alcohol
• household furnishings
• entertainment
• clothing
• vehicle purchases
So, no, the poor aren’t spending all their money on alcohol, steaks, Air Jordans, and Cadillacs. You’re thinking of the rich (well, relatively speaking). Indeed, the average individual in the bottom 20% spent a grand total of $5874 in those categories while the average individual in the two top 20% spent $25,398.
Don’t get me wrong. I’m not trying to tell a morality story in the opposite direction. My goal is not to prove that Bob Cratchit is a better person than Mr. Scrooge, only to argue that there is no evidence that it’s the other way around. And, most important for present purposes, Bob Cratchit will spend his tax break.
With that in mind, what does the Trump tax plan do for Bob Cratchit? Not one whole hell of a lot. It’s not so much that he will end up paying higher taxes--I’ll leave it to you to Google one of the hundreds of analyses of the impact of the plan–but that the lion’s share of the cuts are oriented toward corporate taxes. Guess whose income that affects? As William Gale, chair of the Brookings Institute’s Economic Studies and former economic adviser to President George H.W. Bush, observed (
Here's What the Republican Tax Plan Would Mean for the Average Trump Voter):
“If you tell me to look at someone with a half a million dollars or a millions dollars in income, it would be pretty straightforward to say they were going to get a very big tax cut,” he said. “For somebody in [a lower income bracket], it’s just hard — there are very many moving parts. Some of those people might end up with tax increases, some with tax reductions. You just can’t give a number based on the income level.”
He added, that, not surprisingly, “The rich donors who are part of the base would come out quite nicely from this proposal.”
Who in God’s name thinks this is a good idea? This does absolutely nothing to address the long-term problems from which the economy is suffering and very likely makes them worse.
The reasoning, we are told, is that when we cut corporate taxes they’ll invest and hire more workers. That represents a misunderstanding of the economic factors at work. Take the situation at the mall during the Christmas shopping season. Stores tend to take on more workers. Is this because someone cut their taxes? No, because they expect higher sales. Imagine instead that we cut their taxes but canceled Christmas and all the other gift-intensive holidays. Would firms hire more employees? It’s possible, I won’t completely discount the possibility; but it doesn’t take a PhD to understand that the impact would be minimal. The overwhelming majority of the tax cut would lead to higher profits, and that’s all.
Firms hire workers when demand outstrips their ability to supply. They then earn higher profits. Rising profits are the result, not the cause, of this phenomenon.
We are also told that the rich invest. No they don’t, they save. The confusion comes from the fact that we use the word “invest” for two distinct activities. One is properly called physical investment and occurs when a business adds productive capacity. This includes building a new factory or retail store, retooling machinery, or replacing aged equipment. These things DO create employment and are to be encouraged. On the other hand, buying a share of stock is financial investment and it does not. It’s a form of saving and that’s what the rich do. The proceeds of 99.9% of all stock sales do not go to the firm in question, they are simply the result of a transfer of ownership of that share. Only when stocks are first issued does the issuer actually get new cash to use for physical investment. So, no, the rich do not create jobs by investing, they lower demand by saving.
Again, that’s fine, they can do what they want with the money. But if you are creating a tax cut plan aimed at raising economic activity, it makes zero sense to orient the cuts toward them. That’s my point.
And so the proposal we have in Washington right now is worse than a colossal waste of time. It will very likely leave us worse off than when we started. That income distributions have become skewed and the middle class is dying is so clear that it was treated as a fact in evidence by both parties during the campaign. It is as a consequence of that that we also have disastrously high household debt levels (which is a whole different depressing story). And making tuition waivers taxable income? Who thinks this stuff up? This is illogical and harmful on so many levels that I can’t imagine that it will survive as part of any plan that has a chance of getting passed.
But then politics nowadays are nothing if not surprising. Let us all hope that this is the exception.
John T. Harvey , Contributor
I am a professor of Economics at Texas Christian University, where I have worked since 1987. My areas of specialty are international economics (particularly exchange rates), macroeconomics, history of economics and contemporary schools of thought. During my time in Fort Worth, I have served as department chair, Executive Director of the International Confederation of Associations for Pluralism in Economics, a member of the board of directors of the Association for Evolutionary Economics, and a member of the editorial boards of the American Review of Political Economy, the Critique of Political Economy, the Encyclopedia of Political Economy, the Journal of Economics Issues, and the Social Science Journal. My research consists of over 30 refereed publications, two edited volumes and one book.
The author is a Forbes contributor. The opinions expressed are those of the writer.
