As you know, tax "reform" is on the agenda in Congress. Let's consider the impact of the Trump/Republican tax proposal. There are three purposes of taxes: They can 1) provide revenue for government spending, 2) alter income distribution, and 3) stimulate the economy.
Let's consider the effects of both corporate and personal income taxes. We don't have all the
details yet, but we can address what we do know.
1.Effect on government revenue: It is estimated that this tax proposal will cost the government from $1.5 to $2.2 trillion in lost tax revenue. This means the government must engage in massive borrowing (which increases the national debt), or offset the loss with massive spending cuts for social programs.
2. Effect on income distribution: For purposes of income distribution, economists define taxes as either progressive or regressive. A progressive tax takes a larger percent of income from higher income people. A regressive tax takes a larger percent of income from lower income people. For a variety of reasons, almost all taxes (social security, sales, property, most excise, and many state income taxes) are highly regressive, shifting income distribution in favor of the rich.
Our federal personal income tax is one means of reducing income inequality. However, the proposal's lower maximum tax rate and its smaller number of tax brackets have made this rate
structure less progressive since Reagan, then G.W. Bush, and now the Republican tax proposal.
That's just the rate structure. Consider the proposal's tax breaks, which do little to benefit low-
and middle-income people. The proposal does increase the standard deduction. But, by eliminating personal exemptions and deductions for state and local taxes, any tax benefit from
the standard deduction will generally be more than wiped out. (My husband and I will end up
paying more). And, the earned income tax credit, which is admired by economists as an anti-
poverty program that encourages work, was not increased under the tax proposal. (Know that
even if your income is so low that you do not need to file your taxes, you still must file to be eligible for this credit.)
And, the tax proposal eliminates two taxes that burden high income people. These are the
minimum alternative tax (that currently prevents the highest income recipients from avoiding
income taxes entirely), and the estate tax. The estate tax applies only to the inheritance of wealth valued over $5.5 million.
The overall implication: the richest 1 percent of Americans will receive 80 percent of the tax proposal's benefits. To be among the richest 1 percent, your income must be over $450,000. The remaining 99 percent of us, whose income is below $450,000, must split the remaining 20 percent of tax benefits among ourselves.
3. Effect on stimulating the economy: The proposal's massive decrease in corporate tax rates from 39 percent to 20 percent will supposedly expand private investment. Corporations use their
revenue (income) in three basic ways: i) corporate taxes, ii) reinvestment in plant and equipment, and iii) profits distributed to shareholders (dividends). By cutting corporate taxes,
reinvestment could in theory stimulate (expand) our economy (though economists are divided
on this). Regardless, beginning in 2009, our economy has experienced the longest economic
expansion in history. We currently do not need additional expansion, which would increase inflation rates.
Despite this record expansion, we still have relatively low wages for many people, and we have
pockets of unemployment and poverty in many geographical areas. These do not call for additional stimulus of our economy. Instead, they require the specific types of policies I discussed in my previous column that eliminate pockets of unemployment in specific geographical areas of our country. These include policies in occupations and geographical areas such as investment in education, training, infrastructure, and so on.
The benefits of the proposal to our economy are highly speculative and are of the wrong type to
affect the nature of current unemployment. Also, we know that the U.S. has the most unequal
income distribution in the Western industrial world. I believe what we need is a fairer income
distribution and the direct types of policies just mentioned above. I do not support the
Trump/Republication proposal, mostly because it primarily benefits only the very rich.