How America was Tricked on Tax Policy. Bret N. Bogenschneider
#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