How America was Tricked on Tax Policy. Bret N. Bogenschneider
utility; personal comforts exist on a broad U-shaped function where some is good and too much begins to yield declining rates of return or even to decrease overall utility. Furthermore, some happiness appears to involve participating in projects with others, or helping other people. As the wealthy are now able to avoid most forms of taxation, and increasingly build walls and retreat into private castles, it seems possible that the government might set out to increase aggregate utility by mandating the idle (and, arguably irrational) wealthy classes to participate in society by helping others and thereby to increase the utility and well-being of the wealthy by mandating some type of public service. Utility gains could accrue to the wealthy by participation in society even if the wealthy did not actually do anything helpful for the rest of us. Alternately, if significant taxes were someday levied on the wealthy classes, the wealthy might even be expected to gain utility if the benefits of social programs derived from tax revenue were earmarked and reported back to individual taxpayers, such that each person could be given examples of what their tax revenue actually purchased (i.e., your tax remittance paid for 20 children to receive Head Start education, or your tax remittance purchased one F-22 fighter jet, and so on).
Deception #10. Tax cuts for large corporations are the only viable tax policy option and never tax cuts for small business
The design of the tax system also requires at times selective amnesia. For example, everyone seems to agree that small businesses are the engine of economic growth in capitalism. So, why do OECD (Organization for Economic Cooperation and Development) nations so often choose to tax small businesses at rates of roughly 60 percent and more but large corporations at effective rates often 10 percent or less? It seems that in the course of setting tax policy economists and politicians seem to suddenly forget something that has already been determined by everyone concerned and essentially agreed to be true: that small businesses are the engine of economic growth. If small businesses cause economic growth, and lower taxes are helpful to small businesses, then no tax policy expert should ever talk about anything other than cutting taxes for small business.
In addition, policymakers seem to show selective amnesia about many other important matters of tax policy analysis, such as the value of tax deferral to the owners of capital. After the Tax Cuts and Jobs Act of 2017, which reduced the statutory corporate tax rate from 35 percent to 21 percent, one tax organization was still calling for further tax cuts for large corporations on the ridiculous premise that the US corporate tax system was not “competitive” based on a comparison of statutory tax rates, alone.23 The approach is to switch the policy discourse to inquiry regarding whether the statutory tax rate for large corporations as just too high or too low. That’s another way of saying that the topic of conversation simply switches back to the normative idea that large corporations should not pay taxes. But, large corporations pay tax at the effective tax rate, not the statutory tax rate; and, the availability of tax deferral to the wealthy and large corporations is more important than the statutory tax rate.
Deception #11. Tax cuts for large corporations will reduce prices on consumer products
Many economists have proposed that corporate tax cuts result in lower consumer prices. Yet, this simply isn’t true and represents probably the most obvious attempt at outright deception of all the deceptions discussed thus far in this book. The taxing authority in the United Kingdom even published a white paper along these lines suggesting that there are “dynamic effects” of corporate tax cuts with all sorts of potential benefits that ripple through the economy, although the benefits are never and have never been observed in all prior instances of corporate tax cuts.24 In nearly every field of human inquiry apart from economic theory, scholars at least try to use evidence to determine whether a policy claim should be accepted as true. The question then arises: What is the evidence that corporate tax cuts cause price reductions on consumer products?
If you were conscious in the latter part of 2017 and early 2018, then you might be able to answer that question based on experience. In November 2017, the Tax Cuts and Jobs Act of 2017 was negotiated and passed by Congress and sent to the president for signature. The act involved one of the most significant corporate tax cuts in the history of the United States, reducing the rate from 35 percent to 21 percent. In addition, the system of international taxation was changed such that large corporations no longer had to try so hard to avoid paying tax on overseas profits. Partly because of the reduction in statutory tax rates, the actual amounts of corporate tax remitted by large corporations were significantly reduced. Although no one knows for sure by how much, the Congressional Budget Office initially estimated that the reduction would cost $1.456 trillion. I suspect the amount of taxes payable will be reduced by more than half; that is, on average, I expect that companies that were paying some amount of tax are now paying less than half of what they were paying. And, those tax benefits were booked by the large corporations immediately under the applicable accounting rules. Many corporate executives got huge bonuses for doing such a good job in boosting corporate profits by paying less corporate tax.
But, did the prices of consumer products decrease after the corporate tax cuts as economists predicted? Obviously not. Not even a little bit. The fact is that consumer prices continued to increase after the massive corporate tax cuts. In other words, prices failed to decline even after one of the largest corporate tax cuts in human history. Simply put, corporate taxes dropped by roughly half, but the price of a new car did not drop from $35,000 to $17,500, or even to $34,000. In nearly all cases the prices of consumer products did not decline to any measureable degree and even went up. So, we might ask: What does that say about economic theory on taxes and tax policy?
As will be explained in the next chapter, economic theory regarding taxes is not premised on evidence or data. So, no economist has ever gone back to the drawing board because his or her predictions on tax policy did not turn out to be true. Economic ideas about taxes are almost never revised when better evidence or data becomes available. This is because corporate tax theory is a justification along the lines of moral philosophy; it is not a causal theory. But it is also true that no economist ever said that corporate tax cuts should be expected to cause price reductions. The formalization of some causal hypothesis in advance of testing by observation would be considered necessary in any field of actual science apart from economics as applied to tax policy. The lack of any causal theory in economics means there is no true “science”—and accordingly, no testing of predictions made by economists—about corporate tax cuts or other matters of tax policy. Rather, tax policy is all a magic show put on to trick you.
So, how does this magic trick on corporate tax cuts and consumer prices work? Why do corporate tax cuts not lead to lower consumer prices? Well, perhaps for lots of reasons, but I suspect the most important one is that large corporations set the price for their products based on what the customer is willing and able to pay, not by an anticipated level of after-tax profits. Prices and profits are not the same thing. Profits are not fixed such that a corporate tax cut means that the price for the product can and should be reduced. This is also to say that the universe economists live in is not the same universe we consumers live in. In fact, if a corporate executive set prices in the manner that economists propose, he or she would probably be fired. Corporations are tasked with maximizing profit, not with maximizing fairness to consumers in the relative prices of products. Furthermore, the markets in which large corporations operate are not efficient. Many large corporations compete in markets where small businesses have been bankrupted over the past decade or so by both the tax system and trade policy, so there is little or no price competition for the large corporations. The simple fact is that consumer prices did not noticeably decrease after the passage of the Tax Cuts and Jobs Act of 2017. Accordingly, it is not necessary to debate back and forth why this is so or might be so. We have strong and essentially incontrovertible evidence now that corporate tax cuts do not lower consumer prices. Furthermore, it would be a relatively easy task for economists to gather evidence about consumer prices in relation to corporate tax cuts and put their theories to the test. Since this has not been done (and will likely never be done unless some objection is raised) it is appropriate to now begin to reject the predictions of economic theory on the imaginary pass-through of corporate tax reductions to consumers in the form