If the Republican fantasy that tax cuts pay for themselves by stimulating economic growth were true then why are they simultaneously talking about avoiding an impending deficit disaster by threatening to cut Medicare, Medicaid and other benefits, the so-called “entitlement programs,” euphemistically called “entitlement reform”?
And if they really wanted to simplify the tax code and make it more fair for all they would eliminate provisions that mainly benefit the wealthy. Especially, why tax capital gains and most corporate dividends at lower rates than the ordinary income rates that most of us pay? Less than half the adult population owns stock, and even less, as of 2013, the top 1 percent of households by wealth owned nearly 38 percent of all stock shares, according to research by New York University economist Edward Wolff. And the top 10% own 80% of corporate stock. The result of this strategy is that large corporations and high income taxpayers get a huge windfall from lowering the corporate income tax from 35% to 21% and from the lower tax rates on some corporate dividends and on capital gains.
Lower taxation of capital gains also means that many high-end taxpayers are able to finagle their financial affairs so as to classify much of their income as capital gains rather than ordinary income. This issue — of how to classify income as capital gains or ordinary income — not only drastically complicates the tax code (employing vast armies of tax lawyers and accountants to exploit loop holes) but also gives another undeserved benefit to the wealthy. Nor is there any reason to tax corporate dividends, that are received simply by investing in corporate stock (called “passive” earnings), taxed at a lower rate than income earned by workers’ from their skill and labor in their jobs.
Orthodox Republican and right wing economic doctrine centers on the idea that lower taxes stimulate the economy and create jobs; higher taxes kill jobs. If that were so 2010 Republican candidate for Washington Governor, Dino Rossi, should have explained to Washington voters how he figured that the tax rate for the wealthiest 2.9 percent of the state’s taxpayers of 39.6% kills jobs [Seattle Times 8/31/10, “Murray, Rossi clash on tax cut renewal.”] This favorite conservative mantra is without evidence. They talk as if the rate was 100%. Remember that income taxes are on income. If you don’t have income, you pay no tax. Businesses and corporations only pay taxes on their profit. Profit is gross revenue, less expenses; in other words, what is left over after they’ve paid all their business expenses. Expenses are deductions from taxable income. Among such expenses are wages paid to employees — for jobs that are supposedly killed by higher taxes. Since wages are business deductions how do higher taxes on high earners kill jobs?
As Nobel prize winning economist, Paul Krugman, explained in a 2012 New York Times other one :
Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false.
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Back in 1986, Ronald Reagan -yes, Ronald Reagan-signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further to more than 29 percent, during Bill Clinton’s first term.
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So is it essential that the rich receive such a big tax break? There is a theoretical case for according special treatment to capital gains, but there are also theoretical and practical arguments against such special treatment. In particular the huge gap between taxes on earned income and taxes on unearned income creates a perverse incentive to arrange one’s affairs so as to make income appear in the “right” category. And the economic record certainly doesn’t support the notion that, low superlow taxes on the superrich are the key to prosperity. During that first Clinton term, when the very rich paid much higher taxes than they do now, the economy added 11.5 million jobs, dwarfing anything achieved even during the good years of the Bush administration.
Again, according to Paul Krugman, in his NY Times 9|26|2017 column, the Bush tax cuts didn’t create a boom; neither did the Kansas tax-cut “experiment.” Conversely, the U.S. economy did fine after the 2013 Obama tax hike, as has the California economy since Jerry Brown raised state taxes. Party apparatchiks will no doubt engage in an orgy of Reaganolatry, but the broader public probably won’t be moved by (false) claims about the wondrous results of tax cuts 36 years ago.
The US tax code is littered with deductions, credits and other benefits for the wealthy that they don’t need or deserve. The real estate depreciation deduction is a prime example. It allows building owners to deduct a theoretical but mostly unrealistic depreciation amount that can be applied to offset other income and in many cases allows wealthy property owners to pay no tax even though, in fact, their land and buildings have appreciated in value — and not depreciated, as allowed by the tax code. To add to the iniquity, the law allows real estate speculators to borrow money to acquire the properties that they use as a tax write-off. So they are able to achieve this benefit with borrowed funds and also write off the interest on the loan. Over a period of years the entire value of the property can be written off as depreciation. Moreover, if the property is sold at a profit the capital gains can be deferred by applying the sale proceeds to a new land & building purchase. The cycle then goes on with little or no tax being paid. Another example is the exclusion of income earned outside the US borders. All of these tax avoidance schemes are legal and have been engineered by ubiquitous lobbyists for land owners and developers and are supported by politicians whose elections are paid for by unlimited campaign contributions from those who benefit from these tax schemes. And all of this is rationalized on the false theory that tax cuts benefit the economy and pay for themselves.
In the face of overwhelming evidence that tax cuts do not pay for themselves and that they have no correlation with prosperity. How long will Republicans be able to keep cutting taxes of the wealthy and structuring the tax code to allow them to avoid paying taxes on their profits while selling the lie to American voters that these tax avoidance and reduction strategies benefit the economy? How long will the tax cut hypocrites continue to ignore the impending disaster warned by the Deficit-Hawk hypocrites in their own midst?