Reality Check: Don’t Buy into the Myth of ‘Tax Reform’

The post Reality Check: Don’t Buy into the Myth of ‘Tax Reform’ appeared first on WhoWhatWhy.

President Donald Trump has called on Congress to quickly pass sweeping “tax reform” legislation this year. While his entire plan remains something of a mystery, one element stands out: Trump has insisted on reducing the corporate tax rate to 15%.

Any debate on tax policy is fraught with confusing terms, doublespeak and a whole lot of obfuscation.

As the GOP’s efforts to fundamentally alter the tax code are about to kick into high gear, WhoWhatWhy has prepared this primer to cut through the rhetoric and pull back the curtain on this “reform.”

Don’t Confuse Tax Cuts with Tax Reform

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Our tax code is too complicated and unfair because it was designed by lobbyists for special interests. That is why the groups and individuals with the resources to influence lawmakers end up being the primary beneficiaries of the government’s tax policy.

For example, most of the proposed tax cut “reforms” being proposed will primarily benefit the very rich at the expense of the middle class. Such tax cuts — in addition to increasing the record-high income disparity between the top 1% and the rest of America — also increase the danger of a major market collapse.

Rather than talking about tax cuts for the rich, we should be talking about cutting the tax subsidies for the rich so that those below the top 1% will have more money to buy goods and increase demand.

To appreciate how such tax cuts for the rich could lead to an economic crash, it is first necessary to understand the technical term, price-to-earnings ratio (PE ratio). Here is an example from investopedia that shows how it works: “Suppose that a company is currently trading at $43 a share and its earnings over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05.”

Currently, the overall PE ratio is about 25. This figure will go up even more when corporate tax subsidies are increased. However, this also means that when the current bubble bursts, the fall of the market will be much more severe. One stock market “expert” said stocks were as much as 40% over-valued. That, in turn, would likely trigger further bailouts that ultimately benefit the rich. Putting aside the question of whether the stock market reflects the real economy, the psychological damage will be significant.

Real reform, according to most economists, would be to cut all tax subsidies — or, as economists call them, tax expenditures, because they are hidden subsidies designed for political, not economic reasons — while lowering the rates for everyone. Doing so might overcome the resistance from most of those who benefit from tax subsidies — because they might end up paying lower rates with less compliance costs.

Cutting Corporate Taxes Will Not Create Jobs

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The Federal Reserve’s efforts to hold down interest rates and flood the market with money, as well as Republican promises to cut taxes to boost spending and economic growth, have not worked. The US is facing stagnating (or even negative) economic growth and a declining dollar. The net result of the Fed’s so-called Quantitative Easing (QE), which was designed to give the stock market a boost, has only encouraged corporate managers to pile on debt for their own financial benefit, not the economy’s.

From 2015-2016, debt rose $717 billion. But long-term business investments — in plant, equipment, and inventories — fell by $21.2 billion. Corporations are borrowing billions of dollars in order to buy back their shares to increase dividends and raise the price of the shares still on the market.      

Related front page panorama photo credit: Adapted by WhoWhatWhy from IRS Financial Service Center (Carol M. Highsmith / Library of Congress).