WASHINGTON, October 2, 2017 – After much consultation with members of Congress, President Trump has proposed a massive tax cut designed to stimulate the economy so that economic growth will increase. The Democrats have denounced the plan, saying that it won’t necessarily grow the economy nor will it add jobs or benefit the middle class. The Democrats are spreading pure mythology.
Myth number one: The GOP tax cuts benefit the wealthy and not the middle class. Democrats argue that high-income earners could see a $25,000 reduction in taxes while middle-class income earners will see only a few hundred dollars.
Let’s say Trump wants to be fair and cut taxes for all Americans by 10 percent. A wealthy person currently earns $1,000,000 and pays federal income taxes of $250,000. A middle-class person earns $60,000 per year and pays $4,000 in federal taxes.
If Trump cuts taxes by 10 percent for everyone, the wealthy person gets a $25,000 (10 percent of the $250,000) tax cut while the average person gets $400 (10 percent of $4,000). Since the high-income earner pays 60 times more in taxes, his tax cut will be 60 times greater than the average.
It is simply impossible to “significantly” cut taxes for people who pay very little tax.
Additionally, in 2001 President Bush cut all tax rates by 10 percent for a 10-year period. In 2012, President Obama made those lower rates permanent for everyone except the highest income earners who saw their tax rate increase from 36 to 39.6 percent.
Trump wants to return that larger increase to its earlier 36 percent rate plus provide a slight additional tax break to this wage class, so he set his proposed top rate at 35 percent.
Myth number two: Cutting corporate tax rates won’t create jobs. While the data indicate that after every previous major tax cut, economic activity increased and the unemployment rate fell, Trump’s opponents say that may not happen, claiming corporations could decide to use the extra income to pay larger dividends to stockholders and/or repurchase shares of outstanding stock.
That is actually somewhat true. When there are no good investments for corporations, they increase dividends and sometimes re-purchase their own shares, thus reducing the float and thus lowering the shares’ price-earnings ratio. That can frequently induce current shareholders to increase their positions in the stock; or, should those stockholders spot better or or more aggressive investment opportunities in other stocks or sectors, they will re-invest the money back into the economy by purchasing shares of growth companies.
Whether the corporation invests to expand and add jobs, or stockholders invest in their existing position or invest their profits in other corporations that expand and add jobs, economic expansion will occur and jobs will be added.
Myth number three: Lower class tax rates are increasing. Trump wants to reduce the over all number of tax brackets, so he is combining the current 10 percent bracket with the current 16 percent bracket to create a single 12 percent bracket. Since the standard deduction is significantly increased in the President’s plan, lower income earners will pay a higher rate on their taxable income; but, they likely will pay less in total taxes since the amount of taxable income will be lowered.
In other words, a person today would pay 10 percent on taxable income of $20,000, or $2,000. By raising the standard deduction by $6,000, that same person’s taxable income would be only $14,000. So, 12 percent of $14,000 means the tax bill would be $1,680, a saving of $320, which is more than a 10 percent tax cut. This key distinction has been ignored by Democrats and the media alike.
Further, as low-income earners find better opportunities in a growing economy, their income would increase. Instead of paying a 16 percent tax on that new income, only 12 percent would be charged.
Myth number four: Eliminated estate taxes benefits the wealthy. The reality is that the wealthy set up trusts to own assets. In turn, the trust still owns the assets no matter who receives the asset’s income. In other words, the wealthy minimize their federal estate tax by transferring asset ownership prior to death.
High estate taxes are paid mostly by the upper middle and middle classes. Trump wants to allow people who have earned income, paid taxes and accumulated wealth to pass that wealth on to their heirs without allowing the government to force the heirs sell some assets to pay estate taxes.
Myth number five: The Trump tax cuts will increase the federal deficit. Tax cuts do not increase deficits. In fact, in the long term, they reduce deficits. The reason deficits increased after most tax cuts are put into place is that the rate of increase in government spending was greater than the rate of increase in tax revenue to begin with
After every major tax decrease, economic activity has increased. Usually by the second year of reduced taxes, tax revenue has increased and the rate of increase was higher than before the tax cut was enacted. The deficit problem occurs because spending has skyrocketed.
This was true for every major tax cut except President Clinton’s cut in the capital gains tax rate in 1997. What followed for the next four years was a 30 percent increase in annual tax revenue and only an 11 percent increase in annual government spending. As Clinton declared, “The era of big government is over.” (Unfortunately, it was not over forever.)
Ultimately, after Clinton’s capital gains tax rate cut, his administration’s budget carried a surplus, not a deficit, for four years running.
Since annual economic growth has not exceeded 3 percent since 2005 – which is the longest period of economic stagnation in US history – it is critical that Trump’s tax plan is passed, allowing America’s annual growth to reach 3 or 4 percent or better. That would provide more opportunity for all Americans, reduce unemployment, raise wages, increase incomes, reduce government spending on social programs and eventually reduce social problems as well.
Aside from Trump’s opposition, which consistently misrepresents the effects of Trump’s tax cut plan, who who else could possibly oppose such positive outcomes?
*Cartoon by Branco. Used with permission and by arrangement with ComicallyIncorrect.