WASHINGTON, October 21, 2017 — To really help the middle class, President Trump’s proposed tax cut should be geared to create capital which increases economic growth. Increased economic growth provides opportunity for everyone.
Our political class doesn’t seem to get that. They talk about tax relief and who benefits the most from the immediate impact of tax cuts.
Senate minority leader Chuck Schumer, D-N.Y., called Trump’s proposal to lower the top marginal tax rate “wealth-fare.” Schumer said,
“It seems that President Trump and Republicans have designed their plan to be cheered in the country clubs and the corporate boardrooms.”
Speaker of the House Paul Ryan said Friday that the House version of income tax cuts will raise the top rate. He said he didn’t want top earners “to see a big rate cut. This is about the people, about half of which in this country are living paycheck to paycheck, and giving them a break on their taxes.”
President Trump wants the plan to be of great benefit to the middle class, and he insists that corporate tax rates should be reduced. He knows cutting corporate taxes will lead to the creation of capital. And the creation of capital is extremely important if we want the economy to grow at better than a 4 percent annual rate.
Accelerating economic growth should be the primary goal of tax reform.
The economy has not seen an annual economic growth of at least 3 percent since 2005. That is the longest period of economic stagnation in U.S. history.
The last time the federal government took an action to create capital was in 1997, when President Clinton reduced the capital gains tax rate from 28 percent to 20 percent. Economic growth averaged 4.5 percent over the next four years. Tax revenues increased. Government spending (primarily on income maintenance programs) fell, and the government budget had an annual surplus.
How can capital be created by the new tax policy?
In the business sector, capital is created through after-tax profit. Almost all after-tax corporate profit ends up used by the business for capital expansion, except for portion paid to stockholders as dividends. And those investors who don’t rely on their dividends for annual living expenses often reinvest them back into the economy, thus creating new capital.
On the consumer side, people do three things with their income: they pay taxes, spend on goods and services, and save.
Middle and lower class earners spend almost all of their disposable income on goods and services, leaving very little to save and create new capital. Higher income earners have much more disposable income left for saving, thus the creation of new capital.
It is the highest income earners who create capital through tax cuts.
If you cut their tax rates, the spending habits of the wealthy will not change. What will change is the amount that they can save, hence the rate of capital formation.
Let’s be perfectly candid. If the goal of tax policy is to help the middle class, then strong economic growth is the way to reach the goal. As President John Kennedy said when trying to sell his tax cut (which was philosophically similar to Trump’s), “A rising tide lifts all boats.”
To say that a tax cut will benefit the middle class is only accurate when the economy grows and the middle class has more opportunities. The middle class is heavily taxed:
- 6.2% Social Security tax (really 12.4% considering the employer paid portion),
- 1.45% Medicare tax (really 2.90 % when considering the employer contribution),
- heavy sales taxes in almost all states,
- heavy state income taxes in almost all states,
- property taxes, excise taxes and some special other state and local taxes.
The middle class pays very little federal income tax. More than 40 percent of personal income tax revenue is paid by the upper 1 percent of all income earners. Almost 87 percent of all tax revenue is paid by the upper 20 percent of income earners.
That means the middle and lower class, about 80 percent of income earners, pay only 13 percent of all personal income taxes collected.
It is impossible to significantly cut income taxes for people who pay almost no income tax.
A Tax Cut should spur economic growth
Trump, Schumer, and Ryan should develop a policy that creates new capital and spurs economic growth. That will allow businesses of all sizes to grow. Business growth is what grows the economy.
For the past ten years, we have seen how the lack of capital creation has stymied business, and middle-class wealth, growth.
Venture capitalists invest in less than 5 percent of investment opportunities brought to them, which means that 95 percent of start-ups can’t find capital to grow. This means that new businesses are constantly chasing the small amount of capital available. We need an environment where there is so much new capital created, that capital starts chasing small business. That will lead to growth we need.
Tell the naysayers to stop worrying about who gets the biggest tax cut and start worrying about how the tax cuts can really grow the economy.