Why Tax Rates Don’t Matter Much…but Tax Policy does (and what that means for the new GOP Tax Reform bill)1
December 17, 2017 by JImbo
In a nutshell, the government is pretty much fixed in how much they can collect in taxes. If you raise the rates, people “hide” much of their income or convert it to other forms. There are loopholes. The economic activity falls.
If you lower rates, there is more activity. More people work. More choose to pay taxes rather than “hide” their income.
The end result is that the total amount of tax compared to GDP (Gross Domestic Product) ranges from 17-21% regularly. Around 19% is a good average long-term.
It’s not a theory. It’s just what has happened over time. It’s been observed again and again. Maybe someday they will have more detailed studies on it.
The Corporate tax rate of 21% in the new bill is pretty close to the long term average. We will see over the next decade what this record low rate will do. In theory, it should follow the same economic trend and super-boost the economy. There will be very little “cheating” on a tax rate so low, and it should bring in that same 19% rate in actuality.
On top of that, there is the practical follow-on effect because ours isn’t a “closed system.” This doesn’t show the effect on economies outside the United States. If our taxes are lower than France for example…then a French company is likely to move here and pay less taxes. Those are NEW jobs that we didn’t have before.
For example… Germany had a 25% rate until 2007. They lowered it to 15% and business boomed. They still have higher labor and energy costs, but taxes are so low many businesses moved to Germany.
Our current rate is 35%. Trump WANTED a 15% rate to compete with Germany’s. If they moved to Germany with 15%, then they’ll move here with 15% and CHEAPER LABOR AND ENERGY costs, right? 21% isn’t as low, but we might be able to compete on those labor and energy costs still. It’s a start anyway.
On top of that, there looks to be an 8% “repatriation tax” so that the trillions in money our companies have been sitting on overseas can “come home.” Under current law, US companies with offices/factories overseas have to pay full taxes there and then full taxes here. So they may pay 33% taxes in say France and then 35% taxes here… so their taxes to bring the money back here are 68%. If they leave the money in France and only spend it on new factories in France…then they only pay 33% tax.
So, the end result is that we don’t get the money here… and much of it gets SPENT overseas too. We end up paying other countries’ taxes and building more jobs there.
With an 8% repatriation tax, then our companies can bring money back here from France for just 43% (33% plus 8%)
Now granted, it’s only a “one time” thing… and then they have to pay the full 21% on top of the 33% again. So, they can only bring over one BIG lump sump per business. But, again… it’s a START. Since it’s not going to get better, then enough companies just might use that one-time rate to pull money out and reinvest in American offices and factories.
Imagine you have a company with an office in France. It has been generating extra profits, but you REALLY want to build a new factory in America. However, the money to do that is sitting in French banks because it’ll be 35% extra taxes to bring it home.
On top of that, if you build a factory in the United States at 35% tax (2017 tax code), then you’d have HIGHER taxes than the 33% you pay in France. So what’s the point?
Under the new (2018) tax code, a factory in the USA would pay only 21% in taxes… MUCH LOWER! So, now you REALLY want to build that factory!
Say you have $100 million sitting there in France doing nothing. Well, losing $35 million in taxes to bring it back seems steep…. but losing only $8 million makes it seem worthwhile. So, you move ALL that money back to the United States. It leaves you with $92 million to create jobs.. and $8 million for the Federal government.
Under the current tax code, $0 would have been brought back. It would be sitting in France. No jobs would be created. No taxes for the Federal government.
To be fair, to me having ANY Federal tax code is less than ideal. The Constitution was created in such a way that the States were supposed to pay the tax bill, not individuals or corporations. I’ve discussed this before.
The States created the Federal government. It is essentially a “corporation” with each State a shareholder. That’s how Congress is voted in. That’s how the laws work.
You don’t have a direct “vote” in Congress, your State does. You tell the State what to do, but you don’t actually get to GO to Congress yourself. You don’t OWN that Congressman. (In theory…. we’ll get into lobbying some other time)
So, likewise since you are INDIRECTLY voting in Congress through you State, then you are supposed to be INDIRECTLY taxed… through your State. You pay taxes in your State…then the STATE pays into the Federal government.
That is how it’s supposed to work.
Otherwise it’s that old “Taxation without Representation” thing.
We can then eliminate ALL of this crap and go back to the super-simple method of each State writing a check once a year to the Federal government. We don’t need an IRS or even ONE full time employee to handle cashing 50 checks a year. Any secretary can do that.It’s simple, cheap and constitutional.
Having said that, I think this IS a step forward. It WILL be good for the country. It’s not where I would like it (zero Federal taxes) but it’s BETTER THAN WHAT WE CURRENTLY HAVE.
I know the header says it “doesn’t matter”, but it does in a way. No, the Federal government won’t long-term make more than around 19% in taxes. Even the “repatriation” of money won’t be more than a short-term boost. That’s just how economics and human nature work. We collect about 19% of GDP in taxes.
However, what that means is that since the economy is booming, then the size of the economy (GDP) is much BIGGER. More people with jobs. More money being made. So, that 19% of a BIGGER economy is MORE MONEY.
That also means more people with jobs. Higher standard of living. And yes… more tax revenue.
So, NO it won’t go above 19% tax income long term. However, that 19% will be BETTER for the country in the long run. So in that way, it matters a great deal.
However, as with everything… judge for yourself.
The bill hasn’t passed yet.
It’ll be voted on next week.
You still have time to put in your two cents, although I think they’ve already printed up what they think is the final version.
I’ve included a decent summary of the bill from USA Today:
The House and the Senate have passed different versions of President Trump’s tax reform bill so now it goes to a conference committee. Here’s what that means.
Here’s a look at what’s in the bill:
Personal exemptions, which in 2017 reduce taxable income by $4,050 each for taxpayers, spouses and dependent children.
The standard deduction, from $12,700 this year to $24,000 next year for couples filing jointly. For individuals, the amount goes from $6,350 to $12,000. The additional standard deduction for the elderly and the blind is unchanged.
State and local tax deduction
New maximum of $10,000 for a combination of property and income taxes or property and sales taxes.
Tax brackets and rates
- 10% on the first $19,050 of income for couples and $9,525 for individuals
- 12% above $19,050 for couples and $9,525 for individuals
- 22% above $77,400 for couples and $38,700 for individuals
- 24% above $165,000 for couples and $82,500 for individuals
- 32% above $315,000 for couples and $157,500 for individuals
- 35% above $400,000 for couples and $200,000 for individuals
- 37% above $600,000 for couples and $500,000 for individuals
Remain deductible for those who itemize, and the current limitation of 50% of income is increased to 60%.
Child tax credit
Increased from $1,000 per child to $2,000 of which $1,400 is refundable, meaning it would be paid to parents even if they do not owe income tax. Value of the credit begins to decrease when family income exceeds $400,000.
Remains deductible for those who itemize, but for new mortgages on first and second homes, only the interest on the first $750,000 borrowed is deductible. The interest on home equity loans will no longer be deductible.
Changes to the individual tax code are effective Jan. 1. Therefore, they will not affect quarterly payments due in January or the tax return due in April, since those cover income earned in 2017.
Taxpayers could still experience new rates this winter because the Internal Revenue Service says it could have information out by February on how workers could adjust withholding from their paychecks.
Most individual changes would expire at the end of 2025, meaning the old tax code rates and deductions would kick back in in 2026, unless Congress passes another law before then.
Exemption is doubled so no estate worth less than nearly $11 million would be taxed.
Businesses income reported on owners’ personal tax returns would get a 20% deduction on the first $315,000 of joint income. The bill contains “safeguards” to ensure wealthy taxpayers are not able to disguise personal income as business income to get lower rates.
New 21% rate would take effect Jan. 1 and unlike changes for individuals, it would be permanent. Assets held by U.S. corporations overseas would face a one-time “deemed repatriation” tax of 8% on fixed assets and 15.5% on cash.
Lifts the ban on drilling for a portion of the Arctic National Wildlife Refuge, a provision not related to the tax code but one that was in the same budget resolution that set up the process the Senate will use to pass the tax bill with only 51 votes, rather than the 60 needed to end filibusters on normal legislation.
Starting in 2019, the Affordable Care Act mandate that people have insurance or face a fine imposed by the IRS would be repealed. This is expected to save more than $300 billion over the coming decade, which was applied to offset the cost of tax reductions. Separate legislation is expected to be considered to stabilize insurance marketplaces as part of an agreement to win the the support of Sen. Susan Collins, R-Maine, who opposed the mandate repeal.
The Congressional Budget Office said the repeal would reduce the number of people with insurance by 13 million within 10 years because fewer will enroll in Medicaid or buy coverage in government-managed exchanges, including some who will no longer be able to afford insurance because rates will rise about 10% annually.
Alternative minimum tax
Repealed for corporations. Remains for individuals, but exemption increased to $1 million for couples.
Church and state
The bill does not change the ban on churches and other charities from endorsing political candidates. The bill that passed the House would have repealed this restriction.
Student loan interest would continue to be deductible. The deferred tuition provided to graduate students who teach or the children of university employees would not be taxable.
People could continue to deduct medical expenses. For 2018 and 2019, expenses exceeding 7.5% of income are deductible; that percentage increases to 10%, the level in current law, in 2020. The bill also made the reduction in the threshold from 10% to 7.5% retroactive to 2016.
Losses from fires, floods or other events
No longer deductible unless covered by specific federal disaster declarations.
- Private activity bonds used to build hospitals or low-income housing
- IRA and 401(k) accounts
- Adoption tax credit
- Earned income tax credit
- Affordable Care Act tax on investment income
New 1.4% tax on investment earnings for schools with endowments greater than $500,000 per paying student.
Starting in 2019, alimony would no longer be deductible by the payor for new decrees. Payments would be excluded from the recipient’s income.
Teachers could still deduct supplies they buy for their classrooms.