TAXES, TAXES, and more TAXES
You might have heard that tax reform may be coming down the pipes. As with most things that are extremely complicated, it comes down to the details. Which is why I think this try at tax reform may not get through to the President’s desk. Because the details are changing daily, I will discuss boarder taxes today.
Do we even need a tax cut?
The workforce is generally considered at full employment, corporate earnings continue to grow, and even the employment participation rate has come down slightly. That being said, wage growth continues to lag behind what economists would like to see at full employment. Jobs, jobs, jobs are what politicians tell us is what these cuts would lead to, but the data says otherwise. In 2004 the American Jobs Creation Act let repatriation of foreign profits come home. The top 15 repatriating corporations reduced their overall U.S. workforce by 20,931 jobs, while broad-based studies of all 840 repatriating corporations found no evidence that repatriated funds increased overall U.S. employment. Stock Repurchases grew 16% and then 38% after the AJCA. And of course, the C suite had to get their piece, exe comp growing 27% and 30% the two following years. Based on this knowledge, I think it’s clear what’s going to happen to if we give corporations a huge break.
What would a tax cut do to our yearly deficits and national debt?
Of course, we all want to pay less. But what are the things we are willing to give up (do we ever want to give up something)? Let’s look at it from the standpoint of paying for the services we have now. Over the next 4 years, we have projected yearly deficits (based on Trump’s 2017 Budget proposal) of $443, $392, $465, and $443 billion. Before we even look at what the proposed tax cuts cost, we are in the hole $1.743 trillion. Congressional Budget Office estimates say the cuts will cost $1.4 - $1.7 trillion in lost revenue over the next 10 years. If we do nothing we yearly deficits, we’ve added another $5-6 trillion to the national debt over that time frame and that’s with the rosiest of projections.
What would taxes look like if we paid for everything?
In FYI 2017 if we paid the bills we would need $3.65 trillion. Currently individual income taxes bring in $1.57 trillion or 49% of all revenue. Payroll taxes come in at $1 trillion, corporate income taxes $368 billion, excise taxes $96.8 billion, and a mixed fun bag of other taxes at $163 billion. Where does that leave us? Back at the $443 billion deficit number for 2017. Who wants to pay for it, who can afford it? Historically, individual income taxes have been 45% of revenue. Corporate income taxes have been 14% of revenue, but currently only make up 11%. For the last 4 quarters ending in September 2017, corporate profits have totaled almost $6.6 trillion. The deficit of $443 could be made up by 6.7% of those corporate profits. Looking at historical percentages, it seems that corporations have the most slack to make up. Obviously, corporations don’t want any part of this and have fought hard to keep things murky in the tax code. Looking around the G20 we do in fact do have a high tax rate. I don’t want to come off as corporation bashing. Companies come and go for a reason, it’s a dog eat dog world and a competitive tax rate does help them succeed. But where does the rate need to be to pay the bills and be competitive world wide.
Could any of this ever happen?
No. Again, individuals and corporations like the idea of reform until THEIR certain benefits might be removed. My dream world of no deductions and rates that coincides with no deficits, with corporations paying 20-25% of the pie is never happening. The closest we have come recently was with the Simpons-Bowles Plan. The National Commission on Fiscal Responsibility and Reform formed by former President Obama in 2010 was one few ideas that would have addressed not only taxes, but Social Security, Medicare, and the national debt. The only problem is everyone but the mathematicians hated it. The left hated the extending of social security age, the right hated the tax increases, hawks thought it didn’t cut enough, and lobbyists from all spectrums came swooping in from K street. It of course never made it out of committee.