Dean Baker on Tax Cuts

This segment on The Real News Network covers the Trump regime’s absurd tax proposals that would benefit the richest people in the country at the expense of most of the population.

httpswww.cbpp.orgblogdespite-presidents-promise-emerging-details-point-to-large-tax-cut-for-wealthiest (2)

What is your response to these two things, two reductions, the corporate tax rate and the pass through business tax?

Dean Baker: These are likely to be big tax breaks for high-end individuals. The corporate tax rate, they have justified lowering the tax rate by saying that we have among the highest in the world, which is true, the statutory rate. In terms of what we actually collected, it was somewhere around 22% of corporate profits, which put us right around the middle of the pack.

Now, if we make the statutory rate 20%, presumably they’ll get rid of some deductions but surely the statutory rate will fall two, three, four percentage points below that, which means we’ll be collecting substantially less money in corporate income tax.

Now, one of the important deductions is for interest. Here is one of the bizarre things. They say, “Oh, we’re going to limit the corporate interest deduction,” but it doesn’t say how. That, in principle, would be a very good thing if they sharply limited it, but they didn’t care enough to put in a rate.

Now, the pass through corporation, this is potentially a huge bonanza for very wealthy people, I should point out, including Donald Trump who has most of his businesses as pass-through corporations. What a pass-through corporation means, it pays zero tax. The corporation itself pays zero tax. It goes back to the individual and where that individual is a very wealthy person, like Donald trump, they’d be paying tax at the high individual income tax rate or higher, which in his case, say this goes through, that’s 35%. Instead, he’ll just pay 25%, and what that means is you give people a very big incentive to become corporations to have their doctors, lawyers, other professionals will have most, or all their income as corporate pass through and they’ll just pay a 25% tax rate.

Here, too, we get a magic asterisk. They say they’re going to have the IRS police this to make sure it’s not abused. Well, the republicans have spent two decades weakening the IRS’s enforcement power. This would be extremely difficult thing to enforce, even if you had a very effective IRS, which they’ve done a lot to make sure we do not have.

Gregory Wilpert: Then, another related aspect is the whole thing about the repatriation of corporate taxes. It’s estimated that something around $700 to $800 billion are being held offshore by U.S. companies because their corporate tax is made abroad. They’re keeping them there, so they don’t have to pay the corporate taxes. Trump wants to provide a tax incentive, basically a lower tax rate for temporarily, so they repatriate their profits. What do you think of that plan?

Dean Baker: Let me clarify that. He’s talking about actually making that permanent. We would switch to a territorial tax system, so that they would never have to pay taxes on foreign profits. This is a big bonanza. You have a lot of companies, maybe the most successful companies in the country that declare a lot of profits overseas precisely so that they don’t have to pay taxes here, and at least as an accounting convention they keep the profits over there in many cases, The Wall Street Journal did a piece on this a few years back. The money is literally here in the United States. It’s kept in banks in the Unites States, but at least as an accounting matter, it’s still with their Irish subsidiary, or Cayman Island, or wherever they’re booking it, so they don’t have to pay taxes on it.


Dean Baker: The alternative minimum tax was a catch-all. Basically it says no matter how many games you played that at the end of the day, you still had to pay, I think it was set at 20%. It only applied to a relatively small number of people. Donald Trump, actually ended up the one tax return that was released, or leaked out 2005, he paid the alternative minimum tax because he had enough deductions of different sorts, he would have paid less, so he still had to pay the 20% alternative minimum tax.

I don’t see a good reason for eliminating that. It applies to a very small number of people. Basically by definition, they’re wealthy because there’s a very big floor to it. Unless you’re earning a lot of money, you don’t have to worry about it. Again, unless you’re playing a lot of games, it’s moot. I don’t really see a downside to it. I don’t see anything whatsoever gained by eliminating the alternative minimum tax.

The estate tax, this too, applies only to very wealthy people. People are allowed to exempt 4 million per a person, so a married couple could pass on $8 million totally tax free. It applies to, I think it was two-tenths of 1% of estates. A very tiny number and I just don’t see a good argument as to why we shouldn’t be taxing these people. We’re going to get the money from lower income people instead? I really don’t see a downside to the estate tax, and it’s just unfortunate if we give up that revenue.

Gregory Wilpert: As I mentioned, one of the main Republican arguments, of course, in favor of lowering taxes more generally and it’s an argument that’s been around since President Reagan, is that lower taxes for both corporations and households would mean more money for spending and for reinvestment and therefore more economic growth and, of course, that this would pay for itself. What’s your response to that relatively old argument?

Dean Baker: This is one of the rare cases where we actually had the opportunity to test it. Economists, we can come up with all sorts of theories and we try to find a way to, what looks like that. In this case, we actually did it. They did it under Reagan, they did it under George W. Bush. There’s basically, zero evidence that led to any increase in growth. The growth was okay in the 80s, was not particularly strong, growth was very weak after the tax cuts that Bush put in place in 2001 and 2002. I wouldn’t necessarily blame the tax cuts for the weak growth but you’re pretty hard pressed to argue the opposite that somehow we had very strong growth but something happened and that prevented us from having good growth.

The one thing I will say for reducing complications in the systems, loopholes, basically, that is a way. That’s why I have, actually been sympathetic to the idea of lowering the corporate tax rate coupled with reducing the deductions, because the tax avoidance system is a major source of inequality. You have a lot of people on Wall Street who come up with clever tax avoidance schemes and they get very rich that way. I can’t see any reason we want people to get rich designing tax avoidance schemes. We could argue how much money we should make from designing a good product or whatever, but I can’t see any rationale for saying, “Oh, we want people to get real rich ’cause they’re clever at avoiding income taxes.” I think there’s something to be said for that, but it’s not clear how much we’re doing to combat tax avoidance with this reform plan.