As of late, there has been a noticeable discourse regarding “fairness” in America. Whether it has been an argument on equal rights, trade, or healthcare, the underlying question in regards to these conversations seems to be whether or not they are indeed fair. The recent tax debate is no different, and there have been questions raised as to whether or not this proposed bill is equitable. As it stands now, the bill is being sold as a middle class tax cut, putting roughly $1,200 back in the pockets of most middle class Americans. However, those at the top do indeed stand to gain considerably more than this. As is often said in politics, the devil is in the details and today, we will be taking a look at those details. A look at this proposed bill shows that it adheres to “trickle down” economic policy. For a long time, I had a certain infatuation with trickle down economics, because it was something I had been taught was a good thing. Over time however, I began to look at data and saw that the numbers just do not back this theory up. It took a lot of reading and research for me to develop this opinion, and by no means am I saying it is right, all I am doing is explaining my logic to you. As opposed to a “trickle down” landscape in our economy, this piece will advocate for a tax plan that actually delivers the most benefit to the middle class. In turn, this piece will explain how that investment in the middle class will end in more prosperity for the large businesses this bill is actually focused on. As such, this piece will take raw information that I’ve come across, and will interpret it. None of us will disagree on the data, facts are facts (at least I hope), but we may disagree on how to act on that data, and that is just fine. However, if you do disagree, I would urge you to present me with numbers and data rather than opinion backed by theory.
- Savings Rate by Wealth Class
The graph above, courtesy of Economists Emmanuel Saez and Gabriel Zucman, shows the savings rate for each income class from 1913-2013. Looking at the latest data point, we can see the behaviors of those in different income classes. These results should come as no surprise, since those who already have a great deal of wealth will most likely decide to save much of their excess income. Conversely, it comes as no surprise that people with lower incomes are forced to spend a higher percentage of their budget.
If I were writing a tax reform bill, the first question I would ask myself is “What is the best way to grow the economy?”
I would reason that the best way to grow the economy is to make sure consumers have enough money to purchase the goods and services produced, would you agree? Next, I would ask myself “which segment of our population spends the highest percentage of their income?”
After asking myself this question, I would then refer to the above chart to see that those in the bottom 90% of income earnings spend about 95% of their yearly income, with that number increasing significantly the less they earn. My next step in this logical game would be to ask myself “So, if we give a significant tax break to those in the middle class, does the data we have imply that most of it would get reinvested back into the economy?”
Looking once more at the chart above, yes, it does. And the more you think about it, the more it makes sense.
Individuals in the top 1% of income earners will obviously save a significantly higher portion of their income, and this is because practically all of their needs have already been met. Their mortgage is under control or paid off, they already have enough money to go out and purchase anything they need, so any additional income to them won’t necessarily go towards purchasing goods and services. Rather, it would go towards acquiring assets like stocks and real estate. To be clear, there is absolutely nothing wrong with this. However, Wall Street has been on an eight year win streak, and the most feasible way to continue that trend is to ensure the general public has enough excess cash to purchase the goods that these publicly traded companies produce. The ability of these companies to sell their goods and services to the public is what gives their stock value, this is an important point to make.
You see, if you’re going to try and sell the middle class on a “trickle down” tax cut, and tell them they will be the biggest beneficiary, why not just cut their taxes directly? Many opponents to this will say that our corporate tax rate is too high, and that is what is hurting middle class Americans. This claim is simply untrue, and once again, sometimes you need to go below the surface to get the full truth.
2) Are Business taxes really the “Highest in the world”?
“There are three types of lies: Lies, damned lies, and statistics”
Yes, the statutory rate for corporations is a whopping 39.6%, that is the highest in the world. However, this is a statistical lie. In reality, corporations in the United states have an average effective tax rate that is 10 percentage points lower (CBO/US Tax Foundation).
I must say that I am not opposed to bringing effective business tax rates down to the 25% level. This smaller cut would divert significantly less revenue, and allow for more middle class tax cuts. Furthermore, if large companies all had to pay a minimum of 25%, that would mean we would be ending business loopholes that have been taken advantage of for years, costing an ungodly amount of federal revenue. As you continue reading, you may be surprised with how much these seemingly small differences matter, even to individual taxes. This brings us to the final topic, discussing what a middle out tax plan would mean for individual tax rates.
3) Federal Revenues from income tax
I actually used this chart in my very first piece, but I think it applies even better to this one, so I’ve decided to break it out once more. As you can see, only 11% of taxable income in the US comes from the “Under $50,000” bracket. Also, this bracket makes up for just 7% of income tax revenue. Now, since income tax revenue makes up only half of our government’s total budget, we know that the money brought in by the “Under $50,000” bracket accounts for just 3.5% of our total revenue.
Under the current tax plan proposal, families making under $50,000 would only get about $1,200 in tax relief, that is hardly enough for them to “stimulate the economy”. As you can see on the right-most column, these families are taxed at about 12%, so for somebody making $50,000, that would come out to $6,000 paid in taxes. Now, imagine if the same family only had to pay $1,500 in taxes, leaving them with $4,500 dollars in extra income. Don’t you think that extra money would mean a lot more to them?
That is the crux of “middle out” economics. Because when we give our consumers more disposable income, they spend it at the very same businesses whose taxes we were going to cut anyway. To put it more simply:
Middle Out theory reverses the order in which tax relief is received. While trickle down theory states that it is best to first give money to businesses and allow them to give back to the consumer, middle out suggests that it is best to first give to the consumer, and allow them to spend it at those businesses.
If you’re going to promote a tax bill as a “tax cut for the middle class”, then there is no logical argument against this course of action. Unfortunately, the currently proposed tax plan does not take this approach.
Instead, the currently proposed tax plan repeals something known as the “Alternative Minimum Tax”, which is a regulation that requires income earners, who are generally well off, to pay a supplemental income tax. According to the United States Tax Policy Center, repealing this tax (which impacts just 1.5% of taxpayers) would cost the government over $38 billion dollars in 2018, with that number growing to 60 billion dollars by 2027 (check the statistics fam). Clearly, there has been an economic analysis done that shows that repealing this tax would create a larger tax benefit for the middle class. I have not been able to find such a study, or any theory that supports it, but if you have I’d appreciate you sharing it with me.
When discussing anything of this magnitude, it is always important to exercise pragmatism. It is not pragmatic to suffocate businesses with regulations and tax burdens, especially when the largest ones can find ways around it anyway. Conversely, it is not pragmatic to sell a tax bill as one that is focused on the middle class, and then only give them a fraction of the total benefit. This piece was written because middle out economics is practical, and the numbers back it up. Too often, we formulate opinions on issues like this and disregard any facts to the contrary. However, if you’re an individual who is interested in doing the right thing, and not just following your respective party blindly, then it is important to take all facts into consideration, this is what this piece sought to do.