by Davis Stockman, Daily Reckoning:
Someone should remind the Donald that he actually is President and that it’s high time he accomplished something. Anything.
Back on April 21st, for example, he promised that a core feature of his platform — a sweeping, pro-jobs tax reduction — would be soon unveiled.
Trump said the tax reform package will be introduced on “Wednesday or shortly thereafter,” just before his 100th day in office. While the president would not reveal details about the tax plan, he did say that the cuts will be “bigger I believe than any tax cut ever.”
Well, we’ve passed the eighteenth Wednesday since that promise. What was actually delivered back then, of course, was a one-page statement of vague principles, fond aspirations and apple pie.
So in Springfield, Missouri this week, the Donald is launched tax reform efforts again. And yet again the White House spin brigade has already made clear that it’s all about tone, not substance.
That is, he will orate about tax fairness and closing loopholes, but not name any. He will promise big rate reductions but not say how big and for whom. He will promise to liberate jobs by slashing the corporate tax rate without explaining exactly why that will result in more jobs rather than more stock buybacks. And there were no numbers about how the implied trillions of revenue lost over the next decade will be paid for.
Instead, Donald puckered himself up into a meld of Huey Long and Jack Kemp while preaching up a storm in favor of the “little guy”. A reference to the average worker who purportedly is being crushed by the Federal income tax and who gets tangled in the complexity of the IRS code without a high-priced tax lawyer alongside loophole-savvy financial advisors.
Accordingly, the Donald is going to “unrig” the tax code for these little guys, thereby keeping faith with the millions of dispossessed citizens of Flyover America who voted for him last November.
Except that narrative is essentially nonsense. This isn’t 1981. There is no raging inflation and bracket creep propelling the middle class into tax tyranny. In fact, owing to indexing and large increases in the standard deduction and personal exemption over the last 35 years, the income tax has essentially morphed into a Rich Man’s Levy.
The Donald’s song and dance about tax simplification and reduction comes right out of the well-thumbed GOP hymnal. It speaks little to the blue collar folks — in places like the western Pennsylvania steel country, industrial Ohio, the Michigan auto belt and the manufacturing towns of Wisconsin and Iowa — who on the margin accounted for his electoral college victory.
The Donald, Tax Plan Rhetoric and the Gong Show
Trump’s tax reform airball will promise to make filing with the IRS more palatable to tens of millions of citizens who, apparently, find it inconvenient to shell out $25 to file their Federal income tax return with TurboTax.
Among the 148 million income tax filers, the bottom 53 million owed zero taxes in the most recent year (2014), and the bottom half (74 million) paid an aggregate total of just $45 billion. That amounted to just $8 per week per filer.
If you take all filers with AGI (adjusted gross income) under $100,000 per year, you end up with 122 million taxpayers or 83% of the total. Upwards of 85% of this group uses the standard deduction. So they are not caught up at all in the puzzle palace of IRS code that the Donald denounces.
The 122 million taxpayers — who make ends meet on less than $100,000 of income — paid a total of just $278 billion in income taxes during 2014. That was just 6.5% of their $4.3 trillion of AGI.
To be very clear, there was still $4 trillion left in the collective pockets of these 122 million taxpayers — even after the IRS had its way with them!
Even if a Keynesian demand side tax cut was a good idea, which it isn’t, the fact is there is not much more that could be put “back in their pockets” by income tax cuts.
The truth is that the Laffer Curve has gone missing. At average tax rates of under 7%, the bulk of US wage and salary workers (83%) are not facing prohibitive disincentives to work or production.
By contrast, the top 4% or 6.2 million filers paid $802 billion in Federal income taxes. That amounted to nearly 58% of total Federal income tax payments, and resulted in an average tax rate of 24% on the group’s $3.3 trillion of AGI.
That’s not to object to putting some of that $802 billion back into the pockets of the top 4%. Many of them are small businessmen and the proverbial” job-creators” who make the economy grow, and who also file sub-chapter S business taxes. But incentivizing the job creators in this manner should not be financed on the backs of future taxpayers via borrowing. It must be paid for with spending cuts as a first resort, and less onerous taxes — such as consumption taxes or VAT (if necessary).
The Fed vs Trump’s Tax Plan
The Fed has generated such gigantic financial bubbles and caused all financial assets to become so massively overvalued that incentives for the rich are not really in short supply.
Federal Reserve Chair, Janet Yellen and the other Keynesian economists on the Fed have generated more “trickle-down” wealth and rewards than the Gipper could ever have imagined back in 1981. The $45 trillion in household wealth gains since the 2009 bottom vastly overshadows any possible benefits from lower tax rates, even at the top of the income ladder.
Even Trump’s Goldman duo of Gary Cohn and Steven Mnuchin are saying that there will be no “net cut” for the top tier of households.
If the bottom 83% don’t pay much tax in the first place, and if the top 4% who pay most of the taxes are not to be indulged for social policy/equity purposes, what’s the point of the whole income tax cut charade?
The Goldman geniuses are chasing themselves in a circle trying to cut the rates and broaden the base. But what it actually amounts to is amateurish stumbling around the K-Street corridor where every single “loophole” they propose to close is shot down.
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