Wednesday, December 1, 2021

Tax cut mantra turns out to be strong, but still wrong

Ronald Reagan’s ghost laughs.

As recently as this spring, President Joe Biden and the Democrats were planning the first major tax hike since 1993, including rate hikes for the rich and corporations, to fund his ambitious infrastructure, climate, and social agenda.

Some Democrats in the 2020 presidential primaries wanted to raise taxes even further. A year earlier, Rep. Alexandria Ocasio-Cortez of New York had proposed raising the top marginal tax rate to 70% to help fund the Green New Deal.

Biden also wanted to raise the top marginal tax rate to 39.6%, or higher from the current 37%. (This is called margin because it applies to every additional dollar earned above a certain threshold.)

But, apparently, most of this tax increase should not be.

The victims include: the pullback that Trump has reduced for the rich and the closing of the “withholding interest” loophole that benefits wealth and hedge fund managers.

Also taxation of capital gains of more than $ 1 million in the event of a person’s death; an increase in the capital gains tax rate for those who have made a profit of more than $ 1 million; and a significant increase in corporate taxes.

Instead, Biden and the Democrats are close to agreeing on a surcharge that will affect the 0.02% of the highest taxpayers; Close the loophole that allows those earning more than $ 400,000 to avoid paying Medicare taxes; a slight increase in corporate taxes; and the best performance by the IRS.

The important goal of taxing investment income at a rate close to labor has been abandoned. Billionaires who have become fabulously rich building companies defeat millionaires, many of whom run these businesses.

As Neil Irwin wrote in The New York Times, “Jeff Bezos, the founder of Amazon, worth nearly $ 200 billion, will make little difference in his very favorable tax environment. Andrew Yassi, who succeeded Bezos as CEO and received about $ 36 million in compensation in 2020, is likely to owe more taxes if the Democratic structure becomes law. ”

Without the intransigence of Democratic Senators Joe Manchin and Kirsten Cinema, Biden has done better abroad. The Group of 20 countries have reached an agreement on a minimum taxation applicable to all of its members. A minimum tax of 15% is intended to prevent large companies from moving profits across the border to avoid paying taxes.

I mention Reagan because he achieved a significant tax cut in 1981, lowering the maximum marginal rate from 70% to 50% and then to 38.5% in 1987.

Reagan convinced the Americans of two wrong things.

First, they were subject to higher taxes than other countries. In fact, Americans face one of the lowest tax burdens of any developed country.

Secondly, lower rates will bring more income. In the 1980 primaries, George W. Bush ridiculed this as “voodoo economics.” And he was right. Reagan’s decline resulted in a cut in federal tax revenues and contributed to a widening deficit. They also started a big equality gap, with the incomes of the richest 1% running away from the rest like a scalded dog.

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David Wessel of the Brookings Institution explained:

“When the forecast for the deficit got worse, it became clear that the tax cut in 1981 was too big. So, with Reagan’s signature, Congress canceled much of the 1981 tax cut, with significant tax increases in 1982, 1983, 1984, and 1987. George W. Bush signed another tax hike in 1990, and Bill Clinton did the same in 1993. This is the story: when tax cuts are really too big to be sustainable, they are often followed by tax hikes. ”

However, tax rates have historically been low.

Under Republican President Dwight D. Eisenhower in the 1950s, the maximum tax rate was 91%. This was partly due to the costs of the Korean War.

From 1964 to the 1970s, the maximum rate was in the 70% range. It is no coincidence that this coincided with the peak of the middle class and historical economic growth (the latter was thwarted by inflation in the late 1970s). The United States also had more tax categories: the very rich were taxed more than the rich.

So Ocasio-Cortez was 70% confident in his proposal.

In 2013, economists Emmanuel Saez of the University of California, Berkeley and Peter Diamond of the Massachusetts Institute of Technology published an article claiming that the optimal maximum rate would be 73%.

They offered three recommendations: “First, very high earnings should be subject to high and growing marginal income tax rates. Second, low-income families should be encouraged to work with wage subsidies, which should then be phased out with high hidden marginal tax rates. Third, capital gains should be taxed. ”

This is a compelling argument, especially one based on history.

However, Reaganomics still holds. Republicans talk about “tax cuts” with a repeat of the Aflac duck. They are the simple answer to any situation: recession, expansion, even the seemingly $ 14 trillion, washed away by the wars after 9/11. In general, current taxes are less progressive, and people with low incomes pay more proportionately than those who are rich.

The fact that such thinking is wrong cannot move our highly divided country off the ground. It is difficult to explain the need to raise taxes for investment in infrastructure, safety nets and climate change. Democrats who do this run the risk of getting the S (socialist) word.

The idea of ​​tax cuts has spread to the red states, which, for example, have safely ditched funding for education in order to make it work.

But blue Washington is not much better, without income tax and repeated failures with its introduction.

I opposed the Seattle job tax because it diminishes the city’s competitiveness in the region, not because the government shouldn’t be doing better.

If Virginia’s election for governor is the signal, Republicans will reclaim Congress in 2022 and will be in good shape to bring Donald Trump back to the Oval Office two years later.

Regardless of the state of the nation, the answer is … tax cuts.

Nation World News Desk
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