It is not all bad in Trump land. Yes, we have those pesky Twitter wars, anti-free trade rhetoric, fights with the Australian Prime Minister and the list goes on. It seems that US politics has entered a dark age.
There are a few bright spots that will change the course of the US economy and our personal lives. One is President Donald Trump’s promise to cut corporate taxes to 15 per cent from 35. Trump said recently that major tax reforms will be announced soon. He also promised to reduce personal income taxes but let’s focus on corporate taxes here.
I sense that the usual left-leaning people will protest that corporate tax reduction is a give-away to “evil corporations” and the wealthy. That is utter nonsense. It is a tax reduction for all Americans. That is because corporations pay no taxes, whatever the rate the government imposes. Only individuals pay taxes.
Remember corporations pay no taxes, only individuals do.
When the government levies a tax on corporations, they just turn around and bundle that cost into the price of the goods and services you buy from them. If the market conditions do not allow for passing on the cost to consumers, you’ll see service levels and product quality drop. In that sense, corporations are just intermediaries that collect taxes for the Internal Revenue Service (IRS) from you and me the consumer. So when someone takes a moral stance to say that corporate tax cuts are giveaways to the wealthy, just repeat — corporates pay no taxes, we individuals do.
Now let us look at the benefits a 15 per cent tax cut gets. First, it makes America a competitive destination for businesses. The US is one the highest taxed nations in the world. The result is that many large corporations, especially in the pharmaceutical industry moved to Europe. Ireland, with its 12.5 per cent corporate tax rate, is a destination of choice. Other corporations may be hesitant to move business here.
A reduction in tax rates will incentivise companies to stay in the US, thereby protecting its tax and jobs base. It will also encourage companies to move businesses to the US, which is still the largest economy in the world. That will increase jobs in the US.
Secondly, a tax cut means corporations can either cut prices on the goods and services they sell, increase dividends (which means more money for pension funds that are shareholders) or just reinvest the money saved on taxes. This will again create new jobs in the country.
The strongest argument for a reduction in corporate taxes is that private businesses and individuals manage and invest their money much better than the government. They have to as they are responsible for their money. They have more skin in the game than any government bureaucrat or politician. It’s your money and you should keep it and spend it the way you want.
Imagine a situation where companies are rushing to invest in the US and the explosion of job opportunities it will create. Then we have the scenario of corporations cutting prices due to the cut in taxes. There is also the potential of increased competition bringing down prices. All of this will lead to more money in people’s wallets.
There are of course deficit hawks who will claim budget will go out of whack with a fall in tax revenues and ever-rising expenditures. Is it not surprising that no politician has ever reduced the size of the government budget? That is an argument for another day. In the short-term, the deficit will increase but in the long-term real tax revenues go up and then it’s a matter of controlling expenses.
When the tax rate of 35 per cent is reduced to 15 per cent, tax inflows on every dollar generated falls to 15 cents from 35 cents. That is all that the boring and unimaginative bean counters will say. They ignore the human factor. When people are incentivised by lower tax rates, businesses grow and with it real tax revenues.
This has been proven by the tax cuts effected by Ronald Reagan and George W. Bush. For instance, tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 per cent change during Reagan’s era. From 2004 to 2007, federal tax revenues increased by $785 billion, a benefit from the Bush tax cuts. Unfortunately, both presidents were not able to control expenditure, which widened the budget deficit.
Reagan, Bush and Barack Obama are presidents who operated from a clear set of principles. The lack of a clear set of principles is the scariest part of the Trump presidency. However, once in a while he stumbles across something good. A deep corporate tax cut is definitely one of them.
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