OpsLens

Who Do the Tax Cuts Really Benefit? Who’s Going to Pay For Them?

“The temptation to cut taxes has always been strong, yet as tax reform works its way through Congress, we need to ask if we can truly afford extensive cuts given that public debt now exceeds the entire Gross Domestic Product.”

Nobody wants to pay taxes. We earn our money, so why wouldn’t we want to keep it? Yet along with death, taxes are one of those certainties in life. This isn’t just a figurative saying, but a fact of reality. We need to pay for our schools, roads, military, Medicare, and other vital public services as well. It’ll be difficult if not impossible to remain strong and competitive in the global economy without such basic investments.

Debt will either rise, spending will have to be dramatically slashed, or American families will have to pick up the burden.

The temptation to cut taxes has always been strong, yet as tax reform works its way through Congress, we need to ask if we can truly afford extensive cuts given that public debt now exceeds the entire Gross Domestic Product. Cutting taxes can be a boon for the economy. This is especially true if tax cuts spur investments and/or consumer spending.

However, the current tax bill being pushed through by Congress is being spurred by the same “we’ll pay for it later” approach in Washington that has become so common over the last few decades. This “pay for it later” approach has resulted in a $20 trillion dollar debt burden already, with deficits projected for years to come.

Once deductions and other benefits are taken into account, corporate tax rates drop dramatically. NPR found the actual American corporate tax rate to weigh in at about 18.6%.

The current tax cuts are expected to add at least $1.9 trillion dollars to that public debt. Tax cuts should stimulate some growth, but most economists doubt that this growth will make much of a dent in deficits and certainly won’t pay for the full cost of the cuts. Even the most favorable analyses by conservative think tanks suggest that at least $1 trillion will be added to our debt levels.

Tax Cuts a Big Benefit For Companies, Not So Much for Families

Most projects show approximately 75 percent of the tax cuts are going to corporations and only 25% or so going to families. Currently, the tax cuts will benefit American families across the board. However, many of the tax cuts aimed at middle class voters are temporary and will expire. After these tax cuts expire, taxes on Americans earning between $10,000 and $75,000 will rise sharply. Many of the tax benefits for the wealthy will remain in place.

Corporations, however, will enjoy big and permanent benefits. The 35% corporate tax rate, one of the highest such tax rates in the world, would be lowered to 20%. High taxes in the United States do threaten to drive companies away. In practice, however, companies and especially large corporations are able to take advantage of various tax loopholes to greatly reduce their tax bills.

Once deductions and other benefits are taken into account, corporate tax rates drop dramatically. NPR found the actual American corporate tax rate to weigh in at about 18.6%. The United Kingdom’s corporate tax rate is about 18.7%, while Germany’s is 15.5%.

If Congress was looking to close loopholes and to bring the statutory tax rate closer to the real rate, efforts to reform taxes would make sense. So far, however, it looks like most corporate loopholes will be preserved. This likely means the effective tax will drop substantially. As a result, debt will either rise, spending will have to be dramatically slashed, or American families will have to pick up the burden.

Experiences during the Reagan administration proved that tax cuts won’t necessarily pay for themselves through increased economic growth.

Tax Cuts Aren’t a Simple and Magical Panacea

Simplistic theories suggest that cutting taxes spurs investments, which will then result in increased growth and thus increased tax revenue. Ideally, the tax cuts would pay for themselves. However, the actual effectiveness of tax cuts spurring investment isn’t so clear, and both real world experiences and analysis suggest that they won’t pay for themselves.

Recently, billionaire Mark Cuban suggested that tax cuts wouldn’t spur investments. In many cases, tax cuts to corporates and the wealthy simply results in increased savings, or more money put into financial markets. The IMF has found that tax cuts for the wealthy will stimulate growth. However, that growth won’t be as strong as politicians like to pretend.

Experiences during the Reagan administration proved that tax cuts won’t necessarily pay for themselves through increased economic growth either. Infamously, Reagan was forced to raise taxes when America’s public financial health began to dramatically worsen. In fact, Reagan had to raise taxes 11 different times in order to secure some degree of financial health. On the whole, tax burdens were reduced, but the Reagan experience drives home the point that fiscal responsibility is a must.

Sadly, politicians in DC aren’t heeding these past experiences, and instead seem to be blinded by ideology. Somehow, the massive tax cuts will be paid for, even if the only plan now is to add more debt to the books. This means future generations will have to pay for today’s spending.

The current Republican tax bill looks to be much the same. It will likely spur growth, but will also pile more debt onto the books. Worse yet, in the long run tax reform could dramatically increase burdens on middle class American families. Meanwhile, corporations are likely to enjoy most of the benefits.