What joy with the new Republican tax reform framework – anything that makes the Economic Policy Institute whine is obviously a good idea. That teachers’ union head Randi Weingarten is having hysterics is just icing on that cake which is not, this time, a lie. The plan’s not perfect, that’s true, but this is politics — being absolutely right isn’t something available in this sphere of life.
We’re going to be told a number of things which are not true about all of this, so here’s a handy guide to some of those misleading claims.
First up is “instant expensing.” This is not a tax break in any manner at all. Corporations and other forms of business are taxed upon their profits, profits are revenues minus costs. Buying a machine to stick in the factory is a cost of being in business, you get to add that to your costs before profits are declared, obviously. However, the current system only allows you to do this over time. If your machine will last four years, then you can only knock off 25 percent of the cost each year for four years. This is known as depreciation, or possibly amortization. The thing to note here is that every business gets to do this with everything they buy.
All this instant expensing allows is that you can add your costs to your costs in the year that you spend the money on your costs — that’s it, nothing else. It changes, therefore, when you pay taxes, but not how much. Over the years, you’ll make the same amount of profit, over the years you’ll pay the same tax, either way. This is a cleanup of the tax code for sure, but it’s not a tax break nor a tax cut. It’s just a welcome simplification.
Lowering the corporate income tax rate is folding to the demands Sen. Elizabeth Warren, D-Mass. I know, I didn’t know she had that much power over the Republicans, but she clearly had some sway (I kid!). She’s been insisting loudly, and in ever-rising tones, that income from investment must be taxed at the same rate as labor income. This is what lowering the corporate tax rate does.
Understand this: The tax on capital income is both the corporate profit tax and also the dividend tax that the individual pays. No, don’t think about there being two different people being taxed, the business and the capitalist, that’s not the way it works. We can, usefully, tax either the company or the capitalist. Most countries do one or the other. My native United Kingdom, for example, basically says “The company paid some tax before the dividend was sent out, so, the recipient of the dividend has already paid some tax.” Near every other country does the same.
In the United States, there’s a 35 percent profit tax then another 15 percent on the dividend (plus some bits for Medicare). The tax on capital income is therefore up to 54 percent or so when all of this is added up. The top corporate income tax rate is 39 percent or so at present. The new plan is 20 percent on the corporation, 15 percent on dividends. The top income tax rate will be 35 percent — there we go, we would then tax capital income the same as labor income. Won’t Warren be pleased?
By the way, standard economics says that capital income should be taxed less heavily than labor income, so we’ve still some way to go.
The real joy for me is the elimination of the deduction for state taxes. Blue states like their high tax-and-spend ways, and that’s just fine — people should vote for how they wish to be plucked by their rulers. But allowing those taxes paid to be deducted from the federal tax bill means red states are paying blue states.
Because New York has a high state income tax (and New York City itself again, of course) means that the feds get less tax revenue out of the Empire State than they should, even as tax rates appear to be the same nationally. The markedly poorer Tennessee has to pick up more of the national bill to pay for New York lavishing cash on state employee unions. Abolishing this is an excellent idea, and we’re going to see the most ghastly screeching from those public sector unions (hence Weingarten’s displeasure).
This is not a perfect tax plan. Sadly, that’s not something we’re ever going to see. But the right people are already complaining about it, so it most certainly has good bits in it. The more they complain and obfuscate about it, the better we know those parts are.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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