Revenue, Debt relative to GDP

What Can We Do About Taxes?

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Don’t you just love it that when the Democratic Party is in power, all the GOP can discuss is the increasing debt.  And, once the GOP takes power, they forget all about the debt and suggest a tax reduction for the rich that will add trillions of dollars to our debt and render the budget inflows to be a small percentage of the budget outflows.

This is despite the fact TheDonald (OK, he is not known to have a familiarity with the truth), Senator McConnell, and Representative Ryan promised to present a revenue-neutral tax reform plan for the US.  Of course, the bullet-point presentation of their “tax reform” [sic] package (1700 words, with barely 7 pages of verbiage covering individual, corporate, and estate taxes) is simply a redistribution of tax burdens from the rich to the poor.   (See my previous discussion of this inane “plan”.)

From Where Do Our Federal Dollars Come?

Moreover, a revenue-neutral plan is NOT what we need.  As I’ve demonstrated over the years, the corporate share of federal collections  has dropped from 35% to 10%, and the poor contribute a substantial portion of the total federal revenue collection.

This statement does not mean that a rise in corporate tax rates is needed.  To the contrary, the plan I have been proposing for some 5 years employs a much lower tax rate than the oft-cited 35% (that, in reality,  only small businesses and professional corporations pay).  Because the plan we need requires collections of the US’ fair share of profits from firms that operate in the US- whether they are US-based or foreign entities.

The OECD has already adopted such a plan, which they call BEPS- base erosion and profit sharing.  The plan (identical to mine, of course 😊  ) calls for each taxable entity to average out the effects of their payroll, assets, and revenue percentages from each taxing country and multiply the applicable tax rate by the percentage of profits that accrue to the taxing nation.  (If a company has 1/3 of its payroll, ½ of its assets, and 75% of its revenue in a given nation, then [1/3+1/2+3/4]/3 or 52.7% of its profits times the applicable tax rate should be due that nation.)

Revenue, Debt relative to GDP

But. we must recognize that since our last revenue-neutral tax restructurings (1981 and 2001), tax revenue as a percentage of GDP has radically decreased.   Moreover, the public debt as a percentage of GDP is now almost 80%- twice that of the environment that obtained in those years.

The proposed GOP plan will escalate our debt to GDP ratio to almost 100% during the ten year (the fake life span) proposed for these tax cuts for the rich and corporate citizens.  (This the conclusion via the current CBO projections.)  The $1.5 trillion tax cut can’t be balanced with $ 1 trillion in additional collections from an economy growing at 4% (the pie-in-the-sky promise of the GOP)- or the significantly lower collections that would obtain should the economy keep growing at 2 to 3 %, which has been the (top of the) norm for the last fifteen years.

Tax and GDP Growth

Let us not forget that Clinton [1991] and Bush I [1993] both increased the top individual tax rate- and US output blossomed at 4.1% for the entire decade.  When Bush II cut taxes in 2001 and 2003, the rate of growth for US output fell to 1.7% and remained so until we began recovering from the Great Recession in 2011.

And, if we can believe Dr. Joel Slemrod of Michigan, the connection between tax rates and economic growth is at best tenuous.  See the charts above and below, extended beyond that of his tome, Taxing Ourselves, through 2017. Moreover, he found this to be true for other countries of the world, not just the US.

GDP Per Capita and Taxes

At best, tax cuts have short-term effects (increasing business investment, in particular)- that become negated over time.)

Maybe, we can aim for tax reform- really.

Roy A. Ackerman, Ph.D., E.A.

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