Saturday, January 21, 2017

A Tax Reallocation is Not a Tax Cut and Will Not Stimulate the Economy

The "tax neutral" Brady Plan tax reform package includes a term, the Border Adjustment Tax, which is purportedly worth $1.2 Trillion over ten years.  The folks who are bringing this wonder to you claim that the plan will "fix" our defective tax system, address "tax injustices" and stimulate growth.

Let's unpack this, shall we?

Does the Brady Plan fix the defective tax system?  I have pointed out that the United States corporate tax rate is FAR higher than comparable tax rates in other countries (except the U.A.E. and Chad). This is the fundamental issue in our corporate tax system and explains the attraction of tax jurisdiction inversions.  The new lower corporate rates, on their face, would seem to address this problem, but under the plan, some folks will pay nothing and others will get slammed in an unprecedented way.  This may not constitute actually "fixing" the defects in the corporate tax system. It seems to create new defects that will be fatal to many.

Does the Brady Plan address "tax injustices"?  I have previously shown the math, again and again, that proves that there are NO tax injustices implicit in VAT systems. Consequently, we have no reason to add an ersatz VAT system to address the fact that other countries have VATs. We should thank Congress for not imposing a VAT so far, despite the foolishness of other countries in doing so.

I want to remind you that the United States has been a signatory to GATT since 1947.  We are protected against "tax injustices" under this agreement.  If there were actual tax injustices, whatever that is, we have the means and resources to address them, legal, procedural and practical.  This is a basic function of our federal government.  It is ridiculous to contend that House Republicans "discovered" some sort of tax injustice that, while entirely out in the open, no one knew about for 70 years.  Common sense and a reasoned understanding of the workings of the world informs that it could not be true.  Let's just say that Ryan and Brady are "mistaken".

So what gives?

They want the money to pay for the rest of the plan.  It's a funding mechanism, not a principled attack on a common enemy.  That's the reality and that's why they will defend it up and down the line.

And now to the payoff question . . . .

Will the Brady Plan stimulate the economy?  I rather doubt it, and believe the math backs me up. The Brady Plan is "revenue neutral".  This means that the tax revenues don't change.  Hence, if some people are going to pay less, other people are paying more. In this case, a lot more.

[It is worth noting that this concept of "tax neutrality" is somewhat simple-minded, in that it posits that the folks with much higher tax bills will continue to generate and pay them.  The Brady Plan creates a HUGE incentive to reshape your business to avoid the new taxes. More manufacturing jobs in this country is only one possible outcome. I have previously written about how to take taxes down to zero by buying tax losses. The massive effective tax rates on importers will lead to rampant tax avoidance, and I assume that tax revenues under the Brady Plan will therefore disappoint.]

Under this "tax neutral" plan, no additional money is being put into the economy.  I think a basic concept of supply side economics is that putting more cash in the hands of capital allocators (us) leads to stronger growth.  This plan does NOT involve more money in the hands of the public.  It shifts money from certain pockets in the public (Group A taxpayers, including our company) to the pockets of other taxpayers in the public (Group B taxpayers).  This is a reallocation of tax revenues, a shifting, but not a tax reduction.

Should we care?  Yes, I think so.  An interesting short article from 2008 (Joseph Isenbergh, "The Tax Mirage") makes clear that tax payments are only current payments against public spending.  National debt represents the cumulative difference between tax revenues and Federal spending, and thus, represents a transfer of burden from today's taxpayers to tomorrow's.  In fact, only "Real taxes" matter.  "Real taxes" are federal spending as a percentage of GDP, or in other words, the burden of government as borne by the public.  Our taxes are just current payments against that bill.  The Real taxes record was set in 1945 (19.79%), nearly reached again in 2000 (19.69%) and has been steadily rising back to that level today (from a recession low of 14.45% in 2010 to 18.02% in 2015).

In other words, the Brady Plan is a head fake.  It doesn't address the real problem, spending, and kicks the can down the road by pretending to fix how we fund ourselves.  The Brady plan is complex and goes into uncharted territory, and has been labeled "bold" to put you off the scent. In fact, it's reckless, and it's feckless, too.  As Martin Feldstein himself admits, " . . . there is good reason to believe the deadweight loss of increased tax revenue is likely in many cases to be as large or larger than the direct revenue cost itself.  A dollar of government outlays may have a total cost, including the deadweight loss (or marginal excess burden) that exceeds two dollars."  Feldstein defines "deadweight loss" as "resource misallocation that we economists think of as the true cost of raising taxes."

Whoa.  The implication is that a plan that shifts burden from one set of taxpayers to another, but does not cut spending, does not relieve high costs, may itself create high costs and delivers low value. This is a losing proposition, and the economists who proposed it know it.  So why are they pushing it?

They want the money.

No comments:

Post a Comment