|Federal Tax Revenues and Expenditures|
One of the big differences between the candidates in the last Presidential debate came on the issue of taxes. Republican Donald Trump argued that an across the board decrease in tax rates was necessary in order to get the economy growing again. He also stressed the need to significantly lower the corporate tax rate in order to grow American business and make it more competitive with other countries.
Democrat Hillary Clinton promised to increase taxes on the rich by which she means anyone making over $250000 per year. She argued that this tax increase would enable her to implement all the programs in the Democrat platform without adding to the Federal deficit which is now close to $20 Trillion.
Neither candidate pointed out that there is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 50 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.
Even the much-maligned Bush tax cuts did not reduce Federal revenues. In 2002 the Federal government collected 1 Trillion dollars in income taxes and 1.88 Trillion in total revenues. By 2007 after five years of Bush “tax cuts”, Federal income tax collections went up by 50% to over 1.5 Trillion dollars, and total government receipts exceeded 2.5 Trillion. In 2007 the total federal deficit was a mere 160 Billion dollars, the same it had been in 2002. Only with the recession did income tax revenues go down to 2002 levels although total government receipts stayed higher.
Today, total Federal government revenues are the highest they have ever been. Unfortunately, during the Obama administration massive government spending has far outstripped the increased revenues produced by the Bush cuts. Even if a newly elected president Clinton were to tax those making over $250000 at a rate of 100%, it would not come close to dealing with the massive debt roll accumulated during the Obama administration.
Ironically for conservatives, it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington? Why should this be so?
In the last election campaign Mitt Romney tried to make the same point that Donald Trump is making today. He argued that lower tax rates would actually grow the economy and produce greater revenues for the Federal government. Most people, including those who should know like politicians and newspaper editors, could not understand the concept.
But there is another factor. Increasing tax rates only increases tax avoidance strategies both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the potential reward for deferring, sheltering, or otherwise hiding income has doubled.
Although he has not released his tax returns, Donald Trump has admitted that he uses “depreciation” on his real estate holdings to keep his taxes down, a perfectly legal strategy that neither President Obama nor Hillary Clinton has ever challenged.
No one has ever asked candidate Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work in the first place. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.
Even assuming that the Clintons had the best of motives, they must have realized that they could achieve greater results with their money than the Federal government could. Why give the government a third or more of your speaking fees when all the fees could go to the Foundation. Of course, they also could be able to maintain control over the tax exempt funds as opposed to leaving it to government bureaucrats to decide. The funds could go to pet causes. Recent email leaks have indicated a dark side in the Foundation. It appears that daughter Chelsea had to initiate an investigation of the Foundation to see if there were any conflict-of-interest issues jeopardizing its tax-exempt status.
There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals.
Trump is also right about lowering the Corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer.
Also, corporate accountants are paid to find ways to create strategies that will minimize their corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states as General Electric did this year in Connecticut. We all know that the high federal Corporate tax rate has led many domestic companies to relocate overseas.
Inevitably, increases in tax rates never produce the expected tax revenues. Just look at the state of Connecticut. Two years after his election Democrat Governor, Dannell Malloy, and an overwhelmingly Democrat legislature pushed through the largest tax increase in State history. The expected revenues failed to materialize, and the Governor had to raise taxes again to balance his budget.