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.
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