Economic Policy Republican Party Storm Chaser Network

The GOP Tax Blunder

Donald Trump promised a tax cut during his campaign. The Congress GOP is about to deliver something they call a tax cut.It gives a major tax cut to corporations and the very rich but it increases taxes for many in the middle class. This bill is not a tax cut, it is a tax shift.

The tax bill cuts the corporate tax from 35 percent to 20 percent. It cuts the highest tax rate. However, the bill also retaliates against New York and California who voted for Hillary. This bill blasts taxpayers in New York and California by eliminating the deduction for state and local income and sales tax. The property tax deduction may be eliminated or capped at $ 10,000.

State and local taxes have been a federal tax exemption from the beginning of the tax in 1913. This simply makes sense. First, without the exemption the taxpayer is taxed twice on that money. A tax on a tax is poor economics. Second, without the deduction huge pressure is put on state and local government to cut their taxes. This would eliminate many state and local programs that benefit the middle class.

Reducing taxes for the rich and corporations while reducing deductions for the middle class results in a shift of the tax burden. The end product of this tax shift is another example of the trickle down theory that has been a GOP theory for years. It has not worked in the past, is not working in the present and will not work in the future. The benefits of the cut in corporate taxes will benefit executive salaries and the stockholders. It provides no incentive for the corporations to either hire more workers, increase workers pay or cut prices. If none of these events occur, how is the middle class going to benefit? They are not. This bill amounts to class warfare with the upper class getting the elevator while the middle class gets the shaft.

There are inequities in the current tax code that this bill could have addressed but did not. Bill Clinton made Social Security benefits taxable in a real moon shot. The workers
save during their working years to earn this pension and the government takes part of it away.
This is elder abuse.

The liberals love the income tax because it gives the social engineers a chance to redistribute wealth by making the tax rates progressive. The tax code permits the upper class to reduce their taxable income in many ways. You have to be rich to play these games but the distribution of paid taxes is only progressive for part of the range. Then it turns sharply regressive. We end up with a tax code that has Warren Buffet’s secretary pay taxes at a higher rate than Warren. This GOP tax blunder will make this situation worse.

In my book “The Road to the Ox Carts” I predicted that continued abuse of the middle class by the government could lead to an insurrection. This tax bill will take us far down that road. The Ox Carts refer to the carts used to transport the French nobility to the guillotine during the French revolution.

A final but fundamental flaw in this tax bill is that it is not revenue neutral. The gigantic corporate tax cut will lead to a one trillion dollar increase in our deficit. We cannot afford it. Obama increased the deficit by 9 trillion dollars. This amounts to maxing out the Federal credit cards. We are broke, we cannot afford a tax bill that is not revenue neutral. The answer is to install a Value Added Tax to make up the shortfall. It is important to remember that the founding fathers were smarter than we are. The income tax was unconstitutional. An amendment was passed in 1913 making income taxes possible. Prior to that we relied on indirect taxes and tariffs. We should return to our roots.

Professor Joe Launie is a Professor Emeritus of Risk Management at California State University,
Northridge. His latest book is “The Road to the Ox Carts” were he warns that continued abuse
of he middle class by the government may lead to an insurrection.

 

3 Comments

  • Thanks Jon, it is good to be back.My tax bill would keep the existing structure right up until the taxes due entry. I would cut that in half and shift it to a VAT. I think a flat tax would be too high at the low end and too low at the high end.

    • Well Joe ….this leads us to the argument of why Taxes have to be progressive in the first place and whether or not that’ fair. I think that if you have a reasonable VAT, that will take care of the “progressivity” nicely. Wealthier people with few exceptions consume more goods.

  • Professor Joe. Great to see you back! You know that your argument about returning to the pre – 1913 days makes a lot of sense. I also think you make a good argument for some sort of flat tax for all and a VAT tax. That would be fair and simplify things.

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About the author

Professor Joe Launie

Professor Joe Launie

In 1951, at the age of 18 I enlisted in an all volunteer military intelligence organization. My Korean war experience differed from most. I obtained a Bachelor's degree in Sociology at Northeastern University on the GI Bill. I obtained a Masters Degree in Economics, at University of Nevada, Reno and my PhD in Financial Economics at UCLA. I retired from CSUN in 2000 as a Full Professor after a 35 year career. I have been a litigation consultant since 1978 and have been a consultant to the California Legislature, Public Utilities Department, and Attorney General's Office. I was principal investigator on a study of Punitive Damages done for the Texas Public Policy Foundation headed by George W. Bush. i have more than 75 publications. My latest book is entitled, "The Road to the Ox Carts".