Trump on Taxation

President Trump has announced the intention to make sweeping tax reform, and a significant tax reduction for companies, at present reducing from 35% to 16%. His argument is that by doing this, he will encourage multinational companies to stop hoarding money in offshore tax shelters and bring it back to invest in the US. So what to make of this? The tax reform is an extremely good idea. The simpler and more transparent the tax law is, the less time everybody wastes on minimizing tax and the more they devote to actually earning money. Everybody accepts tax reduction is good for them, but the problem then is, does the government earn enough money to pay for what it wants done? That is a detail that has to be left because it depends on what is available to tax, and how much the government wants to spend.

Company tax is an odd animal because one argument is that you collect more or less the same tax irrespective of the rate. It goes like this. A company earns money, but those earnings are spent in four basic ways: investing in new plant; buying goods/services from other companies; paying staff; paying dividends. Looking at these in inverse order, money transferred to dividends becomes personal income, and that is taxed, so what we are avoiding is double tax. Many countries avoid such double taxation by giving company tax credits with the dividends, and while I am unaware of US tax policy on this, as a general rule as long as there is no double taxation, lowering the company tax rate has no adverse effect on dividends because those on the low tax rates in general cannot afford the stock. The important thing is that unlike people, companies do not spend on themselves, leaving aside “perks” such as company jets. My view is such “luxury expense” for senior staff should be taxed as a personal benefit to them.

Paying staff means the staff pay tax on their earnings. Now, if the staff are low paid, lowering company tax does reduce the tax collected, because most staff do not pay the 35% rate, although some may be on a higher rate. Similarly, buying goods and services from other companies simply transfers the taxable profits, although if the goods are imported, the profits go elsewhere. The question here is, then, will the US increase local production? The reason many multinationals manufacture offshore is that wages there are seriously lower, and they do not have to pay benefits and compliance is less strict. There is rationality in thinking that such goods manufactured offshore should be taxed as if the company met home compliance and had paid home benefits and wages because that levels the playing field from the “own country” point of view, but of course it hurts developing countries.

The virtuous part, according to Trump, is that by lowering company tax, multinationals will bring back more of the offshore funds accreted, and all companies will have more money to invest and create new jobs, or pay dividends. The next question is, is this valid reasoning? I am not so sure. The problem with investing to create new jobs is you have to have something to invest in. That is not so easy to find. There is no real evidence that company tax is inhibiting investment because there is no real evidence that, leaving aside small individual companies in trouble, there is a widespread shortage of money. What I see is more a general shortage of ideas. Thus we see the new product is another mobile phone that is only a little bit different from the last one. Ask yourself this: what would you really want that is not currently available if you had the money to buy it?

What that suggests is the economic slowdown is not caused by higher corporate tax, but more through inequality. Those with money already have most of what they want, and those without money cannot afford much of what is there. If we really want to promote growth, then I am afraid the poorer have to have more purchasing power, because they are the only ones at the moment who could power acceleration in sales. Of course the rich will keep on buying, but only at their current rate, and that will not power the growth President Trump wants. So my question is, will President Trump do anything to reduce inequality?

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9 thoughts on “Trump on Taxation

  1. Slow growth is caused by slow inflation, crushing inequality, lack of state funding for really basic research, national impoverishment of the scientifically and intellectually leading countries, and, finally, subsidies to fossil industries, such as fossil fuels, and, in particular, plutocrats (who are living fossils, by definition, as they are closer psychologically to T Rex than to dedicated intellectuals).
    Good clip inflation facilitates investment in new areas, in particular new technology.

    Crushing inequality discourages economic activity, because, no matter what they do, people will stay serfs when prostitutes such as Obama get 400,000 dollars for one hour of work.

    Only the state can fund really basic research. Research funded by for profit companies is mostly superficial, and will only rarely stumble on something deep (like the 3K cosmic background radiation). In recent decades, basic research has been going down the drain, as prostitutes such as Obama had no idea what it consisted of.

    National impoverishment has, indeed, come from high taxation, in particular of companies. The USA and France taxed corporations around 35%… Except for the few large monopolies which are friends to the politicos (Apple, Amazon, Facebook, Google, etc. in case of democrats and recent US governments).

  2. There is a fine balance between encouraging company growth and obtaining enough tax money. In my opinion Trump is correct with maintaining industry at home for job creation which in turn will help to address inequality. Lowering tax will assist to keep and import manufacturing businesses. The rate that has been imposed may be unrealistic but time will tell. At the moment so many people in the US are unemployed or on a very low income. 50 million on food stamps. We all know the rule, that for every manufacturing business 6 subsiduary businesses benefit. However, there is very little encouragment for inital research and start up growth, so will it encourage manufacturing diversity?. Investment is far harder to find at this level. It reminds one of the childrens story “The Little Red Hen”. Everyone wants a piece of the bread once it is made.

    • I agree that lowering Corporate tax should assist business growth, but they still have to have customers. That was why Henry Ford paid big wages: so his workers could buy cars. However, lowering personal tax at the top adds to inequality, which is not necessarily bad if the bottom is acceptable, but as you note, you have to get that 50 million off food stamps. It has been chronically difficult to obtain research funding that will help discover the basis of new business. Politicians who dish out money want results in a few years. Their time scale is pathetic, and that does not work. To discover anything really novel, you need time.

  3. I disagree that low inflation impedes growth (measured after correction for inflation). For me, the biggest impediment to a dynamic economy is the massive hoarding of money by corporations in tax shelters, but also the lack of something to involve widespread activity. Oddly enough, New Zealand now has a highly dynamic economy – mainly because there is a lot of work going on fixing up the mess of a series of fairly serious earthquakes. But I agree inequality may well be the killer of our economies in the not so distant future.

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