Ask the average American the difference between a Republican and a Democrat on economics and they’ll say the Republican wants lower taxes and spending than the Democrat. This isn’t saying it’s true. I think evidence shows the GOP is not consistently capitalist or fiscally responsible. In politics, it’s very easy for buzzwords to become justification for policy proposals by saying “I support lower taxes and smaller government” or “I want the rich to pay their fair share.” Libertarians are known for the “Taxation is Theft” phrase, but as a libertarian myself, it is evident that none of these phrases are conducive to good public policy or even good arguing.
Is there merit to a moral argument that taxation is theft? Absolutely! But this country, and the field of economics, shouldn’t be limited to blanket utopian ethical statements with no empirical backing; whether it be “healthcare is a right” or any other popular phrase.
Simple reasoning must not lead to simple yet flawed tax plans and budget proposals. What we’ve just seen is a Republican tax bill pass itself through the Oval Office and become law, a tax proposal with so much more potential had we tried.
Sales taxes are not capital gains taxes, and military spending is not education spending.
As much as I would love a tax-free society, even ultra-capitalists like Adam Smith himself call for basic government institutions. Thus, it’s necessary to rank and prioritize the very worst of government expenditures and taxes so that when capitalists of any party take over Washington, DC we can pass an economic agenda that boosts the economy and scores political support from the people.
The Republican tax bill, as I previously mentioned, is riddled with sloppy flaws. First and foremost, the fact that the income tax cuts are temporary, and that many standard exemptions are eliminated, are causes for concern.
Taxes: the worst and the slightly intolerable
Payroll: Payroll taxes (Medicare, Social Security) are without a doubt the most destructive, repulsive, and idiotic taxes paid by Americans today for a number of reasons, but two primarily stand out.
First, the payroll tax, especially the Social Security tax, is extremely regressive. This 12.4% tax, for instance, has an earnings limit of $127,200, meaning a dollar earned over that isn’t subject to this tax, making it perhaps the most obvious instance of regressive taxation.
According to the Urban-Brookings Tax Policy Center, the effective payroll tax rate on the middle quintile of American wage earners was 10.1%, versus a rate of only 0.9% on the top 0.1% of Americans. This tax has kept working-class Americans under for decades and ceasing this would drastically revitalize blue-collar America.
The second major reason for why this tax sucks, in blatant terms, is that it punishes employers for hiring. If Republicans were serious or intelligent about cutting taxes to spur job growth, they would eliminate this tax that directly effects employment rather than trying to gut corporate or estate taxes.
Paying $7,650 a year to give an employee a $100,000/year salary is a massive expense for businesses.
As if there was further justification needed for why this is the worst, our economically-illiterate friend, Senator Bernie Sanders, called for doubling the employer side of the Social Security tax and adding an additional 0.4% in payroll taxes; if he says something will improve the economy, I assume the opposite is true.
Sales (broad-based) and fees: I do not include “sin taxes” here, but I will include goods and services taxes (GST) and value-added taxes (VAT) even if they’re slightly different.
Sales taxes are incredibly harmful to the economy by directly discouraging spending, hurting the buying power of consumers and cutting revenues for businesses. Take transportation, for example. The lowest third of income earners spent a whopping 15.7% of their income on transportation, versus 8.2% for the upper third of workers. Say the government steps in with a 20% tax on new cars, bus tickets, gasoline, train tickets, plane tickets, and everything in between for environmental or financial reasons; the poor factory worker will yield 3.17% of his income versus only a 1.64% tax hike for the wealthy. Meanwhile, a $25 parking ticket or a $34 driver’s license fee is even worse.
If we were to compare the poverty rate with the sales tax rate on a state to state basis, the results are fascinating. If we compared the five states with the lowest poverty rate (Alaska, Hawaii, Maryland, New Hampshire and Connecticut, all of which are under 10%) with the seven states with a severe poverty rate (West Virginia, Kentucky, Alabama, Mississippi, Louisiana, Arkansas and New Mexico, all of which are over 17%) there is a huge difference in sales tax burden.
The Tax Foundation compiled data with the sales tax of every state, combining the statewide tax with the average local sales tax. The five states without a poverty problem averaged a 3.69% sales tax rate; meanwhile, citizens of our seven poverty-stricken states suffered under an average 7.65% sales tax burden.
Tariffs: Tariffs, embargoes and protectionism are bad for the economy on many levels. Free trade causes wage hikes, increased investments, job growth and stable inflation. Tariffs, meanwhile, destroy export-heavy businesses when retaliatory tariffs are inevitably placed and consumers lose buying power.
According to one study, the Smoot-Hawley tariff increased the average tariff from 40.1% to 47.1%, causing volume of imports to decline by 40% in the first two years it was imposed. However, the tariff only counts for 22% of that. Thus, quick arithmetic concludes that revenue actually decreased by 10.4%. ((47.1%*.78)/(40.1%*1)). In many cases, tariffs don’t even raise revenue.
Not only that, but the average price of imports rose by 5-6% at a time when inflation (and likely wage growth) was -9.8% in 1932 alone, meaning buying power for imports dropped drastically. There are an infinite number of negative impacts tariffs have, serving as a glorified sales tax but with different effects. While it only has a major effect on a small portion of the economy, it often doesn’t raise revenue.
Income tax: I’m sure many of you were waiting for when this one would be on the list. Americans spent up to $378 billion in accounting costs to file income taxes in 2012, and a single American making $60,000 would’ve paid 18.4% in 2012. Obviously, personal income taxes are extremely detrimental to the economy and cut down buying power of consumers, but it has a minimal effect on employment and is generally progressive so it isn’t higher on the list.
Alternative minimum tax: I’m aware that this is essentially a different variation of income taxes that applies to fairly wealthy people with often non-traditional forms of income, but it’s worth placing here. The standard AMT exemption is abnormally large of $70,300 for singles, which prevents people from using other forms of deduction, with usually only one or two tax brackets, never going higher than 28%.
While it’s as evil as any income-based tax, it’s simple, lower, and brings in a significant amount of revenue (valued at $38 billion in 2017) despite the fact that it’s applied to far less people.
Corporate taxes: While the top rate was 35% until 2017, most corporations didn’t pay that to begin with. Corporations dodge $90 billion in taxes a year by shifting profits to subsidiaries, and 26 profitable Fortune 500 companies (such as Boeing) paid 0% in taxes from 2008-2012.
There are eight different corporate tax rates ranging from 15% to 38%, with the highest bracket being 35%. However, despite the fact that corporate taxes are not territorial like others and that the percent of tax revenue it makes up has fallen from 32% in 1952 to 10% in 2013 (add to that the fact that “S-corporations” pay different rates and that the highest bracket doesn’t have the highest rate) it seems the corporate tax rate is very messy.
Obviously, to a lesser degree than payroll taxes, corporate tax rates can have an impact on employment and wages. It ultimately depends on how the US taxes domestic and foreign-earned revenues.
Corporations are certainly more able to pay than blue collar workers, but it’s pertinent that companies aren’t incentivized to move abroad to a lower corporate tax rate and avoid triggering a minimum overseas earnings tax. It’s evident that a straight cut to this tax won’t stimulate growth and a straight hike wouldn’t deter economic growth as much as other taxes and there are inherent problems with this tax that must be fixed.
Property taxes: Property taxes, alongside income taxes and sales taxes, are often used by state governments, and are in many ways the lesser of three evils – even if people often factor the property tax rate in when considering moving somewhere.
According to the census bureau, property taxes make up 35% of local and state tax revenue, the largest share of all taxes and fees levied. Considering that it has little to no effect on job creation, the highest state property tax in the nation is only 2.38% (New Jersey) and isn’t innately regressive or progressive, property taxes aren’t horrible to the economy in comparison to most other ones on this list.
Capital gains: A few things to point out. First, this tax is both low and progressive, as the highest rate is 28% and people in the bottom two income brackets pay a 0% rate. The bottom 80% only own 8.4% of the stock market, so it really doesn’t apply to most Americans, and while it’s important to have capital investments in any economy, it doesn’t play as much as a role in shaping the workforce.
It’s also worth noting that like many taxes, increasing the rate isn’t good public policy. From 1986-1987, the top maximum rate on long term gains was hiked from 20% to 28%, yet the revenue dropped 36.3% from year to year, so raising it clearly isn’t a viable solution for multiple reasons, but cutting it isn’t the best way to stimulate growth either.
“Sin” taxes: The reason why this is fairly tolerable is that they prevent bad behaviors from becoming mainstream by taxing tobacco, marijuana, prostitution, abortions, alcohol, guns, cigarettes, pollution or whatever product or service is deemed bad for the society as a whole.
The primary worry is that this tax, in excess, could just push it entirely to the black market, but the low elasticity generally produces high revenues. In 2016, Colorado generated $200 million from marijuana sales alone.
Estate tax: There are a number of valid reasons why this is the most tolerable of taxes. First off, I’ll break my promise to make a moral point: the ethical need to maintain your wealth is far greater when you’re alive, than when you’re dead.
Dead people don’t have rights. Thus, from that standpoint, an income tax hike is far worse than an estate tax hike. This isn’t to say people shouldn’t have a say in where their money goes after their heart stops breathing, but their friends and family didn’t earn that money any more than the foot soldier or the retiree that would otherwise receive the government check.
Numbers wise, this only impacts 0.2% of households as the first couple million in assets are untaxed. Second, while it accounts for less than 1% of revenue, it is expected to raise $269 billion over the next decade. Third, compliance costs are very low, equaling 7% or less than half of the compliance cost of administering income taxes.
Conclusion
We cannot fight statist arguments with generalizations, and for true economic growth, eliminating the estate tax and tobacco tax won’t do much to help the middle class, if anything at all.
It’s easy to argue that the estate or income tax is more morally repulsive than a sales tax – as they involve taxing earned wealth or income as it happens even though the government had little to do with it – whereas a sales tax is merely a minor surcharge in reaction to a voluntary action by the consumer. That said, it is nearly impossible to defend the notion that the estate tax has done more to perpetuate poverty and financial struggles for the poor than large sales taxes, and that’s what is important.
Jake Dorsch
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What’s even more repulsive than an estate or income tax, is government borrowing, which is taxing future generations to pay for our current largess.
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