Archive for the ‘#taxreform2017’ Tag

Taking the Long View   Leave a comment

So, I ran into my extremely liberal former coworker in the grocery store last night. She was all in a tizzy about corporate tax reform and how it was going to “harm” her financially. Wasn’t I worried about how much more I would pay? When I said my sister-in-law (a CPA with tax experience) had checked my math and assured me we would be saving money not losing it, Michelle asked if my husband’s business had finally taken off. No, Brad is still keeping it small and enjoying being able to take time off to go fishing and hiking when he wants. We’re not rich and current tax reform should save us at least $800 and maybe as much as $2000. And, no, Brad’s business is a sole-proprietorship, not a corporation.

Image result for image of tax cuts helping the economyMichelle is a social worker, not an economist, but that’s really no excuse for ignoring the inconvenient fact that voluntary economic arrangements benefit all participants … else individuals could refuse to participate. In the absence of fraud (government’s failure to protect citizens from criminals) or coercion (government’s invasion on citizens’ rights), self-interest will guarantee a benefit to all parties, regardless of what Congressional Democrats may say at the moment.

The progressive strategy going forward will be to ignore many clear mechanisms by which the rest of us gain from improved incentives for capitalists to use their resources for others.

Corporate tax reform improves after-tax rewards for capital investments, providing tools for increased worker productivity and earnings. It further stimulates innovation, advancing techniques and improving technology, risk-taking, and entrepreneurship. This doesn’t just help company owners, but benefits workers and consumers.

Of course, there is a commonsense caveat here. It takes time for owners of capital to fully respond to improved incentives, meaning the positive effects on workers’ circumstances will appear only with time. The whole strategy of tax-reform opponents will be to focus people’s attention on the short run, before the positive labor effects appear in the data. The hope is that voters will overlook these benefits, which may not be fully realized, in fall of 2018 when they go to the polls to elect Representatives and Senators.

It might be a useful strategy because the benefits to capitalists appear immediately in the data. By comparing the limited benefits to workers in the present to both the present and future benefits to capitalists, opponents of corporate tax rate reductions can cast tax reforms as essentially just “tax cuts for the rich,” even if the vast majority of benefits actually accrue to workers over time.

This is how it works. When the tax burden on a class of assets, say corporate stock, is reduced, it will lead to an immediate increase in those assets’ prices. The asset price increase will not only reflect current gains to their owners, but also capitalize the expected increased after-tax profits that can be expected in the foreseeable future. The more durable the improvements are likely to be, due to future effects, the greater the asset price surge will be.

Additionally, most financial resources are owned by people who have greater wealth and income. Often these are older middle-class households who have had more time to convert unmeasured earning capacity into measured financial wealth, but that still leaves their middle-aged offspring not quite certain they’re seeing a benefit in the first year of tax reform. So, by focusing only on the short run (fall 2018), the results can be made to appear as huge asset gains for “the rich,” with almost no effect on American workers’ financial well-being. That lag lets tax-reform opponents assert that their claim has been “proven”. Of course, the main benefit of these short-term results accrues to older households that have had more time to convert unmeasured earning capacity into measured financial wealth.

Unfortunately for opponents’ supposed “proof”, the improved incentives of higher after-tax returns are the mechanism which produces increased worker productivity and real earnings over time. Those cumulative effects are very large, even when their immediate effect is small. But unlike financial market assets, there is no marketplace in which the higher real earnings of workers in the future (economists call that “human capital”) get capitalized into an easily-observed wage and/or benefit increase.

January’s investor- and owner- class begin to benefit workers later in the year or in January of 2019, but by emphasizing the short-run, the opponents basically just ignore that economic fact.

Michelle insisted that they should have implemented the tax reform starting in 2019 to allow people to adjust. I was stunned at first that anyone would want to delay getting to keep more of their money, but then I remembered, there’s an election in November 2018. She was probably just parroting some talking points she’d heard and taken as gospel. By implementing tax reform staring in January, the GOP gives some hope for businesses to see the benefits of tax relief immediately and to begin to pass those benefits onto their workers and consumers by late summer. As proponents of “taxing the rich” see their prospects for a political win evaporate, they will focus attention on the short-run. “Your wages haven’t gone up spectacularly yet, have they?” Banging that drum throughout the year will make excellent electoral ammunition … unless workers see an increase in their paychecks in late summer.

By the way, we’ve been here before with the Reagan tax reform. There are still people (Michelle is one of them) who will insist that the Reagan reforms had no positive effect for ordinary people. It was just “a tax cut for the wealthy.” Unless you were a worker who say a benefit before the next election, you probably thought your own experience was “proof” that Reagan’s tax reform didn’t work. A short term focus is a massive misrepresentation which diverts attention from the fact that improved incentives reveal themselves in the economy and for workers and consumers over time. If we take a longer-term view of economics, we aren’t fooled by the sleight-of-hand, but most progressive have difficulty with the concept that it can take six to 18 months for a tax cut to be reflected in the growth of real wages. I think that’s the effect generated by a bailout mentality.

Now, here’s the thing – ultimately, tax reform is only part of the picture for a healthy economy. The US economy is burdened by many things in addition to a high corporate tax rate. Unacceptably high levels of debt, private and governmental, also drag on the economy. The evisceration of the manufacturing sector doesn’t help. President Trump is making great progress on the rollback of regulations that was encouraging manufacturers to move overseas and a better tax rate might also help to protect and improve manufacturing in the US, but tax reform alone is not a magic pill. It’s just part of a compound strategy that is essential if any other parts of the strategy are going to work. At some point, government is going to have to cut spending in order to eliminate deficits and address the debt, but that only works if the economy is growing.

Unfortunately, politicians tend to see things in 2-6-year cycles, so don’t often take a long-view approach to the economy. Which begs the question –

Why do we think they should be in charge of the economy?

Posted December 21, 2017 by aurorawatcherak in economics

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