Category Archives: Income tax

Rich Getting Richer Via Tax Policies

“I’ve been rich and I’ve been poor. Believe me, rich is better.” This famous quote has always been true, but never as true as today. After decades of dominance by the right, here’s the 2019 version:

“I’ve been rich and I’ve been poor. Believe me, rich is insanely better.”

The insanity stems from tax policies. Marginal income tax rates plunged starting in the 1980s, hitting their modern-day lows under President George W. Bush. After rising modestly during the Obama Administration, they fell again under President Trump.

Rate cuts generate only part of the current bonanza. Tax breaks passed by various Congresses account for the rest, hugely increasing the billions that flow to the haves.

So, insanely, taxes really are making the rich richer. With inequality soaring, they’re widening the income gap instead of making it smaller.

All taxpayers get at least modest breaks, but the big money goes to those who need it the least: income is redistributed upward, with disproportionate shares going to the top percentiles.

The most blatant example literally “wills” capital gains (and capital gains taxes) away. With the stroke of a pen, when assets such as real estate and equities are passed along to heirs, all unrealized capital gains are wiped out. The assets are revalued and given a new basis price, their worth at the time of transfer.

It’s called a step-up in basis, and it can happen again and again. As a result, wealth can pass untaxed from one generation to the next.  (Retirement accounts get no such break, but non-retirement holdings do — and guess who has those.)

In another fiscal favor to the rich, income from wealth is taxed at a lower marginal rate than income from work. The federal rate on long-term capital gains and dividends is 20 percent, well under the 37 percent top rate on income from wages and salaries. The highest earners do pay an Obama-era surcharge of 3.8 percent on investment income; even so, they still save more than a third compared to the tax on income from labor.

This break in particular acts as rocket fuel for income inequality. With income from capital becoming an ever-greater share of total income, a lower rate drives up the fortunes of wealthy Americans and leaves middle America farther and farther behind.

Tax expert David Cay Johnston ran the Internal Revenue Service numbers.  From 1961 through 2013 (the latest year for which data is available), the 400 richest Americans saw their federal income taxes drop from 42.4 cents on the dollar to 22.9 cents. For 2013, adjusted for inflation, that gave the top 400 an average $195.4 million in extra after-tax income. The vast majority of Americans took home more dollars too: an average of $6,812.

It’s the ratio, Johnston wrote, “that may take your breath away.” After more than 50 years of deliberate tax policy choices, here it is:

For each dollar of increased after-tax income enjoyed by the vast majority in 2013, the top 400 enjoyed $28,684 more. That’s $28,684 to $1.

The ratio can always go higher and probably already has; it came before the Trump tax cut, which delivered its own special breaks to the rich.

One of those more than doubled the estate tax exemption, raising it from $5.5 million to $11.4 million for an unmarried person. A couple can shield twice that amount, or $22.8 million.

It was a major anti-estate tax victory, but only the latest in a streak going back to 2001: the exemption back then topped out at $675,000, or $1.35 million for a couple. Legislation passed in that year gradually raised the totals to $3.5 million/$7 million by 2009. Congress later upped those exemptions as well, and the 2017 law has raised them to new highs.

According to “death tax” propaganda, estate taxes amount to double taxation of a lifetime’s hard-earned income. According to the facts, “unrealized capital gains account for almost half of the fair market value of estates.” Under the stepped-up basis (see paragraphs 7 and 8), those gains will never be taxed, period.

Let’s end with an exclamation point. From 2014-2023, two tax breaks alone will put the haves up by an estimated $1.984 trillion. Just from lower taxes on capital gains and the stepped-up basis, those who need nothing will be up by nearly $2 trillion.

That $2 trillion should be going to the common good, not to the well-off. Congress can make it happen by ending tax breaks that do little more than make the rich richer.

• This piece first appeared at www.nydailynews.com

Whom Did Tax Reform Benefit?

Characterizations of the Tax Cuts and Jobs Act have followed agendas – its opponents maintaining it is a bill for the wealthy, and its supporters arguing that the bill fairly satisfies all economic levels.

A previous article, Failure of Trump Tax Cuts, analyzed the effects of the Tax cuts on the economy and showed that tax cuts do not pay for themselves; they do not generate additional revenue that compensate for the loss of government receipts. This article analyzes tax cut effects on individual wage earners. Four scenarios, representative of the tax paying public in years 2017 and 2018, are presented.

  • Single tax payer using standard deduction;
  • Single tax payer using itemized deduction of $16,000;
  • Married taxpayer, two children, filing separately and using standard deduction; and,
  • Married taxpayer, two children, filing separately, and using itemized deduction of $16,000.

Effects on wage earners are not the sole means for evaluating the worth of tax bills; other factors will be considered.

The results for single taxpayers, using the standard deduction, are shown on the left in the following table.

In 2017, this type of taxpayer added a deduction from a $4050 exemption to the standard deduction of $6000. In 2018, the standard deduction was raised to $12,000, but no exemptions were allowed.

The single taxpayer in 2018, using the standard deduction, had a $1950 advantage in taxable income compared to the single 2017 taxpayer. Because the tax rates were also lowered in 2018, a single taxpayer of equivalent gross income gained another advantage and paid less tax than in 2017.

Which earning group did the reduced taxes most benefit?

By absolute figures, the higher the earnings, the greater is the benefit. However, a more accepted manner for examining the figures is by proportion. By these criteria, the lower waged earners received the greatest benefit — 21% for low wage earner, 18% for high wage earner, and 9.3% for ultra-high wage earners.

The results for single taxpayers, using itemized deduction of $16,000 deduction, are shown on the right of the table.

In this case, the 2017 wage earner had an advantage. In addition to the $16,000 itemized deduction, the 2017 wage earner received a single exemption of $4050 applied to the deductions. The lower tax rates in 2018 offset this advantage, but insufficiently; none of the single taxpayers received much benefit, and the lowest wage earners actually paid slightly more taxes.

The results for the married taxpayer, using standard deduction, are shown on the left in the next table.

In 2017, this type of taxpayer was able, from four $4050 exemptions, to add a deduction of $16,200 to the standard deduction of $6000. In 2018, no exemptions were allowed, even for married families. Offsetting this disadvantage were the child and spouse credits. In 2017, each dependent child, created a $1000 tax credit, directly off the bottom line of the tax statement. In 2018, each dependent child created a $2000 tax credit and a $500 tax credit was allowed for the spouse. In 2018, the child tax credits are refundable (not the spouse credit), which means a negative tax, up to $1400, is refundable.

The higher tax credits in 2018 enabled all of these types of married taxpayers ($4500 tax credits) to reduce their taxes in 2018. Note that the difference in taxes between the 2018 single taxpayer using the standard deduction and the married taxpayer using the standard deduction is exactly $45000. In this scenario, the absolute tax gain was almost equal between all wage earners, except the ultra-high wage earners. Proportionately, the lower wage earners received the most benefits.

The results for married taxpayers, using an itemized deduction of $16,000, are shown on the right of the table. In this case, by itemizing deductions, just as for the single taxpayers, the 2018 married taxpayers lost the $6000 advantage they had compared to the 2017 taxpayers. The combination of loss of this advantage, together with the difference in tax credits and tax tables for the two tax years, made erratic differences between taxpayers from the two years. Generally, the absolute advantage for the 2018 taxpayer was small, even going negative for middle-income wage earners.

For this scenario, only the ultra-high wage earners managed to maintain a distinct advantage in the 2018 tax year. The low wage earners had a decent advantage, but the $1400 limitation in the tax credits limited the advantage.

Other Considerations

The analysis uncovers the inutility of the standard tax deduction, which only moves the income down the tax schedule. As an example, a single wage earner of $40,000 in 2018 who uses the $12,000 standard deduction pays the same tax as a wage earner of $38,000 in the same tax schedule that has no standard deduction. For those who itemize deductions, subtracting $12,000 from their deduction steers taxpayers to itemize deductions only when they have more than $12,000 in deductions. Similar reasoning applies to the exemption; it also only shifts the tax table by the exemption, which every single taxpayer has, by the exemption amount. Having a standard deduction and an exemption make it seem that the Internal Revenue Department is being considerate of taxpayers, but all these considerations do is raise the level at which it is beneficial to itemize deductions. Is it not simpler and preferable to have neither a standard deduction nor exemptions and modify the tax table to more equitably distribute taxes?

Married taxpayers with children, who also have no exemptions in 2018, have a $500 tax credit for the spouse and a $2000 tax credit for each child. Regardless of the taxable income, all taxpayers receive the same credit. Is this fair or logical? Should the lower income groups, in which the care of a dependent child is a greater percentage of available income and, therefore, a greater financial burden, receive more benefit? Tax credits are a correct approach, but shouldn’t they be inversely proportional to the income? As an example, a wage earner with dependent children, could receive a tax credit by the formula

N X K/I = TC

where N= number of dependents, K = Tax Credit for one dependent, I = income, and TC = Total tax credits.

As an example, if N=2, K= 80 (expressed in 000), and I = 40 (expressed in 000), then
TC = 4 or $4000.
If I = $100,000, then TC = $1600.

Although the Tax Cuts and Jobs Act managed to save all 2018 wage earners something in their taxes, the savings beg another question, “Were the benefits sufficient to warrant the Tax act?” Entering into the discussion is that the reduced taxes increased the federal deficit. Regarding the entire situation from a total perspective, we have the increased deficit essentially financing the tax cuts. Wage earners received a temporary loan from the government, which should be repaid one day by increased taxes. Should be, but not definitely – the deficit monotonically increases with no regard of ever reducing it.

The tax cuts could have been used to re-distribute the wealth – heavy tax cuts for low wage earners and no tax cuts for ultra-high wage earners. Why give those earning $200,000 another $5000 and low wage earners only another $1500? Shouldn’t it be the other way? Better yet, why not make tax cuts, budget neutral, and have low wage earners receive sizeable tax cuts and ultra-high wage earners pay more taxes to compensate for the revenue lost to the government planners..

Going further, why has the administration bothered to spend huge dollars for preparing, legislating, and managing new income tax policies that gave $6000 to people who already had after tax income of $160,000, and served to increase the federal deficit and support their largesse? Why did it not keep the same tax legislation and use the costs incurred for the new tax legislation together with the monetary benefits that occurred with the new legislation and use the total revenue to assist the least advantaged citizens of the American economy?

Conclusions

(1) The Tax Cuts and Jobs Act mainly favored those using the standard deduction.

(2) From a proportional saving perspective, lower wage earners gained mostly from the Act

(3) The fact that the Act was not budget neutral, and increased the deficit, its effectiveness is definitely judgmental.

(4) A more meaningful and fair Tax Cuts and Jobs Act gives more decisive benefits to all low wage earners and serves to redistribute the wealth.

(5) Reappraisal of the income tax should have included a reappraisal of the worth of the standard deduction.

(6) The tax credits gave equal weight to all income levels, which does not seem fair or logical.

(7) The most debatable feature of the Tax Cuts and Jobs Act is that it assumes that the function of income taxes is to regulate consumer purchasing power rather than provide adequate revenue for government programs.

Americans for Tax Reform and Grover Norquist take note: There is no evidence that income tax cuts pay for themselves or stimulate the economy. Until poverty is eliminated, tax cuts are meaningless if they only give more funds to those who already have adequate means to live.

Failure of Trump Tax Cuts

For President Donald J. Trump, there is only one goal in life – making money. Lowering taxes gives corporations and individuals more money; therefore, lower taxes must be beneficial. The constant self-serving references to his management of the economy are meaningless – examining President Trump’s essential thrusts for invigorating an already invigorated economy reveals contradictions in his Taxation Policies.

Reducing Income Taxes

President Trump signed the “Tax Cuts and Jobs Act” into law on December 22, 2017. His belief that reducing income tax rates automatically advances the economy is a shibboleth; a simple analysis exposes the fallacy.

Some economists find subjective reasons for why lower income tax rates benefit the economy. Objectively, income tax rates only determine the transfer of money between government and taxpayers. Neither direction, up or down, adds or subtracts money to the economic system nor allows more or less available spending to the economy; purchasing power stays the same, which means the total purchases of goods and services remain the same. One exception – unlike the consumer who cannot accumulate vast funds for sizable investments, the government can temporarily postpone consumer spending, aggregate billions of dollars, and channel these funds into huge projects that add to the Gross Domestic Product (GDP).

As one example, the government uses an accumulation of taxes to initiate construction projects. The suppliers to the projects hire workers, and the total wages paid the workers almost matches the taxes raised for the effort. Spending by the new wage earners ripples through the economy, and, in its final appearance, almost matches the reduced consumer spending of the taxed individuals. Consumer spending stays about the same, but money circulates through other channels. Employment, production (new constructions), and GDP increase — give one advantage to tax increases.

Individual workers and taxpayers benefit from tax cuts; however, stimulating the entire economy by income tax breaks is a psychological phenomenon. The exaggerations, promises, and optimism generated by tax breaks fashion a more optimistic public that incorrectly assumes they stimulate additional spending to already combined consumer and government spending. Creeping into the debate are other false assumptions — those who have excess funds will purchase domestic goods, invest, and stimulate growth. Not considered is that individuals might purchase imports, invest in speculative ventures that only churn money, and decrease available purchasing power in the domestic economy. The latter seems to have been one result from the tax cuts.

New York Times, March 6, 2018, “In Blow to Trump, America’s Trade Deficit in Goods Hits Record $891 Billion”.

Money from the tax cuts helped Americans buy more imported goods than ever in 2018. In addition, to finance the tax cuts, the government needed to borrow more dollars, some of which came from foreign investors.

If those who protest vociferously against the ever increasing government debt and its burden to future generations want to ameliorate their children’s problems, why don’t they pay their fair share of taxes now, which will lower the government debt and prevent higher taxes for their descendants in the future?

Overhauling Corporate Taxes

Granted that overhauling an antiquated corporate tax structure could be advantageous to the economy. However, is it necessary for an economy that, despite supposed elevated corporate taxes, achieved great success, which included low unemployment and high corporate profits? Why fix something that was not broken and had no indication of being disrupted? If lowering corporation tax rates promoted more exports and investment, then its value is apparent. Has that happened? Analysis, statistics, and several charts answer the question.

Corporations already paid less than 21% in taxes.

In 2012, among large corporations that met that $10 million in assets threshold, 42.3% paid no federal income taxes after tax credits. Among profitable large companies, 19.5% paid no federal income taxes. The average effective tax rate among the profitable large corporations was 16.1%, under federal tax treatment. Compared to the pretax net income these corporations showed in their annual reports the rate was 14%.

One prominent feature of the “Tax Cuts and Jobs Act,” which should be factored into the assessment of the overhaul of the corporate tax structure, is the change from a global to a territorial tax system. Instead of corporations paying the difference between the U.S. tax rate and taxes already paid to the country where income was earned, each subsidiary now pays only taxes to the country in which it earns the income. Under new tax code Section 965, U.S. multinationals are required to pay a one-time “transition tax” on income accumulated overseas since 1986. The law treats the income as repatriated and imposes a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on illiquid assets, such as factories and equipment.

The amount of offshore cash corporations are bringing back to the U.S. dropped sharply for a second straight quarter, falling short of the trillions of dollars President Donald Trump had promised would result from his tax overhaul.

Companies repatriated $92.7 billion in the July-September period, the lowest amount this year and down almost 50 percent from the previous quarter, according to data released Wednesday by the Commerce Department. U.S. corporations repatriated $294.9 billion in the first three months of 2018 and $183.7 billion in the second quarter.

This provision of the “Tax Act” may be the only tax reform that stimulated the economy.

Assessing benefits of the “Tax Cuts and Jobs Act” examines its effects on:

Corporate Profits

Observe corporation after tax profits (lower figure) during the last several years — companies had high profits, and sufficient funds for investment must have been available.

Compare after tax to before tax profits (upper figure with slightly different scale) and note the low tax rate on the profit. As examples,

Profits in 2014 reached $2320 billion and after tax profits were $1920 billion.

Tax Rate = $400b/$2320b = 17.2 percent.

Profits in 2015 were $2000 billion and after tax profits were $1640 billion.

Tax Rate = $360b/$2000b = 18.0 percent.

Profits at end of 2018 (after Tax Act) were $2220 billion and after tax profits were $1980 billion.

Tax Rate = $250b/$2230b = 10.8 percent.

Calculations verify that Tax Rates for most corporations were much below the previous 35% rate and, presently, are only about 6-7 percent below that of the previous average rate.

Another supposition is that, with increased after tax profits, corporations can improve competition from foreign sources by trading the profits for lower prices. How much can prices be lowered? Calculations, shown in the following table, demonstrate what products will cost for two different profit margins with reduction of the corporate tax from 35 percent to 20 percent, and if the corporation forfeited all of the profit increase by reducing its prices.

Price That Maintains After Tax Profit

Is the cutting of prices by 2.0% – 4.0% sufficient to make products more competitive? Unlikely! Advantage from the more realistic 6 percent tax cut makes it more unlikely.

How additional profits were used


Stock buybacks, increased dividends, and net domestic investment provide the answers.

Stock buybacks increased by $330 billion; dividends increased slightly.

Net Domestic Investment increased by $200 billion.

As shown before, the repatriated profits, less the 15.5% tax rate, amounted to about $424 billion in year 2108. The sum of additional usage of profits amounted to $530 billion in year 2018. Obviously, the repatriated profits played the major role in additional usage of profits, and tax cuts had little effect on profit usage.

Using repatriated profits to enrich stockholders might have merits – stockholders deserve benefits from their corporations and this benefit has an added significance. Unlike normal stock market trades, where money is exchanged and no new money enters the system, these stock buybacks took external funds and injected them into the domestic system, which increased the available money supply and purchasing power.

Trade Balance

It is difficult to assign a relation between tax cuts and Trade in Goods and Services. President Trump’s tariff policies add confusion to determining the causes for the trade deficit and how it was affected by tax cuts. Clearly, despite President Trump’s stress on improving it, the tax cuts did not reverse the trend, and the trade deficit increased by a large margin ($69b) in year 2018.

Foreign Competition

Exports, which had already been increasing, additionally increased, and imports, especially of goods, increased much more. Bottom line is that the corporate tax cuts cannot be shown to have improved competition with foreign sources.

Gross Domestic Product (GDP)

The GDP grew at a more rapid rate during year 2018, up about $1160b compared to growth of $852b in year 2017, or an additional $300b in the rate of growth. The kicker is that Federal Government Spending (shown above), which added $110B to the GDP, coupled with the $200b increase in net domestic investment (cited previously) accounted for that added growth. The additional trade deficit of $69b (cited previously) subtracted from the GDP growth, but can be accounted for by a partial spending stimulus from the $330b stock buybacks due to the profit repatriation (cited previously). Sufficient evidence exists that other mechanisms than the tax cuts were responsible for the added growth to the GDP.

Government Deficit

According to Department of the Treasury reports, corporate tax receipts fell by 28 percent – from $223 billion in 2017 to $162 billion during the first nine months of fiscal year 2018. For that reason, as the following chart shows, the Federal Government deficit, which has increased in all of years of Trump’s presidency, increased by $114 billion. If $75b taxes had not been collected on the $500b of repatriated profits, the deficit would have increased by $189b. Because the defict increased, it can be argued that the deficit increase, caused by the tax cuts, stimulated the economy.

Conclusions

Evidently, corporations flush with repatriated profits, used these retained earnings for about $330 billion in stock buybacks and about $200 billion for additional investment. The repatriated profits also increased the money supply and GDP.

This indicates the tax cut are responsible for (1) increased after tax profits for already highly profitable corporations, (2) increased trade deficit, (3) about $80 billion loss (annualized) in government revenue, and (4) increased federal deficit to $114b. One more result – lowering of competition — corporations with large profits can use the funds to buy out and provide stiffer competition to corporations that have miniscule profits or losses.

President Trump’s corporate and income tax cuts enriched corporations, satisfied those already employed and flush with money, and did little to stimulate the national economy.

Note: Deciphering a multitude of economic statistics and using them to evaluate the effectiveness of tax cuts is a complicated task. It is believed that the statistics have been correctly applied and the results are credible. If not, rebuttals to lapses in argument and incorrect formulations, as well as advice to obtaining more precise numbers, are welcome