In an op-ed in the Financial Times, former Clinton Treasury secretary Larry Summers claims that Trump’s tax plans favor the rich and will hamper economic growth. Summers, a liberal economist, simply recycles the typical progressive rhetoric that any tax cut — ever — adds to the debt, favors the rich, and will fail to encourage economic growth. He’s wrong, and here’s why.
1. Congress determines tax policy, not the president
Summers’ attempt to demagogue the Trump tax plan and imbue fear into the populace is exaggerated. In fact, if tax reform happens, it’s unlikely to look exactly like the proposal offered by Trump. After all, the president doesn’t determine tax policy — Congress does.
For example, look back at the Bush tax cuts. By comparison, the proposed cuts were smaller and less aggressive than what Trump’s proposing. Yet Bush still wasn’t able to convince Congress to agree to the very tax reform plan he ran on during his campaign.
Instead of lowering the top marginal rate to 33 percent, Congress lowered it to 35 percent, and it never passed the charitable deduction measure. Additionally, the tax cuts included provisions never offered by Bush on the campaign trail, including a reduction in capital gains and dividend taxes.
Summers oversaw Obama’s economic policies that added $9.3 trillion to the debt — more than the combined debts of the previous 43 presidents.
Summers knows that Trump’s tax plan is merely an ideological blueprint for Congress to follow — a mandate to implement a large tax cut. However, the exact provisions and the overall size of the tax cut must accommodate the wishes of Congress, too.
2. Tax cuts strengthen and grow the economy, not weaken it
Summers follows up with yet more typical, liberal talking points:
There’s one big problem with this statement: It reeks of hypocrisy. Summers can complain all he wants about tax cuts, but that doesn’t change the fact that as President Obama’s economic adviser, Summers was responsible for facilitating a massive stimulus program in 2009, which included $211 billion in tax cuts.
Also, since when has a liberal worried about the debt? Summers oversaw Obama’s economic policies that added $9.3 trillion to the debt — more than the combined debts of the previous 43 presidents.
Furthermore, Summers’ narrative contradicts economic studies published by other mainstream liberal economists. For example, Obama’s first chief economic adviser, Dr. Christina Romer, published an academic paper, which found a positive correlation between tax cuts and “very large and persistent positive output effects.”
The prevailing view that people know how to allocate capital in an economy — i.e., handle their own money — better than the government is shared by more than just academics. In fact, the most famous Democrat of the 20th century, John F. Kennedy, was a constant champion of tax reductions to grow the economy.
Economist Larry Kudlow writes in RealClearPolitics.com, “Fifty-four years ago, at The Economic Club of New York, President John F. Kennedy unveiled a dramatic tax cut plan to revive the long-stagnant U.S. economy.” Quoting from Kennedy’s speech, “In short, it is a paradoxical truth that tax rates are too high today and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now.”
As a result, the economy under Kennedy’s tax cuts grew by roughly five percent yearly for nearly eight years. That’s quite the contrast with tax-hike champion, Obama, whose economic growth has averaged 2.1 percent, the fourth lowest since World War II.
3. Upper-income households bear the largest tax burden, not the lower-middle class
Finally, there is the simple intellectual argument about who receives tax cuts. First, tax cut debates are often constructed with the entire tax code in mind. Yet, when Washington talks about tax reform, they are often only focused on one section of the tax code: income taxes.
After all, payroll taxes, which most people pay, provide a dedicated stream of revenue designated for very specific retirement benefits, like Social Security and Medicare. The amount paid in, which is associated with a person’s lifetime salary, is partially correlated to the benefits a person will receive in the future.
But there is little interest in Washington to manipulate the payroll tax. Instead, the debate over tax reform mostly deals with the individual income tax, as well as corporate tax.
Therefore, any tax cut combined with comprehensive tax reform will intrinsically benefit upper-income families. That’s because those individuals — making more than $265,000 per year — pay 88 percent of all federal income taxes. Yet individuals making less than $47,400 don’t pay any federal income tax. In fact, they have a negative tax liability, meaning after accounting for refundable tax credits and deductions, these individuals receive more from the government than they pay in income taxes.
Therefore, Summers knows that any tax cut will simply tax less from the people who make more than $70,000, or in other words, those who pay the bulk of the income taxes (see chart above). After all, it’s hard to cut income taxes for those far below that average income level since they don’t pay much federal income tax to begin with. In fact, this point only re-enforces the need for tax reform — and tax cuts.
In total, the government is expected to raise $3.421 trillion in taxes in 2017. Of that amount, $1.667 trillion comes from the income tax — nearly 50 percent of all revenues. The individual income tax is the main source of revenue for funding the normal operations of government; the rest is dedicated to specific programs (except for corporate taxes, which are relatively small at $284 billion). Yet the burden of funding our democratic government is increasingly being pushed onto fewer and fewer people (see chart below).
The message outlined by Summers is nothing new from a liberal ideologue. Summers’ rhetoric is not only misleading, but it is also antithetical to the more important debate. As he acknowledges in his piece, tax reforms:
[C]ould help offset the dramatic increases in inequality that have taken place over a generation, repair a business tax system that globalization has rendered dysfunctional, reduces uncertainty and promote growth.
But the debate must first start with proposals. Summers may not like Trump’s conservative, pro-limited government tax proposal, but the merits of Trump’s plan should be fairly and equally debated so that beneficial compromise or legitimate changes to the plan can materialize. But the skewed commentary in Summers’ op-ed is designed to stymie the discussion — a political vendetta to accomplish nothing but to deliver a loss to Trump and the American people.
The U.S. can’t wait any longer for tax reform; the evidence of the benefits offered are clear. Instead of scoring political points, Summers should join the conversation as an intellectual and help propel tax reform for all Americans.
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