Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Trade Deficits vs.Income Tax Reform to Stimulate Economic Growth
The principal cause of the anemic growth of the U.S. economy in recent decades has been the chronic trade deficits with the rest of the world which have cost millions of U.S. manufacturing jobs and converted the U.S. from the world’s leading creditor to the world’s leading debtor. Multi-country trade agreements encourage American corporations to invest in countries with low corporate income tax rates and to export the goods they produce to the U.S. duty-free. The government’s first task is to bring our trade into better balance. Tax reform will not do it. As the U.S. Gross Domestic Product statistics show, the US international trade deficits averaged about 3 percent per year in recent decades. If trade had been in balance, the growth of the GDP would have been nearly five percent on the average instead of one to two percent.
What causes international trade deficits are the relative costs of producing goods and services in different countries, the foreign exchange rates, and the existence of barriers to trade imposed by our trading partners. Wilbur Ross, the Secretary of Commerce, in an opinion piece in the Wall Street Journal 8/1/2017 states that the U.S. imposes fewer barriers on imports than the European Union and China with which we have huge trade deficits. Other countries with which we are experiencing large chronic trade deficits are Japan, Korea, and Mexico. Together with China and the EU, these countries accounted for 88.9 percent of our trade deficit in 2016. Single-Country-Variable-Tariffs are all that we need to balance trade. There is a simple solution to the trade deficits,namely, single-country-variable-tariffs which we believe to be authorized by the world trade agreements.
Income taxes do not affect the costs of producing goods and thus do not affect the volume of exports and imports. Profits, the principal component of corporate income, is what is left after subtracting expenses from revenues. Profits are the result of trade, not the cause of trade. The high rate of corporate income tax is considered by many conservatives to be a barrier to trade. It isn’t. But it is an incentive to locate factories in low corporate income tax countries to avoid the high U.S. corporate tax rate.
The corporate income is a bad tax. It should be repealed and corporate earnings taxed as personal income of the shareholders. The corporate income tax burden the low and middle income shareholders and their pension plans because the same tax rate applies to them that applies to billionaire shareholders. The corporate income tax induces uneconomic business practices such as debt-financing instead of equity financing and buying back shares instead of paying dividends. Moreover, economists believe that corporations with monopolistic power shift the burden of the corporate income tax to consumers and themselves bear little of the tax burden. By contrast, little shifting can occur in highly competitive industries like agriculture and retailing. The primary tax reform would be to abandon the corporate income tax and tax corporate earnings as personal income, just as we do with partnership earnings. After all shareholders are partners who enjoy no liability for the debts of the corporation, a distinction important when the corporate income tax was adopted. Today, partnerships (and even proprietorships) can register as limited liability companies under the laws of most states. Thus the reason for the existence of corporations as separate tax entities no longer exists.
Tax reform will have no effect on the trade deficits because income taxes do not affect the costs of producing goods and services. They do not affect exchange rates, and do not eliminate the formal and informal barriers of trade imposed by our trading partners. But tax reform is needed because the present tax system has a number of inequities. The current proposals for reform call for reducing rates, eliminating the AMT (the alternative minimum tax), imposing a limit on charitable deductions, increasing deductions for dependents, and eliminating the Estate Tax. We agree with most of the proposed reforms except reducing the corporate income tax and eliminating the Estate Tax. The corporate income tax should be abolished and the earnings of corporations taxed as personal income. Such treatment would result in no revenue loss whereas the proposed cutting of personal and corporate income tax rates would cause a huge loss of revenue and increase the budget deficits. And the Estate Tax should be strengthened, not eliminated.
It is thought that to be a conservative one must oppose progressive rates of income tax and oppose estate taxation. This is not true. The very word conservative means to preserve what is established, what has proven of value, and to limit the growth of government powers. The personal income tax has been progressive throughout its century of existence. The rates have changed rising in war time to a top rate of 92 percent but with top rates varying from a low of 28% in 1989 to 39.6% in 1996. Pres. GW Bush reduced the rate to 35% in 2003 but Pres. Obama returned it to 39.6% in 2013. The progressive income is the only means of preventing excessive inequality of income created in a free market. And the estate tax is the only means of preventing the excessive inequality of wealth over generations. The estate tax falls only on estates totaling $5.45 million or more and the maximum rate is 40%. The very existence of the tax provides an incentive to the extremely wealthy to arrange for the continuation of their businesses and dispose of much of their wealth during their lives. Condemnation of the estate tax because it supposedly causes the break-up of family businesses turns out to be largely hokum and misplaced sentimentality. For the Republican party to oppose progressive rates of income tax and the estate tax is not conservative; it is reactionary, and would doom the free enterprise economy and our democracy which is dependent on the free enterprise economy.
Administration after administration has hidden in the personal income tax code tax expenditures benefiting crony capitalists, tax credits buried in the income tax code to conceal how much they cost the taxpayer. Besides taxing corporate earnings as personal income, the most needed tax reform is the elimination from the code of such tax credits. Government subsidies to particular individuals should be shown in the annual budget for transparency. The proposed reforms overlook reforms that economists have long recommended, such as changes in the provisions for depreciation allowances and the tax treatment of capital gains. Eliminating the estate tax is a non-reform since the estate tax is important in reducing the huge inequality of wealth over generations. It is one thing to reward the inventors of products and good ideas with huge wealth to which we have no objection. This is an important incentive to invent and innovate. It is quite another to perpetuate those difference in wealth beyond the life of the productive individuals who earned it. Reasonably progressive income taxation and estate taxation are sound means of reducing income and wealth inequalities inherent in a market characterized by invention and innovation. For example, the four wealthiest Americans include the founders of Amazon, Microsoft, Apple, and Oracle. Economists provide an additional reason for progressive rates, namely that very high annual personal incomes are often the result of monopoly power, what economists call economic rents. Some Republicans believe that to be conservative means to oppose all forms of progressive taxation. They favor the flat tax and sales taxes like the value-added tax. That’s not conservatism but being a reactionary.
The internal revenue code encompassed about 500 pages in 1930 and now covers 2652 pages, not and the . Some estimate that the code and its regulations covers 74,000 pages! As the Tax Foundation points out, "Over the decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy electric and hybrid vehicles, turn corn into gasoline, purchase health insurance, buy a home, replace that home's windows, adopt children, put them in daycare, purchase school supplies, go to college, invest in historic buildings, spend more on research, and the list goes on." Another important reform that we recommend is to eliminate all the enumerated tax expenditures from the Internal Revenue Code. Congress would then be forced to include such tax expenditures in the federal budget where their cost would be transparent. Subsidies do not belong in the tax code but in the budget where taxpayers can see how much the subsidies are costing and who receives them. Aside from entitlements in the nature of welfare, the principal beneficiaries are millionaires and at least one, Elon Lusk, a South African-born Canadian billionaire, earned most of his millions as a result of U.S. subsidies buried in the tax code.
Allowing the deduction of health insurance premiums for persons not included in an employer-paid health insurance program is justified on equity grounds. The expenditures currently are deducted as a business expense by the employer but are not counted as employees’ income. It is the largest tax expenditure amounting to about $235 billion. So those who are self-employed or whose employers do not provide free health insurance are severely disadvantaged. Employees could be required to include the value of their employer-financed health insurance in their personal income subject to tax but Congress is unlikely to eliminate an entitlement received by millions of voters. In the interest of fairness, those paying for their own health insurance should receive the same entitlement.
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