Guest post by Edward Mendlowitz
Massive tax cuts are being suggested in the name of “reform” with claims the cuts will spur economic growth. In my opinion, nothing that is presently being suggested can work. The proposals can pass, but they will not work only causing future problems to fix what they put into motion today. Following is the way I see it.
Myth 1: “Tax cuts will fuel economic growth because they provide incentives for business spending.” At present and for the past eight or nine years interest rates and fuel costs have been at traditionally low amounts, and wages have remained at almost stagnant levels and that hasn’t been able to spur business spending. Reduced taxes won’t provide a magic bullet that will cause businesses to suddenly increase spending in new plants and equipment.
Myth 2: “Tax cuts will fuel economic growth because they have in the past.” Occasionally this was so, not always! However, the economy has changed. We are no longer living in yesterday’s world. Wealth is now not being created by massive physical structures but by new and clever uses of the Cloud, artificial intelligence, robotics, digitization and virtualization of transactions using a global marketplace and labor pool, none of which require enormous capital spending.
Myth 3: “Tax cuts will fuel economic growth because they are the direct reason for the spending.” Possibly, but in recent years many of the tax cuts were made retroactive. How can a tax benefit for something that was already done provide an incentive for doing it? It can’t and doesn’t; it is impossible, but our politicians continue to tell us tax cuts do that.
Reality 1: Tax reform means to me that the tax code will change in a way that doesn’t increase or decrease aggregate tax revenues, i.e., it would be revenue neutral. If the “reforms” result in overall reduced taxes, it Is not reform but rather a tax cut. If the reforms result in greater tax revenues, it is not reform but a tax increase.
Reality 2: Taxes are necessary to maintain our government, our national security, our way of life and so many other necessary things. We know that, and we pay our taxes voluntarily. Evenhandedness, fairness, and consistency are cornerstones for voluntary compliance. Continued politicization of the tax system will draw people away from voluntary compliance, divide constituencies, cause divisiveness, confusion, and even more dissatisfaction, disillusionment, lack of faith and distrust with our legislators than exists today which seems to be at the nadir in our nation’s history.
Reality 3: The more complicated the laws get, the more difficult voluntary participation will be. The present system stinks, but it is what we have, and it seems to be working. Changes cannot be made in a vacuum. Adding a benefit to one group would require taking away a benefit from another group. The result of taking away a benefit will be dissatisfaction by those that lost the benefit; however, without the lost benefits, we will have reduced government revenues giving us a tax cut rather than a reform. BTW, I am not suggesting tax cuts are bad; I am suggesting that cuts in the cloak of reform or by using invalid assumptions are not truthful.
Reality 4: The major tax issues that are being bandied about are one-sided reductions. If our legislators want to cut taxes let them say so and call it a tax cut, but what they are doing is not reform. Some “reforms” are reduced corporate tax rates, elimination of the net investment income tax, raising the exemptions to reduce coverage for those eligible for the alternative minimum tax, and increased depreciation deductions allowing a shorter cost recovery period for fixed asset acquisitions.
Each of these, in and of themselves are desirable. However, I haven’t heard too many revenue enhancing changes, i.e., tax increases, except for the “windfall” that say that would result from large corporations repatriating foreign cash, which I contend will not occur. I am all for tax cuts, but they need to be responsible and consider the overall picture and not be done in a way that will cause insurmountable problems someday in the future…it will be kicking the can forward to be confronted at a later time by equally predisposed politicians inclined to avoid a confrontation with the overall issue.
Edward Mendlowitz testified twice before the House Ways and Means Committee – in 1980 and 1985. His 1980 proposals were adopted by then candidate Ronald Reagan and again when he became president as one of his arguments for the massive 1981 tax cuts that were enacted. Alas, none of his 1985 proposals were adopted, but his predictions of greater tax law obfuscation became reality after the 1986 tax law was enacted.