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The Taxing Debate Over Tax Cuts

The debate over corporate and individual tax cuts in the United States unfolded in a predictably narrow-minded way.

For much of the last half century, since the combination of Vietnam and Lyndon Johnson’s “Great Society” spending began piling up fiscal deficits, the debate over any fiscal proposal is invariably characterized as a war between higher taxation for Big Government spending and tax cuts for the Private sector and capitalist elites who espouse the kind of ‘trickle-down economics’ that helped create today’s cavernous income inequality gap. In one sense, this debate goes right back to Plato’s cave, the ‘many’ and the ‘few.’ Advocates for both sides rarely find value in anything the other has to say.

By Indranil Ghosh

The ‘debate’ entirely missed seismic shifts in the structure and fairness of the US economy over the last 30-40 years. Today, the top 20% earns over 50% of the nation’s income and controls over 85% of the wealth. Tax policy, which in its optimal form would have prevented this inversion of society’s prosperity, instead has helped to widen the gap.

For example, the highest bracket of personal income tax has gone from 70% under Carter to 39.5% under Obama. In the same period, long-term capital gains tax has been ratcheted down (with helping hand from both parties) from 35% to 15%.

This has been a windfall for the rich both in income, but mainly in capital gains, from which they derive the bulk of their income. Surely, the reversal of these trends in tax policy must be put on the tax agenda given the wide chasm that has developed between the rich and the poor.

Exacerbating the damage that trickle-down has done is the fact that people are living longer lives just as the number of stable middle-class jobs is waning. These jobs – the salaried sales and middle management positions, as well as the factory foremen and managers that were stalwarts of the 20th Century American Dream, have declined, as has the real wage.

Offshoring and technology, and a failure to use tax policy to incentivize employment in the US, has again made things worse. This is only the beginning: increasing automation driven by the diffusion of technologies such as AI and robotics will ratchet up the pressure on the vulnerable middle.

It is more vital than ever that tax policy – and policy overall – shifts to creating high-quality, high-wage jobs and upskilling workers to fill them. Without this, we are generating a bigger welfare burden today and an unmanageable liability in the future. And yet this is not addressed in the duelling House and Senate tax bills.

Indeed, rather than helping, the current corporate tax structure stacks the deck against workers. Firms are incentivized to install IT and robots (tax-deductible capital investments) and cut jobs (which incurs payroll taxes).

Furthermore, US multinationals are given a pass on paying tax on overseas profits until those profits are repatriated. Clearly this encourages profits to be kept in lower-tax countries where they used for productive investment and job creation, rather than being ploughed back into the US. Investing is technology is not the only way for companies to increase productivity and remain competitive.

Tax policy that invests in people by doubling-down on education and incentivizing lifelong learning can also boost productivity while creating higher-wage jobs. Combined with greater investment to upgrade America’s failing infrastructure, we would have a recipe to promote quality jobs and national competitiveness.

Another tragic failing of this one-in-a-generation overhaul of tax policy is its complete disregard for the unsustainable depletion of natural resources and the degradation of the environment. This cannot be simply a footnote in the US P&L statement, though it is treated as such – when it is treated at all. Increased taxes on the use of natural resources could create a sizeable stream of government revenues.

Those who worry that this may blunt firm competitiveness due to higher input costs can put their minds at rest. Eco-taxes in countries such as Germany show that such tax structure leads to efficiencies in the use of energy and materials, while creating jobs in efficiency-generating, waste-reducing initiatives. Corporate profitability is driven by efficiency gains vs job-cuts.

A final word on missed opportunities: rethinking taxation with regard to the digital economy. That term encompasses a broad range of activities, much of it involving digitally-enabled transactions or the flow of information between firms and their business partners and customers. These activities add welcome dynamism to the economy and pay a share of the freight in terms of tax burden.

At the other end of the spectrum, the ‘digital commons,’ an analogy to the pastoral commons concept of economist Garrett Hardin, is a realm of free knowledge (e.g., open source software, human genome libraries, manufacturing blueprints) shared through a digital fabric. This segment of the digital economy has unleashed creative collaboration and innovation among entrepreneurs, artists, and inventors.

The challenge lies in the middle - an uncomfortable space where large corporations that have built multi-billion dollar proprietary platforms (e.g., Facebook) based on personal information shared by individuals for free. Furthermore, these companies often operate without paying the requisite worker benefits (e.g., Uber) or local taxes (e.g., AirBnB) as competitors from the traditional economy. There is much room for additional fair taxation from these highly-profitable digital giants.

None of the above possibilities were debated – and that is not the fault of the two major parties. The myopia afflicting today’s Republicans is at least matched by the retrograde soft-socialism professed by those on the progressive left. Neither sees beyond the barricades that are as old as the French Revolution: State v. Private, Elites v. Masses. It is time to take a much bigger picture view of fiscal options.

Indranil Ghosh, founder and CEO of Tiger Hill Capital, is a global authority on long-term policy planning for corporate and financial services clients, and an advisor to several national governments.

Photo Courtesy of Images Money TaxRebate.org.uk

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