Tax Cuts Never Cause Deficits

Understanding Basic Economics . . . Don't Be Deceived. Tax Cuts Are Always Good for the Economy

A key element to Bloomberg’s flawed thesis is his claim (and that of most on the left) that the Jobs Act tax cuts will cause deficits. There are at least two reasons his reasoning is fundamentally flawed.

First, it is a well-settled principal that you don’t raise revenue by raising tax rates. Raising rates always has the effect of reducing economic activity. What you tax, you get less of. When you tax income and productivity, you get less income and productivity. When you reduce tax rates, there’s more incentive to work harder because people will keep more of what they earn. It’s immutable human nature. Harder work means more income, which means more tax revenue, even at lower rates.

Bloomberg was outraged at the idea that a tax break would be offered to corporations that have stashed money offshore to avoid the U.S.’s past high corporate tax rate—the highest in the industrialized world. The reality is that you could have set a rate of 100% (rather than just 35%) on that revenue and you wouldn’t have raised a nickel’s worth of revenue because corporations simply would not have brought the money back—ever.

Under the Jobs Act, corporations will pay a one-time repatriation tax of 15% on what they bring back. The incentive is obvious. By reducing the rate considerably, some revenue is collected versus none. And don’t think it won’t work. Already, Apple announced on January 17, 2018, that it plans to bring back to the U.S. the vast majority of the $252 billion in cash from offshore profits that it’s been hoarding there for years. In fact, about 94% of all of Apple’s cash is held offshore. Upon bringing the money back, Apple will pay a tax of $38 billion.

So, friends, which is a bigger number: $38 billion, or $0?

And what will the mean, greedy, impersonal corporation do with the money? Apple says it plans to add up to 20,000 new jobs and will build a new domestic campus somewhere in the U.S. Plus, it will spend about $10 billion in new data centers in the U.S. On the other hand, Apple said it would never have brought the money back without a change to the corporate tax laws because it simply would have been too costly. Apple is already the U.S.’s largest single taxpayer, and with this one-time repatriation tax and the increased employment taxes from 20,000 new employees, Apple will pay even more going forward.

Secondly, tax cuts, no matter how deep, NEVER cause deficits. There’s only ever been one reason for deficits—and that’s spending. When you spend more than you take in, you get a deficit. The best example is what happened after Reagan’s first two tax reform measures passed in 1981 and 1982. Federal revenue about doubled by 1989. But deficits kept climbing. Why? During that same period, Congress increased spending by over 4 times. No tax increase can possibly keep up with that kind of spending.

This is an article taken from January 2018 issue of "Pilla Talks Taxes."'
and a continuation of another article found in this issue, "IS THE JOBS ACT A TRILLION-DOLLAR BLUNDER?"

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