If Trump’s tax cut for the rich causes

The lawfulness or otherwise of the House version of the corporate tax cuts provides some important clues as to whether the president and Republicans in Congress are looking to increase revenues or simply to…

If Trump’s tax cut for the rich causes

The lawfulness or otherwise of the House version of the corporate tax cuts provides some important clues as to whether the president and Republicans in Congress are looking to increase revenues or simply to increase the economic benefits they think wealthy investors will take.

The effects of the House plan on the most valuable assets on the books of companies are important. On the 50 wealthiest taxpayers, the average tax rate under Trump’s plan would be only 6.2%, according to the Tax Policy Center. Most of these taxpayers already have enormous wealth: In 2005, the 10 highest-income taxpayers had taxable incomes of $3.4 trillion.

The combined value of all the businesses on the books of the 50 wealthiest would be $53.3 trillion, according to S&P. So if the plan meant to increase corporate revenue by raising taxes on the companies’ owners, it would have to have substantial effects on the value of those businesses.

So, what would that look like? The difference in values is enormous. Last year, Apple had an operating margin of 37.5%, according to the TPC, meaning that the company was bringing home $193.3 billion in profit. In 2010, Intel had a margin of 21.1%, meaning that it took in $16.1 billion in income. Both of those companies would feel the effects of a higher corporate tax rate, but for a different reason: A higher tax rate would make them less efficient. They would either have to pay more to their employees to make up for the new tax revenues or they would have to raise prices to their customers.

How would the Senate plan look like? It’s hard to tell, and there’s another reason: If a company’s owners know that they’re taking more of their pay as dividends to pay for the corporations’ operations and capital spending, it’s hard to see how the company would lose money. If the company’s owners think their investments will generate more profits than paying the tax, then they would reward the companies for sticking with higher expenses.

Of course, many of the wealthiest investors do not base their decisions on companies’ operations or their capital spending. Bill Gates, Warren Buffett, and other billionaires invest primarily for tax breaks – for example, they can either pay a low rate on regular income or receive a reduction on capital gains (income minus the cost of their investment) at the same time.

There’s a reason why the House bill’s federal revenue estimates are half what most other estimates have been. As the Congressional Budget Office pointed out, the bill’s corporate tax cuts would lead to an immediate $1 trillion loss in tax revenues. That would fall on top of the approximately $2.5 trillion in revenue lost as a result of eliminating the estate tax. Since business investment doesn’t put much cash into the Treasury, we’d be looking at a vast new deficit without those revenue losses to pay for them.

This wouldn’t necessarily mean that we’d be broke. The capital gains reduction would reduce the deficit if it is cut enough to produce a big enough one-time windfall, as Warren Buffett would prefer. And that windfall might be large enough to repay the debt, as George Jallah said in a related Post commentary: “Recurring revenue from a sudden tax cut would support a large reduction in the debt” (although he did not advocate a continual surplus).

Furthermore, given the large number of other tax expenditures that the House bill appears to target, the tax savings are likely to be smaller in the long run than they would appear on the government’s books today.

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