Friday, November 13, 2015

Five Republican Myths About Taxes

The last Republican debate exposed some of the GOP myths about taxes. Okay, so not all were discussed in the debate per se, but a few were, and the others are pretty much part of the implicit assumptions in the Republican mainstream. A short list must include these ideas:
  1. Corporate taxes are high in the US
  2.  Lower taxes boost investment
  3. 50% don't pay taxes, including immigrants
  4. A flat tax would simplify the tax code
  5. Reducing taxes could still finance big government
But it is well-known that reality has a liberal bias, so facts do not bode well for these GOP talking points. The common strategy in these positions is to purposely misrepresent the truth with statistics (Disraeli’s third kind of lie, as per his dictum that there are three kinds of lies, lies, damned lies and statistics).

The corporate tax rate is indeed high in the US, but as noted by the Center on Budget and Policy Priorities (CBPP): “The U.S. corporate tax code includes a host of special provisions that significantly reduce the taxes that most corporations owe… Largely because of these preferences, the corporate tax base is very narrow.” So the tax rate is high, but corporations don’t pay much.

Number two is the Holy Grail of supply-side economics. But at this point it should really be relegated to the annals of crazy science. There is no shred of evidence, as noted by Mark Thoma. By the way, all the evidence on investment is that it responds to the level of activity, the so-called accelerator.

While the correct number, again according to the CBPP, would be more like 40% of people don’t pay taxes in normal times, it is still the case that the vast majority does pay taxes. Not income taxes, but payroll and sales taxes, which are, by the way, regressive. And they pay state and local taxes too. For the vast majority of the labor force payroll taxes, not income, is the biggest burden on their paycheck. And immigrants do pay sales taxes, and often payroll taxes too.

Alan Blinder has noted (subscription required; or read Jared Bernstein here) that the complexities of the tax code do not come from multiple tax brackets and that a flat tax rate would not simplify the tax system, besides being regressive. Complexities derive from what is defined to be taxable income instead.

Finally, you might think 5 it’s a typo, since Republicans are not for Big Government. So they would NOT suggest that lower taxes can finance big government. In fact, as shown by Jeffrey Frankel here (scroll down for his talk, and go here for more recent data) every Republican president since Ford has increased spending and deficits while every Democratic president has done the opposite, and that includes Obama after the fiscal package passed in 2009. So they are for big government (for corporations and war), and the idea is that cutting taxes would still allow to fund for that. It would certainly lead to higher deficits and debt, which of course they would only favor during a Republican presidency. But arguably that’s their point, to increase debt so that they can claim that government spending must be restrained, and privatize Social Security.

PS: Mike Isaacson of the great blog Vulgar Economics reminded of the death tax. And I'm sure I missed other myths too.

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