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BORDER TAXES AND PRO-GROWTH TAXES

April 13, 2017

BORDER TAXES AND PRO-GROWTH TAXES

Trump proposes to establish “border taxes” on imports from China, Mexico and others (who he says are “ripping us off”) unless the production of such goods in some yet unstated ratio comes back to America’s shops and factories which, of course, will not work, since such affected countries will establish contravening “border taxes” of their own on imports from America, which would in turn have devastating effects on our export industries already suffering from high dollar value (which Trump ignores while complaining of Chinese “currency manipulation,” an extremely difficult charge to prove).

As usual, Trump wants to use a machete rather than a scalpel to our trade agreements, and if he does, I confidently predict that the operation will be a failure.  Equalizing trade outcomes requires delicate give and take, and his “plan” would simply raise prices to ultimate consumers both here and abroad and thus reduce demand and increase unemployment both here and elsewhere, hardly a formula for economic growth either in this country or that of our trading partners. Bluster and bullying cannot substitute for the niceties of trade bargaining among and between trade professionals, especially with the multi-country trade pacts to which we are party along with our one-on-one bilateral trade agreements.

Thus “border taxes” as proposed by Trump are penal in nature, and are not taxes at all in the traditional sense. However, there is a range of pro-growth and pro-equality tax reforms that can both raise revenue and rebalance misaligned incentives via, among other possibilities, the taxation of global income of American multinational corporations  involved in production and trade (as pointed out by Stiglitz in his 2016 book, Rewriting the Rules of the American Economy). I will treat a few of such pro-growth and pro-equality potential reforms in the following.

First, tax plans are designed not only to bring revenue to the government but are also designed to improve incentives by encouraging socially desirable economic behavior and discouraging undesirable behavior. Take, for instance, the very high taxes we exact with the so-called “sin taxes” on the sale of tobacco and alcohol which are plainly designed to limit or end their use.  However, there are many other such socially undesirable practices we have identified and could do something about with enlightened tax-writing philosophy as well.

Thus we have made changes in the tax code for the past some thirty five years that follow the supply-side nostrum which gives tax cuts and subsidies to the rich and corporate class while placing a greater burden on the rest of us and leading to neglect and postponement of critical pubic investments such as our infrastructure and reduction of our national debt. The code by its terms taxes capital gains at a much lesser rate than that imposed on the salaries and wages of working people, and why?  Because special interests have written such lopsided distinctions into the code to feather their own bottom line nests but which are anti-growth as wage inequality is enhanced and aggregate demand in our “free market” controlled by the special interests withers further, a result both socially and economically undesirable.

Overseas corporate profits of American multinational corporations can be held overseas interminably and not be taxed until repatriated to this country, often after negotiation for a lesser rate than the code allows, a bonus denied to you and me who work with our hands and minds in the real economy. There is no good reason that our tax code cannot be amended to structure incentives that reward work evenly if not advantageously with the crap shooters on Wall Street, especially when we know that such favoritism results in distortion of the economy and increases wage inequality, among ancillary negatives. Wages and capital gains should be taxed at the same rate or even at a rate favoring wages, and if they were, we could raise much more revenue that could in turn be invested in education, infrastructure, and technology, which would result in a stronger economy via enhanced demand, reduce wage and other inequalities while increasing opportunity for social mobility as the young could again pursue “the American dream” and move up the ladder of economic and social success.

Other examples of how such present day tax favoritism is anti-economic growth include the so-called step-up rule, which by any decent standard should be eliminated. Why? Here’s why. This provision in the code allows all of the capital gains earned during a person’s life to entirely escape all capital gains tax when such assets are bequeathed to heirs and devisees, which means that a small number of the wealthiest families pass on wealth free from capital gains in perpetuity. Piketty treats this anomaly extensively under the heading of patrimonial capitalism, and for good reason. This select group of the superrich not only enjoy a near free ride when living with their lower capital gains and carried interest and other such means of redefining and avoiding their fair share of the tax load, they can even pass on their fortunes tax free to heirs and devisees, which is a marginally better deal than they could have enjoyed while living when buying and selling such capital assets. Do we want a code that encourages death? Talk about misaligned incentives!

Someone tell me what such heirs and devisees have done to deserve this no-tax treatment while people who work for a living are paying ordinary income rates on their meager salaries and wages. I know of no standard that justifies such a stark and unfair relative treatment via the code, and the section of the code which allows this, along with other such intolerable maltreatment in other areas, should be repealed carte blanche in any such attempts at tax reform.

Trump tells us that he is going to reform the tax code, citing high taxes and overregulation of the rich and corporate class as detrimental to economic growth. I could enumerate dozens more of such tax travesties in the code to make my point but for time and space, but my final observation is this: That Trump’s proposals will if enacted contract rather than expand economic growth and will most likely lead to recession – or worse.        GERALD        E

 

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