The Republican tax plan makes it more rewarding to do business in the U.S., whether as a corporation or as a part-owner of an LLC or similar pass-through structure. The proposal does not seem to have caught on with young people. Why not? I’m reading a book by a psychology professor who studies American generations. This one is about Americans born since the mid-1990. From iGen:
As it turns out, iGen’ers are actually less likely to want to own their own business than Boomers and GenX’ers were at the same age, continuing a trend started by Millennials (see Figure 7.4). Just as they are cautious about driving, drinking, and dating, iGen’ers are cautious about going into business for themselves.
Entering college students show the same trend: in 2016, only 37% said that “becoming successful in a business of my own” was important, down from 50% in 1984 (adjusted for relative centrality). So, compared to GenX college students, iGen’ers are less likely to be drawn to entrepreneurship. These beliefs are affecting actual behavior. A Wall Street Journal analysis of Federal Reserve data found that only 3.6% of households headed by adults younger than 30 owned at least part of a private company in 2013, down from 10.6% in 1989. All the talk about the young generation being attracted to entrepreneurship turns out to be just that—talk.
So it makes sense that they don’t like business tax cuts if nobody among their peer group is involved in business, except as a wage slave.
[Of course, one could argue that a business tax cut makes it more likely that iGeners will have W-2 jobs to begin with and that jobs will pay more because global business will be more enthusiastic about headquartering and operating in the U.S. But I wouldn’t expect the average American to see things that way. People seem to evaluate tax policy on the theory that everyone’s behavior will remain unchanged after a massive change to tax rates.]
“jobs will pay more because global business will be more enthusiastic about headquartering and operating in the U.S”
In the current fiscal environment this is not a particularly significant factor so it isn’t particularly important (perhaps even not surprising) that “the average American” doesn’t “see things that way”. To the extent that each dollar in corporate tax cut generates less than roughly $50 in increased corporate revenues the tax cut will expand the deficit so the truly relevant question becomes are those jobs which “will pay more” worth the added debt (relative to other ways we could do with the funds we are incurring the debt for).
@Neal,
Come again?
I’ve read and reread your last sentence (59 words!) and I still don’t understand your analysis. ??
Mark: If each dollar of reduced corporate tax induces less than roughly 50 dollars in increased corporate revenues then the tax cut will have the effect of reducing tax revenues which will increase the deficit and will require the acquisition of additional debt.
Aassumptions: 20% corporate tax rate and 7.5% profit margin; 40% of the additional revenues go to employees at 20% tax rate and with a multiplier of 3.
$1 tax cut/ 0.2 / 0.075 = $67 of additional corporate sales less (67 * 0.4 * 0.2 * 3) = 16 dollars in additional tax revenues received from increased employee income. $67 – $16 ~ $50 dollars in increased corporate sales to offset 1 dollar of reduced corporate tax revenues.
Even IF “global business will be more enthusiastic about headquartering and operating in the U.S” and this DOES increase economic activity in the U.S., unless the multiplier is massive there will be a loss of tax revenue which will currently be financed with debt.
Neal: Are you sure that it isn’t possible to do a simpler analysis? Corporate income tax is roughly 6 percent of total U.S. taxes (9 percent of federal, but only 3 percent of state/local; see https://www.cbpp.org/research/federal-tax/policy-basics-where-do-federal-tax-revenues-come-from and https://taxfoundation.org/sources-state-and-local-tax-revenues/ ).
The rate cut might actually increase long-term revenue as corporations decide to pay tax in the U.S. rather than in Ireland or the U.K. or somewhere else (and/or bring money back from offshore).
But let’s say that the rate cut does reduce corporate tax actually paid to 4 percent (from 6 percent) of the total. Most of our other tax revenues scale pretty well with business activity. So wouldn’t the cut in corporate tax be made up for by increased revenues from other kinds of tax given even a tiny amount of extra economic growth?
This tax reform is a joke. Unless we cut spending then we are just increasing the debt.
Priming the pump is just a story to sell people on the idea of this tax cut. All we are doing is continuing to borrow money and passing the bill to those that come after us. At some point the debt will be so huge that paying the interest on the debt will cripple the economy.
The replacement for the Fed chair, Jerome Powell, is just another lackey put in to start the printing presses for Trump (as Bernanke/Yellen did). Soon we will get QE4.
Then the Chinese will make their move…
GermanL: Agreed that there is no easy solution to the problem that the U.S. isn’t successful enough economically to fund the government that citizens have voted for (especially the long-term pension and health care obligations). But I am not sure this tax plan is being seriously sold as more than a first step. What if we look at it as an emergency measure taken before all of the successful enterprises move their tax homes to Ireland, the UK, Singapore, etc.? After the bleeding is staunched the Congress can try to grapple with the deeper problem.
[23 percent of corporate tax revenue was lost to inversions by 2016; see http://fortune.com/2016/05/11/u-s-corporations-dodge-inversion/ ]
“So wouldn’t the cut in corporate tax be made up for by increased revenues from other kinds of tax given even a tiny amount of extra economic growth”
Unlikely. I had already accounted for this with a very generous multiplier in my estimate.
“Agreed that there is no easy solution to the problem that the U.S. isn’t successful enough economically to fund the government that citizens have voted for”
Luckily that isn’t our problem. Our problem is that we are unwilling to pay for the government that citizens have voted for. Still a difficult problem, but with different difficulties than the one stated above.
“Interest rates are projected to rise above 3 percent in 2018, according to the Office of the Management and Budget. They are expected to increase to nearly 4 percent by 2020. By then, the interest on the debt will almost double, to $474 billion. It will consume almost 9.7 percent of the budget. By 2026, the interest on the debt will be $787 billion, and take up 12.2 percent of the budget.
That means the government will spend more on interest than on national defense by 2021. The following year, it will surpass all other discretionary spending. That’s everything except the mandatory budget, which includes Social Security, Medicare, and Medicaid benefits. (Source: “The Legacy of Debt,” The Wall Street Journal, February 5, 2016.) ”
Source: https://www.thebalance.com/interest-on-the-national-debt-4119024
Since large multinational corporations have managed through tax avoidance schemes to avoid paying much in corporate taxes, it’s really small and medium ones that will benefit, and they are the ones that have higher staff to turnover ratios.
That said, it’s unfortunate Trump did not keep his campaign promise to do away with the BS “carried interest” scam hedge fund managers use to pay much lower taxes on what’s really ordinary income fraudulently reported as interest.
Citizens didn’t vote for most of the government we have, which may be why there is not a strong collective desire to pay for it.
The iGen is as naive as we were at their age. They expect keeping their nose clean & showing up for work are all they need & the system will provide, the same as generation X 20 years ago. Divorce & inflation will eventually hit & they’ll realize they can’t make money working for someone else.
I don’t have scientific data, but I think government entitlement and excessive regulation is to be blamed for this.
Today, there is far too much entitlement, and far too much regulation, as such taking risk and responsibility doesn’t pay and is not worth. The government keeps today’s generation “safe” and their “xBox” is ready — so why bother with all the headache and start a business?
“Citizens didn’t vote for most of the government we have, which may be why there is not a strong collective desire to pay for it.”
I think that all of the major elements of government spending (e.g. social security, medicare, medicaid, defense, public safety, and public education) are broadly popular.
philg: To clarify, I’m not claiming that corporate tax cuts aren’t bad for the economy or that they aren’t more damaging to the economy than other forms of taxation. My claim is that they probably won’t pay for themselves.
For the current generation, the most rational choice is to get some kind of government job (2nd best to collecting child support). They are among the last jobs to offer defined benefit pensions. They have terrific job security. Many current generation graduates have degrees in “gender studies” and other such worthless areas so they have no skills that are marketable in the private sector. However, there are plenty of government jobs that involve being a professional grievance monger or flak catcher for same.
Compare that to the risks of opening a business. In my neighborhood, several ethnic restaurants have recently closed after only being open for a year or so (the restaurant business is especially risky). I can imagine that the hard working immigrant owners of these business poured their life savings into them and now it is all gone. Sad, as our President (who knows something about [his investors] losing everything in bankruptcy) might say.
> I can imagine that the hard working immigrant owners of these business poured their life savings into them and now it is all gone
Do you know that for a fact? Tons of these businesses like dry cleaners that come and go are financed, and are often franchise operations. The “owners” barely have any capital stake. Curious to know what typically goes on in the casual dining industry.
It’s been common to see complaints from the old guard about how they scrimped and saved for decades to spin up four profitable locations, but then ultimately enjoyed great profits. But ultimately the margins were absolutely wrecked by cheap credit franchise operations staffed with immigrant slave labor.
@ Neil
>“Citizens didn’t vote for most of the government we have, which may be why >there is not a strong collective desire to pay for it.”
>
>I think that all of the major elements of government spending (e.g. social >security, medicare, medicaid, defense, public safety, and public education) are >broadly popular.
The Practical Conservative has a good point. The question is not whether there are large vocal groups supporting a given program, the questions are:
1. Would the program have passed in a referendum when it was introduced?
2. Would the program pass in a referendum today?
Viking: I think the answer for (2) is “yes”.
The Republican leadership is counting on their primary electorate being too dumb to analyze this plan. Probably a good assumption given the lack of agreement among intelligent commenters here. When it doesn’t work a couple of years out, they’ll double down that those rascal libtards didn’t let them go far enough.
The real showdown will come for whoever is in office when the proles realize they are priced out of medical care. These $2000 per month/$10,000 deductible (and rising!) plans may finally bring out the pitchforks. A few hundred in tax cuts won’t be comforting.
the other Donald: It goes without saying that people who support any party other than one’s own are “too dumb”. But by what criteria would this plan be declared to fall under the “it doesn’t work” rubric? The current tax system doesn’t raise anywhere near enough revenue to fund the government that Americans voted for (which is why we have $20.5 trillion in debt; see http://www.usdebtclock.org/ ). So it couldn’t be as simple as “eliminates deficit or not” could it?
@philg: Clearly the current tax proposal “works” if the criteria is “will this plan give wealthy or high income individuals a big tax cut?” or perhaps “will this plan create larger deficits in the future giving apparent justification to the claim that we ‘can’t afford’ certain government spending we don’t like?” However, I would suggest a criteria more like “Are the benefits to those Americans whose incomes are at or below the 80% percentile so compelling that they justify borrowing money to obtain them?”
If a tax cut, be it this one or any other one, is bad, not worth it and won’t do any good, than why tax increases pass with little notice?
And when I say tax increases, I don’t mean to limit it to federal or state income taxes. I mean it for all kind of government taxations and services — from property taxes to toll fees — they always go up or never go away even when their terms expires after N years (may tolls in MA were suppose to expire decades ago).
So if voters are dump to understand tax cuts are they also too dump to understand tax increases as such they keep allow it?
The tax plan will benefit the households raising the next generation of taxpayers. Many of them are only “high income” if 100k/yr household income is high.
Hard to think entrepreneurial when you are surrounded by monopolies.
Answer is 2 is right according to me