In Australia, and I suspect the UK and in Western Europe more generally, Donald Trump is widely despised. I try to cajole people. OK, I say, you don’t and never will like him, but can you at least look to see whether you like any or some of his policies. It is a forlorn endeavour. I will tell you why.
The vast majority of people get their news and views from the mainstream media or, if younger, from social media. Thus, the tax-reduction Christmas present that he and the US Congress are delivering to the American people (alas we are not getting one) is portrayed as benefiting the rich at the expense of the poor. That this is complete and utter tendentious drivel is by the way. Repeated often enough, it is a factoid in the making.
In fact, all but a few American taxpayers will benefit. Some with very high deductions which have now been removed or capped might not but, in the main, this will affect only the well-heeled. But here comes the rub. Those now paying most tax will on the whole gain the most benefit in absolute dollar terms. That’s the awesome power of arithmetic which so befuddles leftist minds.
In the United States, according to the Tax Policy Centre, 45% of households pay no federal income tax and, therefore, will not benefit from rate reductions. To illustrate the picture differently, the top 20% of individual income earners pay 87 percent of federal income taxes while the next 20 percent pay the rest. The bottom 60% pay a net zero percent.
For the edification of the left, halving taxes for those who pay little gives them little. Taking just five percent off taxes for those who pay an awful lot gives them much more. Democrats being Democrats, leftists being leftists, resist this unavoidable outcome with as much sanctimony as they can muster.
The real problem, of course, is that those on the left live in a static world of haves and have-nots, within which the division of the pie is the be-all and end-all. Once you are stuck in this world; as, say, is Bill Shorten, there is no exit point and around and around in circles you go preoccupied with inequality. In the end result, forcing more equal outcomes undermines market forces. The pie never grows to its potential.
The prime purpose of lowering taxes, as presidents Kennedy and Reagan argued, is to boost economic growth. What is important is not that some rich people get a lot richer out of this, but that the vast majority of people benefit.
Business taxes fall on owners or shareholders, on employees, and on customers. The incidence of benefit for any reduction in such taxes is hard to gauge. But rich and not-so-rich owners and shareholders are likely to benefit as are customers. Importantly, workers will potentially benefit though the creation of more jobs and higher pay. This is the main game. When it comes to lowering business taxes, the only question worth asking is how much lift will it likely give to jobs and economic growth. Unless you detest Trump, of course.
In conversation the other day I mentioned that the US was lowering its corporate tax rate from 35 per cent to 21 per cent. The retort was that Trump was doing this to benefit his own commercial interests. Help me, I pray, to live in love and charity with my neighbours at this festive time, however predictable, baseless, prejudiced, and irritating are their views.
Tax reductions are not on an equal footing. Tax reductions paid for by reduced government expenditure are best. Second best are those paid for by unexpected surges in revenue – think Howard and Costello. Unfortunately, the US is stuck with the third best circumstances, as are we, in which deficits and debt prevail. In such circumstances, there is a risk that lowering taxes will end up dampening growth by increasing the budget deficit, thus putting upward pressure on interest rates and on future rates of taxation.
Against this unpromising scenario, supply-side economics offers the prospect that lowering taxes – particularly business taxes – will generate sufficient revenue from economic growth to pay, or more than pay, for tax reductions. This is a brave call. However, it becomes less brave when lowering business taxes is combined, as in the US under Trump, with extensive and substantive deregulation. In my view, this strategy has a fighting chance of lifting growth sufficiently to reduce the budget deficit.
Let’s face it, the option of staggering along, growing insipidly, while trying to reduce deficits and debt by controlling entitlement spending is the very epitome of tilting at windmills. That’s what is happening in Australia. It is depressing. And all the while the much-maligned Trump is trying his best to create the conditions for dynamic growth and Merry Christmases in the United States. What a bad Santa is he?