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The Truth Behind the Tax Cuts We’re Promised Will Determine Our Market’s Future

5 | By Shah Gilani

Don’t bother Googling “what tax reforms are Democrats proposing?” There aren’t any.

Republicans, on the other hand, according to House Speaker Paul Ryan, “have to deliver tax cuts to the hardworking, middle class.”

But they’re not doing that, either.

Instead, Republicans want voters to believe big tax cuts for corporations are going to trickle down and create jobs that elevate wages for hard-working Americans.

That’s not going to happen.

The truth about Republican tax-cutting plans and why the Democrats aren’t offering up counter tax-cutting proposals is, unfortunately, not at all what America needs.

Here’s why the politicians have it all wrong, and how the markets will react to potential tax cuts…

The Trickle-Down Trap

Forget tax reform. There’s none on the table.

While comprehensive tax reform would solve many problems facing America, it’s complicated to pull off and won’t immediately generate votes. Still, it’s tax reform and not immediate and direct tax cuts that America needs.

We don’t need an immediate tax cut for corporations because corporations don’t need it.

According to the Center on Budget and Policy Priorities, “The average corporate tax rate on profits from new investments made in the U.S. is 24 percent… The share of worldwide profits that U.S. multinational corporations pay in U.S. and foreign income taxes is about 28 percent.”

That’s the average. Some big corporations don’t pay any tax, but generally, most U.S. corporations have an “effective rate” considerably lower than the statutory top rate of 35% after employing a myriad of deductions and other accounting benefits embedded in the tax code.

American corporations are enjoying record profit margins, and many are enjoying record profits. They’re not begging for an immediate tax cut, politicians are. It’s the politicians who are saying the benefits of a big and immediate corporate rate cut from 35% to 20% would create jobs and lift wages.

There’s absolutely no proof of that. None.

In fact, the greatest application of capital by corporations today and into the future is into technology to reduce labor costs and benefit liabilities. So much for trickle-down corporate tax cuts generating jobs and higher wages.

The problem with the tax debate today is that it’s all about tax cuts and who benefits.

We’re all better off with lower taxes, especially if less Treasury revenue reins in runaway spending.

However, Democrats aren’t proposing tax reforms or offering counter tax-cutting proposals for the middle class or workers, because they’re benefiting by pointing to Republican tax-cutting plans as trickle-down nonsense.

If Democrats wanted tax cuts for their constituents, they’d be fighting for them. But their agenda for getting votes is spending, not tax-cutting.

What We Need vs. What We’ll Get

What America needs is comprehensive tax reform that incentivizes corporations to pay better wages and funnel more of their profits into dividends and shareholder benefits.

If dividend payments were fully deductible, for example, corporations would be incentivized to pass profits through more, especially if they are the sole deduction allowed. That benefits investors, stimulates capital formation, and greases the economy’s wheels.

As part of that comprehensive tax reform, the corporate rate should be ratcheted down to no more than 20% over a 10-year period, reduced from 35% to 20% by cutting it 1.5 percentage points every year over the next ten years.

Commensurately each year, deductions (except dividend payments, which are not currently deductible) should be reduced so that in 10 years corporations are essentially paying a flat 20% tax.

Taxes on business pass-through should also be reduced to no more than 20%, over time. Individual taxes, including on the rich, should be reduced, too. Just not all at once.

Individuals should be incentivized by the tax code to save, invest, and generate wealth. One way would be to eliminate taxes on any investment income, especially dividends, for individuals up to some level of income, maybe $100,000. And allow for a 100% write-off of short- and long-term capital losses incurred on stock investments.

The idea isn’t to spur speculation; it’s to incentivize individuals to save and invest in the capital markets as a means of wealth creation. The goal should be to make the capital markets hospitable and incentivize listed companies to enrich shareholders.

Nothing like that’s on the table. Now, it’s all about tax cuts for businesses.

The stock market’s been supported and boosted by prospects for corporate cuts and repatriation deals. If we get meaningful cuts and a repatriation deal, the market’s going to go up another 10%-20% in a matter of months.

If tax cuts are delayed (or worse, shot down), the market will be vulnerable to a serious bout of profit-taking, which could turn into a correction or a crash.

Consider yourself warned.

Sincerely,

Shah

5 Responses to The Truth Behind the Tax Cuts We’re Promised Will Determine Our Market’s Future

  1. John C.Burke says:

    I agree that the proposed bill is not tax reform. A gross receipts tax on corporations, partnerships, and LLCs; some small businesses and imported goods and services at 10% or more replacing the current direct income tax on businesses and individuals would be a start on reforms; possibly with a corporate tax on distributions (dividends, director and officer compensation) at 10% or less. The payroll taxes and estate,gift and generation skipping tax would remain with modifications. This would simplify the Internal Revenue Code, broaden the tax base, reduce unfairness, reduce interference in the economy by the government, reduce government data keeping on individuals and reduce personal liability for unpaid tax.

  2. randy a says:

    When you propose tax reforms you dance to the governments tune. There is only 1 real comprehensive tax reform.- ABOLISH THE IRS. Why cant we have the government we want, because you get the government you deserve!

  3. Douglas L Nelson says:

    Mr. Galani. I’ve prospered in many ways from your no nonsense, straight talk. Among all the many voices and views that are widely broadcast and bandied about, your’s is steadfast, reasonable and accurate.
    I applaud you and I thank you.

    Douglas Nelson

  4. Douglas L Nelson says:

    Mr. Gilani. My bad, It would be good if I bothered to check and spell your name correctly.

    My apologies Sir.

    Douglas Nelson

  5. Roy F. "Fritz" Schoonover says:

    Finally, someone’s talking some sense. Except you need to talk more about simplifying the tax codes, too.

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