In his recent State of the Union speech, President Biden stated, “Unlike the $2 trillion tax cut passed in the previous administration that benefited the top 1 percent of Americans, the American Rescue Plan helped working people — and left no one behind.”
Excuse me? It’s true that the Trump tax cut benefited the top 1 percent of Americans. But it also helped Americans at all income levels. It helped in two ways. First, it cut taxes for virtually everyone and often by a lot. Second, the 2017 tax cut increased incentives to invest in more capital. With more capital to work with, workers were more productive and their higher productivity showed up in higher wages.
These are the opening two paragraphs of David R. Henderson, “Correcting Biden,” Taxbytes, Institute for Policy Innovation, March 9, 2022.
Final paragraph:
In his speech, President Biden used the term “trickle down” to refer to the idea that tax cuts on corporations and on the most productive people will help workers generally. Here’s the interesting thing about that term: no one who advocates such tax cuts uses the term “trickle down.” There’s an obvious reason why. Given how well tax cuts have worked, a much more accurate term is “gush down.”
Do read the whole thing. It’s quite short.
READER COMMENTS
Infovores
Mar 9 2022 at 10:56pm
I’m similarly skeptical of the claim that the American Rescue Plan “left no one behind”.
David Henderson
Mar 9 2022 at 11:09pm
Good point.
Thomas Lee Hutcheson
Mar 10 2022 at 5:47am
If the “Tax Cuts for the Rich and Deficits Act of 2017” had just increased incentives to invest — the reduction in business income taxes (and by reducing the marginal rates of business taxes that are riddled with inter-activity distortions it increased the efficiency of investment) — it would have been and admirable though modest piece of legislation. But that overlooks the deficit increasing effects. The act should have offset the revenue loss with new revenue collections on consumption (and I’d say primarily on the consumption of those who consume the most).
Craig
Mar 10 2022 at 7:31pm
“But that overlooks the deficit increasing effects. ”
During the period federal revenue increased. Also during the period spending increased more.
Daniel B
Mar 10 2022 at 10:08pm
While not all tax cuts pay for themselves, my understanding is that the 2017 Trump tax cut is not a very good example of that principle.
Alan Goldhammer
Mar 10 2022 at 8:07am
I think you are asking the wrong question. It should be, “Did the 2017 Tax Cut disproportionately favor the top tax brackets?” The answer to that is a clear yes. It also rather pointless continuing to debate these questions and leaving the discussion of total reform of the tax code behind. It is far more productive IMO to come up with approaches that get rid of as many tax preferences as possible, reduce the corporate tax rate as low as possible (it generates a much smaller percentage of Federal revenues and in some cases is easily avoided by off shoring intellectual property), and implementing a VAT which is easy to implement.
TR Reid’s fine book, “A FINE MESS: A Global Quest for a Simpler, Fairer, and More Efficient Tax System,” is a very good read on this topic. His proposals are a much needed counterpoint to the looney ones coming from the left wingnuts who think a wealth tax is all that is needed. Of course, any thoughtful individual realizes that such a tax is not only ill thought out but will also be hard to implement and only create more jobs for creative accountants who will figure out how to avoid it.
robc
Mar 10 2022 at 8:18am
Single Land Tax.
Any time anyone brings up a VAT, I will bring up the SLT, because Henry George was right.
For one thing, its the only deontologically sound tax system, IMO.
Matthias
Mar 11 2022 at 7:04am
VAT is better then some othe taxes that are currently used.
Property taxes are better than VAT. Land value tax is even better than property tax.
If you a priori restrict your world to staying on earth, you could probably make a claim that land taxes are deontological better or something.
Given that we are on the cusp of becoming a true spacefaring civilisation no longer bound to just this rock, I don’t think deontology is enough of a foundation.
We can still say that empricially, land taxes work well. No need to get all philosophical about it.
robc
Mar 11 2022 at 9:09am
It is funny you mention space travel, because nearly 4 years ago I wrote an article discussing the Single Land Tax that involved space travel.
https://www.glibertarians2018.link/2018/04/26/funding-libertopia-a-gedankenexperiment/
It is not a very serious article, but it is not a very serious site either. But they will happily publish me, whenever I get around to writing something, so there ya go.
David Henderson
Mar 10 2022 at 9:53am
You wrote:
No. The answer to the question you ask is a clear no.
Look at the numbers in the piece I wrote. I’ll quote the key paragraph here:
So the top 1 percent had their average tax rate fall by 4,7 percent. The bottom 20 percent had their average tax rate fall by almost 100 percent.
Moreover, I wasn’t writing to correct Alan Goldhammer, although I just did here. I wrote my piece to correct Joe Biden’s claim. So you can say that I asked the wrong question. But I asked a question to which Joe Biden gave the wrong answer.
Thomas Lee Hutcheson
Mar 10 2022 at 10:51am
Id say that the “cuts” portion of the Tax Cuts for the Rich and Deficits Act f 2017″ should be measured by the distribution of the revenue reductions. But more important is the distribution of the growth-inhibiting increase in the structural deficit.
Mark Z
Mar 10 2022 at 4:32pm
Why should it be measured that way? If a policy doubles everyone’s income, is it right to say that policy ‘disproportionally helps the wealthy,’ since the benefits, in absolute terms, go more to the wealthy, even though everyone’s wealth increases by the same proportion? By your measure, even a policy that reduces the Gini coefficient can still ‘disproportionately benefit the rich.’ If revenue reductions are, say, spread evenly across the population, I think it’s appropriate to say it disproportionately benefits the poor, since their incomes grow by a greater fraction, and also because, per the principle of diminishing marginal utility, a given amount of money is probably worth more to a poor person than to a rich person.
Alan Goldhammer
Mar 11 2022 at 8:27am
Yes, I did ask a different question but David’s response here is a good example of the wrong use of innumeracy.
So the top 1 percent had their average tax rate fall by 4,7 percent. The bottom 20 percent had their average tax rate fall by almost 100 percent.
Vivian Darkbloom
Mar 11 2022 at 10:36am
I would be interested in an example of the correct use of innumeracy 😀
Jon Murphy
Mar 11 2022 at 11:05am
It’s not really an innumeracy point, though. Biden made the claim that no one but the Top 1% benefitted from the tax cut. David is pointing out that many people beyond the 1% did benefit from the tax cut.
AMT
Mar 24 2022 at 9:00pm
You certainly know that if someone paid $1 in taxes, and then that goes to zero, in this context that is completely meaningless. This cannot be sheer stupidity, therefore it is flat out intellectual dishonesty. I no longer retain any shred of respect for you.
David Henderson
Mar 25 2022 at 7:11pm
No, it’s flat out good math. I now have no respect for your mathematical ability.
Thomas Lee Hutcheson
Mar 10 2022 at 10:44am
I’d like to get rid of the corporate tax except as necessary to tax non-tax residents. But the lost revenue should be collected with an income tax (with deductions for saving to make it more like a progressive consumption tax). I do favor a VAT, too, but the first call on VAT revenues should be to replace the wage tax. We should also remove the incentives for employers to purchase health insurance for their employees.
Craig
Mar 14 2022 at 1:10pm
“to tax non-tax residents”
What do you mean by that? to tax non-residents perhaps?
If so, non-residents actually do pay tax on income earned in the US. They will typically receive a non-resident ITIN which looks like a SSN but with a 9 in front. I think at the moment if they earn a capital gain they don’t pay that? If they receive a dividend, they pay tax on that? But honestly not sure, nevertheless, they are SUBJECT to tax, you don’t have to put the onus of taxing a non-resident alien’s interest in a corporation at the corporate level.
Dave Smith
Mar 10 2022 at 10:33am
Another interesting thing that Biden left out is how much the American Rescue Plan would help the 1% and corporations.
Thomas Lee Hutcheson
Mar 10 2022 at 10:45am
Helping “corporations” is a silly concept. Corporations are their shareholders.
Mark Z
Mar 10 2022 at 4:22pm
Biden himself used this language in his speech, e.g. making “the wealthy and corporations” pay their “fair share.”
Matthias
Mar 11 2022 at 7:06am
Corporations being their shareholders is only an aspiration.
In practice, corporations are their managers. Shareholders barely get a say.
Craig
Mar 14 2022 at 1:14pm
There are more than a few corporations where there is a majority shareholder or a shareholder with such a large plurality of shares that shareholder or controlling group of shareholders really does control the corporation. Obviously there is a litany of closely held corporations which aren’t even publicly traded, but obviously there are corporations headed by cults of personality like Gates, Zuckerberg, Bezos, Musk etc
Cyril Morong
Mar 10 2022 at 5:25pm
Good article
Also, we had the lowest poverty rate ever reported in 2019, 10.5%. It fell 1.3 percentage points that year, tied for the largest one year drop in the previous 50 years. Black poverty was also at a record low
Daniel B
Mar 10 2022 at 10:45pm
Gosh, every time I hear a left-winger talk about “trickle-down economics” I always want to refer them to Thomas Sowell’s work on the subject.
It’s sad that many people are unaware of the empirical literature on corporate tax cuts.
Zeke5123
Mar 12 2022 at 11:49am
Doubling the standard deduction also greatly simplified tax filing for not relatively high earners. That is, the tax reform limited many people’s administrative burden.
Also the increased standard deduction effectively eliminates tax preferences for many individuals.
steve
Mar 12 2022 at 11:34pm
I think that you have left out that there was little impact on business investments.
https://www.brookings.edu/research/searching-for-supply-side-effects-of-the-tax-cuts-and-jobs-act/
Steve
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