There’s a Financial Storm Coming - Granite Grok

There’s a Financial Storm Coming

Decision making without a grasp of the impact

Taxation is a weapon of government. Taxes directly affect the well-being of every American. Taxes are a necessary evil. We do need to fund a limited constitutional government. But what does that mean? What should our system of taxation look like?

A well-designed revenue system minimizes the damage caused. It should not do harm to individuals. It should not do harm to businesses. What does “harm” mean? Specifically, it means we should not damage businesses’ ability to innovate and create new jobs.

Taxes that are too high or poorly designed destroy wealth. They discourage investment and stifle economic opportunity. In the last four years, we saw the most sweeping update to the U.S. tax code in more than 30 years. It was a good thing. Rates and complexity were reduced. Americans are no longer suffering under some of the most burdensome features.

The Tax Cuts and Jobs Act of 2017 (TCJA) simplified tax paying for many Americans. Lowered taxes on individuals and businesses stimulated the economy. People were more prosperous. They had more money to spend. It also updated the business tax code. American corporations and the people they employ can be more competitive.

Many Americans are benefiting twice from the tax cuts. First, we are paying less in taxes. Second, we are receiving higher wages. This effect is generating a faster-growing economy. In the first quarter of 2019, the economy exceeded expectations while wages continued to grow. This effect found low-income workers receiving the largest gains.

In 2025 most of the individual and some of the business tax cuts will expire. The deadline gives Congress an opportunity to revisit the tax code. Congress should make much of it permanent. There are still more issues they should address which were not included in the 2017 tax bill.

Federal taxes in America are paid in three main ways. First, the individual income tax raises 50.6% of federal revenue. This includes taxes paid on investments or capital gains and dividends. It also includes taxes on business profits. This tax is paid directly by the owners on their individual tax returns.

Second, payroll taxes make up 35.2% of federal revenues. These include your Social Security and Medicare taxes. Third, the corporate income tax makes up just over 6%. We must understand and not forget; people, we are the investors, workers, and consumers.

Ultimately we are the ones who pay business taxes, such as the corporate income tax. Workers shoulder the largest burden. We are hit directly through taxation of what we earn but our wages are restrained through lower wages. When we harm business we harm ourselves doubly.

The U.S. tax code remains too complex. Today it has a fundamental bias against saving and investment. There are myriad subsidies and carve-outs for the politically connected. These things continue to endure. They add to the complexity of and economic distortions. The biggest distortion is caused by the double-tax on savers. Taxation on savers levies a tax on wages PLUS a second tax on any earnings if the wages are saved and invested.

The return on savings and investment is simply compensation for waiting to use the income. This is a basic question of fairness. By taxing the investment earnings, the tax code makes saving more expensive relative to spending immediately. The lower tax rate on capital gains and dividends helps move the income tax toward a more neutral treatment of saving. Who does this hurt most? The elderly and those saving for retirement. We are punishing responsible behavior while creating a burden on government entitlement programs. Two wrongs do not make a right. Just saying…