Friday, January 12, 2018
Of Tax Cuts and Swimming Pools
Wow, Democrats really don't like the tax cuts! They've referred to them as apocalyptic, tragic, deadly, and the end of the world. Only the rich will benefit, they say. The poor and middle class will get "crumbs", opined Nancy Pelosi. A "deception", wined Chuck Schumer. Of particular concern to Democrats is the drop in business income taxes which they say will only help "corporations". Not a single Democrat voted for the bill.
And yet since the bill passed, 81 prominent corporations have already announced significant wage increases and bonuses for their employees, the latest being the nation's largest retailer, Wal-Mart. Add to that all the small and medium sized employers who are doing the same, and this looks like a windfall for the American worker. Moreover, overseas profits are flooding back, companies are abandoning "inversions" opting to remain here, foreign companies are planning to increase their U.S. footprints, capital expenditures are predicted to skyrocket, and the stock market is soaring.
So why are Democrats still criticizing something that has been so effective in such a short time? Aside from the usual political posturing, Democrats, along with a few Republicans, have a fundamental misunderstanding of basic economics. Contrary to popular belief, BUSINESSES DON'T PAY TAXES. Period.
I know it's confusing because businesses do COLLECT taxes, and REMIT taxes, but the business is only a pass-through entity in this transaction. The money comes from the PEOPLE. In fact, all taxes are paid by people. In the case of business taxes, those people are the employees, customers, owners, and vendors of the business.
Here's a helpful analogy: Picture the economy as a giant swimming pool filled with people trying to escape the oppressive heat of a hot summer's day.
Feeding cool water into the pool are businesses, and draining water out of the pool are taxes. New water does not pile up - it flows throughout the pool and always helps those at the shallow end most profoundly. Conversely, the opposite occurs when the level drops.
This is a precise, though simplified, version of an actual economy, and it illuminates a few important concepts and misunderstandings:
A tax on business is a direct drain on the flow of water into the pool. That water never enters the pool. Some tax money is recirculated back to the pool, but due to inefficiencies it is always a net drain. When a tax is reduced, there is an immediate increase in the level of water in the pool which is, again, felt most profoundly at the shallow end.
If you haven't figured it out yet, water = VALUE. The shallow end is where the economically vulnerable are and the deep end is where the economically secure are. Most people are somewhere in the middle.
Democrats always scream, "tax cuts for the rich!", but the swimming pool analogy disproves that assertion - you cannot add or remove water from only one end of a pool. Everyone is swimming around in the same vat of value and the only thing that distinguishes one person from another is the amount of value they are floating in, or in some cases wading in.
In the real world when a business pays taxes they take a number of offsetting actions - prices go up for their customers, wages go down for their employees, and vendors are squeezed. Globally, their competition gets an advantage. All this does is lower the level in the pool.
When a rich person has their taxes increased they take similar actions. They spend less, they invest less, they work less, and they produce less. All this does is lower the level in the pool.
Tax cuts do the opposite. And tax cuts on business are the most direct because it is essentially new value flowing into the pool.
Democrats weren't always clueless about this. JFK understood this and spoke of a rising tide lifting all boats. He cut taxes. Some Democrats voted for both Reagan's tax cuts and George W Bush's. But today's Democrats are completely oblivious. Sad!
Posted by @RonnyReich at 11:51 AM