We at Liberty Works have been skeptical of Donald Trump. But we enthusiastically endorse his courageous tax cut proposal, presented in his Detroit Economic Club speech of August 8. He’s received too little credit from Conservatives and free market supporters. He would dramatically reduce income tax rates for all businesses, from the largest corporations to the smallest mom & pop enterprise. What makes his idea courageous? Read on.
Mrs. Clinton’s rebuttal to Trump’s proposal has been to regurgitate the same progressive slogans and chants that have, for nearly a century encouraged voters to indulge the ugly and self-destructive emotions of rage and resentment against “the rich.”
Resentment and loathing of men and women who are and always have been the heroes of the American economy is a prominent theme in Hillary’s campaign. Trump’s proposal is courageous because he knew the entire phalanx of political-media-academia elites would stampede to the cameras and keyboards to revile and denounce him, thundering the same accusation: “Trump’s plan is cruel to the poor and middle class while giving even more money to the wealthiest!”
But Trump’s cutting-edge proposal would energize what has been the moribund Obama economy with a new, low tax rate on all businesses, from the huge corporations to modest mom and pop enterprise. He would set a maximum 15% tax rate on all business income. Currently the maximums are 35% for large corporations and 39.6% for “pass through” medium size and small businesses. We’ll explain pass through in a moment.
Mrs. Clinton also gave a speech in Detroit, three days after Trump’s. She didn’t actually describe his 15% idea. Instead she offered this ugly interpretation:
In his speech on Monday, [Trump] called for a new tax loophole – let’s call it the Trump loophole – because it would allow him to pay less than half the current tax rate on income from many of his companies. He’d pay a lower rate than millions of middle class families.
So what is Mrs. Clinton’s tax platform? In her campaign events she bellows endlessly that the rich, including those who own businesses and create jobs must begin to pay their “pay their fair SHARE.” She plans to increase taxes on business because, in her words,
“We’ll go where the money is!”
After a look at the relevant numbers we’ll show how Mrs. Clinton’s promised tax increase contradicts her other promises to create more jobs and more small businesses and why higher tax rates on upper income business owners punishes the middle class far more than the wealthy.
Each year the IRS publishes exhaustive tables of statistical data. While most economic headlines are about estimates that are usually called “studies” extrapolated from indirect sources, the IRS publishes precise data drawn directly from tax returns. The most recent IRS data is from the 147 million 2013 tax returns, that were submitted during the spring tax filing season of 2014.
Democrat candidates have always told us high income Americans don’t pay their “fair share.” So let’s go to the IRS data and look at what those candidates never disclose: what SHARE of total tax revenue the highest income taxpayers actually do pay.
The pie charts show that in 2013 a tiny fraction of taxpayers, a little less than one percent, earned over $500,000. Yet their SHARE of total income tax paid was 35%.
Put another way, ONE out of every 136 taxpayers pays $350 of every $1,000 the IRS collects.
The national media rarely ask Democrats what share of income tax paid would be “fair.” But whenever Democrats and their supporters have been asked their answer has always been the same: MORE!
What do the IRS statistics tell us about these highest income earners? How do they earn their wealth? As the chart below shows, most of them – 89% – are business owners.
These businesses are organized – in IRS speak – as “pass through entities.” They are sole proprietorships, S-Corporations, LLCs and partnerships and do not submit business tax returns like large corporations. Instead all business revenue, expenses and profits “pass through” to the owners’ personal tax returns. According to census data 55% of all business employment is in pass-through companies.
Typically, these owners keep a portion of profits for personal/family consumption and leave a portion in the business to reinvest in improvements, upgrades and expansions or to pay down debt. But both portions – all income – is combined and reported as a lump sum, on a single tax return which does not differentiate.
Most of these 951,000 high income taxpayers are the owners of of the “middle market” businesses that create nearly all the new jobs in America.
Middle market is generally defined as a business with annual gross sales in the millions. They’re bigger than “small businesses” with less than $1 million in sales and – typically – a dozen or fewer employees, but smaller than “big business,” the huge corporations with annual sales in the billions and thousands of employees. One survey found that middle market businesses average 367 employees each.
Should the rest of us, the 99% who earn less than $500,000, be for or against taxing away more of the profits of these businesses? Is there a downside that Democrats’ emotionally charged campaign slogans don’t disclose as they encourage us to resent these business owner taxpayers?
These high income business builders don’t react to tax hikes by moving their families into smaller homes or buying cheaper cuts of beef. When government shrinks their after-tax income they react with shrinking investments in the start-ups and expansions that generate new jobs and raise the demand for employees which results in higher wages. This is why Mrs. Clinton’s call for targeting these specific business owners for higher taxes directly contradicts her promises to create jobs.
In a rational world the government would set lower, not higher tax rates on these entrepreneurs and investors, to benefit the middle class. This is exactly what Donald Trump has proposed.
Nothing the government could do would juice the economy and increase the demand for employees more rapidly than Donald Trump’s proposal to tax business income at no more than 15%. The share of income tax paid by the top one percent would likely decline slightly. But so what? We have a simple choice: tax increases designed to raise the SHARE of taxes paid by business owners, or tax cuts to free them to create jobs – which also creates tax payers – and to raise wages and spread prosperity?
In our next post we’ll look at the actual results of the most recent tax hikes on “the one percent.”