By Ashton Barwick | USA
The United States Senate recently passed a tax reduction bill by a narrow margin of 51 to 49. The bill lowers the top corporate tax bracket from 39.1% to 20%, and the top income tax bracket will be lowered from 39.6% to 38.5%. This will allow individuals to keep more money they earn which will grow the economy, but what will become of the deficit?
The Secretary of Treasury, Steve Mnuchin, has repeatedly said that the tax reduction will pay for itself with the additional wealth created. This cliche sentiment has become ubiquitous among those that fantasize over tax breaks. Although I am personally fond of economic liberty, I also realize that government cannot take in less than it spends. These tax breaks will allow for more private sector investment to grow our economy, but allowing debt to accumulate will only result in economic stagnation from inflation.
Unemployment is expected to shrink due to the new legislation. When the government reduces its influence in the market, competition then begins to lower prices and allow more people to find work. Regulation often doesn’t work as expected either. Once inflation forces people into higher tax brackets they then reduce their taxable income. They accomplish this with a myriad of different methods such as moving trade to the black market, working less, spending more money on accountants, and most famous of all: offshoring.
The United States currently has one of the highest corporate tax rates in the world. This forces many potential companies to relocate in order to avoid the high regulatory burden. A common misconception associated with offshoring is that businesses move offshore in order to exploit workers in the third world. However, this conceited notion cannot stand up to rational scrutiny. Offshoring leaves some with a bitter taste because it is often associated with sweatshops in poor southeast Asian countries. While this is sometimes the case, workers in the third world are often close to busting down the door in order to fill out an application. Corporations such as Nike pay their workers in Vietnam double the average annual income. While conditions still leave much to be desired from our standpoint they see it as the opportunity of a lifetime. These opportunities are only available to these people because of the low amount of red tape. As Ludwig Von Mises once said, “Capitalism breathes through loopholes.”
Another great benefit of lower tax rates is more American jobs. President Trump promised Americans that jobs will return. Lower taxes and regulations will move the supply curve to the right. Thus, incentivizing more people to enter the market. With our exorbitant taxes, it is no surprise we have lost jobs. If the marginal cost to employ someone exceeds the benefit then that person will most likely remain unemployed. Moreover, these burdens upon businesses are shifted upon the consumer with higher prices. Corporations actually pay more money complying with regulation than they make in profits. Lowering the tax burden will incentivize businesses to put more money into production and employ more domestic workers.
Rappeport, Alan. “Ahead of Vote, Promised Treasury Analysis of Tax Bill Proves Elusive” The New York Times. Nov. 30, 2017.
Goldman, Henry. “Mnuchin, Ivanka Trump Pitch Tax Plan’s Benefits for New Jersey.” Bloomberg Politics. Nov. 13, 2017.
Crews, C.W. “Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State. Competitive Enterprise.
Nivola S, Pietro. “Inside Outsourcing: More Bad News from Business Regulation?” Brookings Institute. Nov. 1, 1996.