The lower taxes are, the better – that should go without saying. But when politicians throw around promises of tax cuts as party favours, intending nothing more than to please the crowd, they risk hobbling any serious hope of tax relief. They also risk distorting our economy as people change the way they work and do business to take advantage of these new, half-baked policy proposals.
That’s probably not a huge worry in the case of presidential candidate Kamala Harris, whose throw-away promises are likely the only tax-cut ideas we’ll see from her.
But it’s a serious concern with Donald Trump, who already presided over tax reform while in the White House and could do so again. “We will end all taxes on overtime,” Republican candidate Trump told an appreciative audience in Tucson, Arizona on September, 12.
The former and, perhaps, future president’s promise came three months after he vowed in Nevada, “when I get to office we are going to not charge taxes on tips.” No doubt pleasing her most left-leaning allies, Democratic presidential hopeful Kamala Harris expropriated his proposal for her own efforts to win the votes of service workers.
The combined offers of relief had many Americans contemplating how they could structure their compensation to shield themselves from Uncle Sam’s predations. “Can someone get paid in primarily tips and overtime?” joked Cato Institute vice president of economics Scott Lincicome. “Asking for a few million friends.”
Lincicome spoke tongue-in-cheek, but he understands that exempting some types of compensation from taxes without considering consequences will affect economic activity. Economists foresee big changes in how people will get paid when they know they’ll get to keep a lot more of one form of pay than another.
Writing for the Tax Foundation, Garrett Watson and Erica York predict that “employees would be encouraged to take more overtime work, and hourly or salaried non-exempt jobs may become more attractive if the benefit is not extended to salaried employees.”
With regard to exempting tips from taxation, their colleague, Alex Muresianu, similarly believes “the proposal would make more employees and businesses interested in moving from full wages to a tip-based payment approach.” He foresees previously untipped occupations, potentially including highly compensated professions like law and accounting, replacing wages and fees with tips to escape taxation and avoid Uncle Sam.
That’s not idle speculation. Government interventions warped worker compensation in strange ways in the past, with effects lingering into the present. Many benefits Americans receive from their employers are direct results of efforts to dodge intrusive restrictions on compensation during World War II.
For example, wage and price controls were imposed by the federal government for the duration of the war, but employers still needed to recruit workers. They took advantage of a 1943 ruling by the War Labor Board that contributions to insurance and pension funds were not wages and so not subject to restrictions.
“In a war economy with labor shortages, employer contributions for employee health benefits became a means of maneuvering around wage controls,” according to the 1993 book, Employment and Health Benefits: A Connection at Risk, and “by the end of the war, health coverage had tripled.”
“If a wage freeze led to workers relying on employers for health and retirement plans, why wouldn’t tax exemptions result in many people getting the bulk of their pay from tips and overtime pay as they shift their compensation to escape income taxes?”
Of course, if more people take their pay in untaxed compensation, the government collects less revenue. The Tax Foundation puts the hit from exempting overtime pay at between $680.4 billion and $3.1 trillion over 10 years. Exempting tips would reduce the tax take by at least $107 billion over that time.
Not that anyone should shed tears over denying the government part of their income. People are entitled to use their money for their own priorities, not those dictated by politicians. But a big, unplanned decline in revenue, especially when D.C. runs massive deficits, and economists working for the Penn Wharton Budget Model warn of a looming default on debt that would “reverberate across the U.S. and world economies,” is likely to panic the political class. Rather than consider comprehensive tax relief, they’ll be inclined to push big tax increases.
“Trump is losing the tax plot by promising all sorts of costly tax giveaways that will make it hard and maybe impossible to extend the pro-growth components of his reform,” The Wall Street Journal editorial board recently warned about the candidate’s tax-exemption proposals, as well as his plan to remove the cap on state and local tax deductions for residents of high-tax states.
That cap was part of the 2017 Tax Cuts and Jobs Act (TCJA) which “cut taxes for most Americans,” according to The New York Times. Passed when Trump was in the White House, it’s set to expire next year. Extending the law would be a major achievement for a second Trump presidency, but his scatterings of tax-cut candy could cause problems that get in the way. The same can be said of Harris’s promises, though nobody expects broad tax relief if she wins the election.
While neither Harris nor Trump have been very specific about their economic ideas, more details trickle out as the election proceeds. That offers a basis for estimating the eventual effects of their promises.
Harris’s tax plans, such as they are, are projected by the Tax Foundation to increase federal revenues, but also to “reduce long-run GDP by 2.0 percent, the capital stock by 3.0 percent, wages by 1.2 percent, and employment by about 786,000 full-time equivalent jobs.”
By comparison, Trump’s disconnected ideas, especially extending the TCJA, “would increase long-run GDP by about 1.5 percent” and boost wages and jobs. But his proposed tariffs largely offset the good effects of tax relief. If the giveaway tax exemptions (the overtime idea came out after the analysis) get in the way of extending the TCJA, the result is likely to hobble jobs, wages, and economic growth.
Neither candidate plans to balance the budget or address deficits and debt. That’s a given in modern American politics.
Until the federal government’s bills come due — a day fast approaching — Trump’s tax ideas are better than Harris,’ but that’s only true if he can get his own ill-conceived promises out of the way.
National Post