What is the right spark plug to jump starting an economy, tax cuts vs. tax spending?
In recent news, the President proposed tax cuts to jump start the U.S. economy. The proposed plan, as stated in the White House press release will attempt to:
- Cut taxes and simplify the tax code by taking the current 7 tax brackets and reducing them to only three brackets: 10%, 25%, and 35%.
- Double the standard deduction.
- Repeal the AMT (Alternative Minimum Tax).
- Return the top tax rate on capital gains and dividends to 20% by repealing the 3.8% Obamacare tax.
- Repealing the Estate Tax.
These policies raise the following question: Whether new tax cuts are the right way to jump state the economy?
The author of this Bloomberg article, describes how Sweden has taken the opposite approach and raised taxes and government spending to spur its economy. According to the article, Sweden enjoys one of the highest average annual growth rates when compared to the US, OECD and other European countries,
Sweden's Finance Minister, Magdalena Andersson, attributes Sweden's economic growth to its high taxes, strong union and an equal distribution of wealth. See the following chart which reflects that the bottom 90% of Sweden's workforce's income exceeds the bottom 90% of the US workforce's income, and the disparity between the income of the bottom 90% of Sweden's workforce and the top 10% of Sweden's workforce is less pronounced when compared to the same segments of the US workforce.
Also noteworthy in the article is that Sweden has tax revenues at about 43% of its GDP, while the US tax revenue is only 26% of its GDP. The article points out that Sweden's economy is growing about twice the rate the US economy is growing despite having a heavier tax burden for its citizens. The article attempts to attribute this disparity to the highest labor force participation, which generates higher tax revenues, and also is producing budget surpluses.
Of course, just because Sweden is raising taxes and spending the tax revenue to boost its workforce, doesn't mean that this strategy will work in the US. In fact the Bloomberg article cites opposition to the Swedish tax policies and the fact that there is a possible vote of no confidence if Sweden raises its taxes. The opposition would also point that the alleged surpluses are now being used to subsidize health care, education and defense. The opposition would also point out that the surpluses are only the result of the prior regime which promoted tax cuts and that the current government is threatening the growth that is attributable to the tax cuts because of its lavish spending on social services.
So what should be the right course of action for President Trump? Should he cut taxes and hope for economic growth as alleged by the opposition, or should he raise taxes and fund social services which would then allegedly drive more economic growth? We may never know which method is best.
Regardless of the tax policy enacted by Congress and the President, in most cases everyone still has a tax liability. If you know of a taxpayer not meeting its tax burden, CONTAC US to evaluate your claim and to assist you in determining whether to file a tax whistleblower claim. The IRS is paying 15-30% of collected proceeds if the IRS proceeds based on a whistleblower's substantial and credible information.