Confession and Taxes

First of all, I must confess. The problem with this type of communication is that, when you commit an error, all can see it. In my blog on the tax bills originally proposed by the House and Senate, I greatly overstated the amount of our increase. I combined two methods and came up with an erroneous base. In fact, these bills would have increased our taxes by only 11-12%. Now, after the reform bill has become final, I find that our increase will only be about $93. That is certainly bearable, but it is, equally certainly, not a tax cut. I hope that the true working and middle class taxpayers fare better. It is likely to be so in the short run.

Some of the worst aspects of the original bills have been eliminated. Graduate students will not be taxed on their tuition waivers. Interest on student loans is still deductible. However, some things that are particularly bad for those seeking an education remain. I am particularly disturbed by the taxation of some college and university endowments. Many colleges and universities, including the two that I attended and one of my wife’s, have moved to “need blind” admissions. Under these systems, students are admitted based upon their academic qualifications and potential. Once admitted, financial needs are assessed. If students and parents are unable to meet some or all of the costs of attendance, the college endowment picks up the necessary costs. To the degree that endowments are taxed, the ability to continue such practices is diminished. This does not seem to be logical public policy. I can see the logic in taxing those endowments that are not reserved to purely academic purposes. I can see no logic in taxing funds intended to assist and broaden the educational experience.

I understand why “budget adjustment” procedures and rules required that some tax cuts be temporary. However, the effect of choosing individual taxpayers as the focus of these temporary rates has the effect of concentrating the impact of the failure to stimulate growth on these individuals while holding the corporations whose behavior contributed to that failure harmless. Ugh!

Why am I still harping about this failure? The first reason lies in experience. It hasn’t worked in the past, so why should it work now? Most economists agree with this view.
The second reason lies in my assessment of corporate behavior. Many business leaders have indicated that they do not believe that the tax act will result in higher levels of investment and growth or in significantly higher wages. They suggest, and I agree, that profits are most likely to be spent on stock buy-backs and purchase of other companies.
This can be traced to the fact that corporate executives are rewarded for “increasing shareholder value.” The most reliable, short-term way to do this is through reducing the number of shares outstanding or by adding value by the purchase of another enterprise. Expanding through capital investment and increased productivity linked to higher wages is, at best, a longer term process. We are fortunate enough to hold a significant number of corporate investments, and I have seen almost nothing in the annual reports of corporations in which we hold stock that would contradict my view. I have no doubt that we are profiting from this practice, but I do not think that it supports the supply side model espoused by the supporters of the recent tax bill.

We will see. I am sure that many will seize upon bonuses offered and the Wal-Mart increase of starting Pay to $11 and hour as evidence that the scheme works. I am more skeptical.