Myths Surrounding the Tax Cuts and Jobs Act

Myths Surrounding the Tax Cuts and Jobs Act

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They finally did something! A few days ago, on December 20th, Congress passed the Tax Cuts and Jobs Act and sent it to President Trump’s desk for him to sign it. On December 23rd, with the signature of the President, it became law. This act (though not a flat or fair tax) is a solid improvement in our tax law for several reasons.

The bill reduces the amount of taxes American families will be paying by increasing the standard deduction and lowering the rates of 5 of the 7 income tax brackets. It lowers the corporate tax rate from a stifling 35% to a much more competitive 21%. And as an added bonus, it repeals the tyrannical Obamacare individual mandate which forces Americans (often those making less than $50,000/yr) to buy health insurance or face a fine. In short, this is a good bill which decreases the amount of taxes paid by 80% of Americans, will prompt higher wages for many American workers, and will promote additional economic growth.

Yet, in the most baffling way, many Americans are outraged at this tax bill. Indeed, in my life I have never seen people so angry about having to pay less in taxes, allowing them to keep more of their hard earned money. It truly is incomprehensible, until you factor in the bias of the media and the misinformation that many Democrats are spreading about this bill. There are two myths regarding the Tax Cuts and Jobs Act that I want to dispel in this article.

First, there is a myth surrounding the corporate tax cut and what large companies will do with the extra money that they will have as a result of the reduction in the corporate tax rate from 35% percent to 21%. Many Democrats, and their allies in the media believe that the only thing companies will do, is further increase their profits, and initiate buybacks of their stocks. Indeed, the media’s bias in distorting the result of this tax cut is demonstrated in a quintessential interview on NBC which took place between Savannah Guthrie and Paul Ryan. In this interview, regarding the idea that companies will instead pay their workers more, and invest more in the economy, Guthrie asks Ryan, “I’ll ask you plainly, are you living in a fantasy world?” Her disdain for the corporate tax cut is palpable.

Yet in an amazing twist of irony, later on the very same day, the tax cut were passed by Congress, and “Comcast chief executive Brian Roberts said the company would be giving out $1,000 bonuses to ‘eligible frontline and non-executive employees” as a result of the tax bill. What is so ironic, is that Comcast owns NBC, which means that Savannah Guthrie, yes the very same one who earlier in the day had asked Paul Ryan if he was “living in a fantasy world”, is likely to receive a bonus in her next paycheck because the corporate tax rate was cut. Irony at its finest. In other words, the same media talking head who thought that all companies would keep the extra money saved from lower taxes, is going to be making more money since her employer (one of those companies) is passing down some of that extra money. As millenials often say, “lol.”

Indeed, by my count there are currently 7 companies that, in the 24 hours after the tax bill was signed, are now going to pay their workers higher wages and/or are planning on infusing millions and billions of dollars into the U.S. economy. In addition to Comcast, the companies include AT&T, 53rd Bank Corp, Boeing, FedEX, CVS, and Wells Fargo. That totals seven examples so far as to how cutting the corporate tax rate will lead to higher wages, and more economic growth.

In addition, Wells Fargo will be raising its minimum wage to $15 per hour. This will have a positive, long term impact for all of their current, and future employees! It seems that one of the best ways to ‘fight for $15’ is to reduce the corporate tax rate, rather than mandating an artificial and random minimum wage forcibly through the federal government.

As a side note though, there are many companies that will be investing more in the economy and passing on their increased earnings to their employees just like the seven previously mentioned. It is possible that some will do some sort of stock buyback as well. This is often used as an argument against reducing the corporate tax rate. However, buybacks are often beneficial in three ways.

Firstly, since buybacks are optional to shareholders, those most likely to accept the offer of a buyback are those who are most likely to have a better use for it. This allows the money to find a new home in startup ventures, and new companies that grow and become the next mega employers (like Walmart or Amazon). Secondly, the stock price of a company often increases after a buyback which benefits a company’s shareholders, and the workers of a company which often have been given opportunities to buy stocks of that company at a reduced rate. The stock increase as a result of the buyback increases the value of the shares they hold, meaning that the companies workers benefit in this way as well. And lastly, studies show that “Firms that buy back stock subsequently beat their peers by 12.1% over the next four years.” In this way, when companies choose to buyback stocks resulting from an increase in profits, the economy and new companies benefit, as do shareholders, and the workers of the company. That is hardly a good argument against a cut in the corporate tax rate.

The second myth, is that the majority of the tax bill’s benefits go to those at ‘the top’ or the ‘top 1%.’ This too is demonstrably false. Indeed, though this bill has many positive, conservative aspects, it is progressive in the sense that it will continue to shift the tax burden to those at the top. The only people who will potentially see a tax increase are millionaires in high tax states such as California, New York, or Illinois.

Yet, you wouldn’t know it from the left’s outrage in which they claim that the middle class and the poor are going to foot the burden from this tax bill, and that those at the top are going to get the tax cuts. Progressives (or socialists like Bernie Sanders) attempt to lie and call this bill a “massive attack” on the middle class. The root of this misconception is based in the arithmetic used to support that claim.

For example, let’s say that Person A has gross annual income of $1,000,000, and Person B has a gross annual income of $100,000. Now, let’s give Person A a 5% tax break, and Person B a 10% tax break. Now who would you say is getting the larger tax break? The answer is Person B since he is getting 5% more of a tax cut than is Person A. However, the left will claim that these tax cuts are unfair since Person A is getting the larger tax cut. How is it possible to claim that? Well, a 5% tax cut on $1,000,000 is $50,000 where as a 10% tax cut on $100,000 is $10,000. So, the left claims, Person A is getting 83% of the tax cuts where as Person B is only getting 17% of it. How unfair! Obviously, it is not anything close to being unfair, as Person B is getting the larger tax cut on a percentage basis.

In this way, whenever some claims that this tax bill is unfair since most of the benefits will go to the top, consider whether that claim is being made based upon a dollar amount, or a percentage amount? Likely they will be using the dollar method so that they can claim a mistreatment of the middle class, even though the poor and middle class will be receiving a larger tax break than those at ‘the top’ from a percentage perspective.

Under this tax bill, those who are making between $20,000 and $200,000 each year will receive between a 7.4% and a 16.3% cut. And the amount of people who will be paying no federal income taxes will increase from 43.9% to at least 47.5%. Whether that is a good thing or not can be up for debate, but at the very least one cannot claim that the benefits from this tax bill are only going to those at the top.

The Tax Cuts and Jobs Act is a good bill which will raise wages, promotes economic growth, and reduces the amount of taxes paid by most all Americans, including those in the bottom and middle income brackets.

Though it has seemed hard lately to view politics through a positive and optimistic lens, we can rest easy that at least with this bill, we’ll have a little more money in our pockets, and we’ll be a little more free.


You can follow this author on twitter @ZacharyMettler

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