Republican Tax Cuts Receive Poor Reviews: Policymakers Need To Adopt Tax Policies That Foster Innovation And Economic Development

​April 15th is Tax Day for US taxpayers.  It is the last day when the American People can file their tax returns with the IRS.  Some will always owe money, others will owe nothing, and still others will receive a significant sum.  With the continued implementation of the 2017 Tax Cuts and Jobs Act, however there is a lot of discussion in 2019 as to whether or not the American People saw a reduction in their tax bills.  Overall, tax returns actually fell 1.1% while Middle Class taxpayers saw a decrease of about $20 per week in their tax burden.  Tax benefits for individuals will, of course, disappear after an eight-year period.  Businesses, which now permanently pay about half as much in taxes thanks to a reduced corporate tax rate of 20%, and the affluent are seeing the greatest direct benefits.  These benefits come at the cost of a 17% increase in the US Federal Deficit.  With little to no direct benefit going to the American People, it should be obvious why the American People are dissatisfied with the Republican tax plan.

​With that in mind, the justification for Republican tax policies has always been the presumption that they would lead to increased economic growth that would indirectly benefit everyone.  Like all tax cuts, the Tax Cuts and Jobs Act probably did help stimulate the US economy.  Unfortunately, the kind of stimulus tax cuts provide is both very limited and short-lived.  The stimulus package of the Obama Administration and the two stimulus packages of the George W. Bush Administration demonstrate the limited capacity of the government to build the economy with tax cuts.  Meanwhile, slashing taxes on businesses and the wealthy is proving to offer limited returns in terms of economic growth.  Economic growth and development are, after all, fueled by sustained consumer spending, not reduced tax bills.  Cutting any expense will give people and businesses more to spend, but consumers will only spend when they have a reason to spend.  Giving more money to the poor, for example, helps create demand, because the poor have unmet needs and wants that they can address with additional money.
 
In many respects, the Republican approach to tax policy is the traditional approach government has continually relied upon to help stimulate the economy.  By putting more money into the hands of American taxpayers, Republicans hope to fuel increased consumer spending.  Increased consumption should, in turn, lead to job creation.  By lowering the corporate tax rate and revamping the corporate tax code, they hope to encourage renewed investment in the US economy and workforce.  The Republican approach is the same approach that has continually failed to meet expectations, because it is an approach that does not recognize the reality of the economic situation in the United States.  The US is geographically divided into a growing number of extremely wealthy communities and extremely poor communities with a diminishing number of middle-income communities.  As such, the US economy is failing to properly distribute wealth to the businesses, individuals, and communities that make up the vast landmass that is the US.
 
The Republican tax cut approach assumes the US economy is like a massive factory awaiting a reason to produce massive amounts of goods and jobs.  Economically prosperous areas have the opportunities to ramp up production and the earnings to utilize tax breaks.  Poor regions do not.  The reason tax breaks do not help foster across-the-board economic development is that far too many businesses in far too many communities do not have enough consumers nor enough revenue to justify the risk of growth or sustain growth, even if they get tax breaks.  Tax giveaways to the more affluent, therefore, help exasperate the growing income gap that prevents poorer consumers from increasing their participation in the US economy.  Tax credits to the poor and Middle Class families do help fuel consumption, but they create dependency and the stimulus they provide is just as fleeting as that of any other tax break.  
 
What the US needs is a tax code that fosters the innovation needed to spur economic development.  It is important to recognize businesses, industries, and economies depend on three kinds of capital: financial, intellectual, and labor.  The investment of financial capital provides businesses with the money they need to open their doors, maintain their operations, and expand as their customer bases grow.  This is why investors and banks are so important.  It is also why the investment of financial capital is rewarded with either a share of a business or interest payments.  The need for the investment of intellectual and labor capital is not, however, always appreciated or properly rewarded.  To restructure the economy to benefit average Americans, intellectual and labor capital needs to be cultivated.  Over the past few decades, the financial sector of the economy has been a persistent bright spot, in part, because policymakers crafted policies to cultivate financial capital.  One such policy has been a reduced capital gains tax, which offers a window into ways labor and intellectual capital can also be cultivated.  

For average income American investors, a lower rate for the capital gains tax serves as a long-term incentive to invest their money in order to ensure their financial future.  It helps them build wealth for retirement while fueling the continued economic growth of the country.  Because stock markets afford individuals a convenient vehicle for investment, so they do not have to directly risk their savings in a local business venture, most people invest in the national and global economies through various financial instruments, including IRAs.  Money is funneled into investments that have more stringent reporting requirements, with the greatest benefits and risks going to those who invest in segments expected to grow the fastest.  The benefit to the economy is a readily available, broad-base source of capital that can be used to expand economic activities on Wall Street and on Main Street.  Unfortunately, a vibrant financial sector does not directly create too many jobs.  The financial sector does not employ a great deal of labor compared to the greatly diminished manufacturing sector.  
 
Consequently, steering too much money into the financial sector may hurt the economy as a whole.  After all, it diverts money away from the economic activities that directly benefit most Americans.  Today’s economy is built on increasing returns to those who can afford to be investors.  For wealthier Americans, a lower tax rate for unearned income is not an incentive to invest.  It essentially affords them a windfall for money they would have invested anyway.  This translates into a situation where an excess of capital is driven toward investments with the highest payouts, thus creating economic bubbles.  In turn, Wall Street firms and affluent individuals have been increasingly able to use extremes in the markets to siphon capital out of the economy, especially with their use of exotic financial instruments.   Consequently, U.S. policymakers should embrace and cap the benefits of a lower capital gains tax rate, so it can act primarily as an incentive for middle-income households. 
 
In turn, governments might consider subsidizing another type of capital through tax cuts that would drive growth where it is most needed, i.e. intellectual capital.  Innovations and the spread of new technology can create good paying jobs by sparking the development of novel industries.  Coupled with improved patent laws, offering a tax discount on par with the current capital gains tax deductions for royalty payments on novel technologies and other innovations would make them far more valuable.  By making patents and other intellectual property more valuable, financial capital would be steered toward innovation, thus ultimately cultivating new industries and jobs.  Government can pay for these cuts by adopting a more progressive business tax code and rolling back the overly generous benefits it gave corporations.  If wealthy businesses hope to retain their tax cuts, they simply have to invest in intellectual and labor capital.