TAX CUTS AND ECONOMIC STIMULATION

Well, we have it again, Donald Trump has proposed the tired old proposition that, if you cut taxes, the  increased economy resulting from the tax cut will replace the loss of revenue.  Though Ronald Reagan once followed this, he became so alarmed at the Federal deficits he was ringing up that he started increasing taxes again. I believe he did it 12 times and recovered nearly half the revenue lost from his tax cuts.  Reagan never did come close to balancing the budget.

As a result of Reagan increasing taxes, I ended up paying more taxes than I did before his tax cuts.  One of the loop-holes he closed was being able to take interest paid on time purchases from your income tax.  Of course the tax cuts weren't meant for the likes of me, but for the wealthy.

If the proposition was true, why not cut taxes to zero and have infinite Federal revenue?

I discussed years ago (beginning in 2010, my all time favorite) why cutting personal income taxes is an inefficient way of  stimulating the economy.*  The problem is that the wealthy do not spend all their money productively.  For examples, they buy bonds (municipal, Treasuries, corporate, foreign) which can be productive if they are new issues not to pay down other debt (e.g. high interest debt).  They buy existing stock (companies only benefit from selling new issues), and then they spend on luxuries such as Canadian personal Bombardier jets, chalets in Switzerland, island in the Bahamas, and the like.  And the poor pay down debt.  Many of these enrich other countries and are good for the global economy but do nothing for the U.S.

Then we have the example of president "Dubya" Bush who cut taxes a lot, particularly for the wealthy, and plunged us into the near economic death, the Great Recession.  To be fair, it wasn't just the tax cuts that plunged us, but his opposition to regulation of the financial industry that may have been the biggest cause.  Of course having two wars paid for on the cuff (borrowing) didn't help (Disclosure I did support the war in Afghanistan because I thought we had to do something after 9/11, but I didn't support having a tax cut on top of it.).

There are two  types of business tax cuts.  Trump wants to lower the corporate tax rate to 15%.  I'm not sure how much fiscal damage it would do as I believe that is about the rate companies actually pay now because of tax breaks.  GE, for example became famous for, among other things, not paying any corporate taxes for 2010.  GE said that it wasn't true and that they would pay a "small income tax" for 2010.***

The other corporate tax cut that might be beneficial is to permit companies to repatriate money held from profits overseas.  This has been done before and

Buybacks have become a popular use for foreign earnings****
Others are using the cash to pay down debt.
Last month, President Barack Obama proposed letting companies bring back the profits they hold at overseas subsidiaries at a tax rate of 14%, and then proposed taxing foreign earnings going forward at a minimum of 19%.****

Stryker, which makes medical devices, said last year that it earmarked $2 billion for return to the U.S. The company incurred tax bills in Europe when it moved some of its intellectual property to the Netherlands from other European countries and realized that those taxes would help reduce its U.S. tax bill on the money to roughly 5%.

“We will use the funds to drive growth in our existing businesses through investments in acquisitions, dividends and share repurchases, in that order,” said CFO Bill Jellison.****

Some companies also paid out special dividends with a part of the repatriated money and made some acquisitions.****

In 2004, the United States Congress enacted such a tax holiday for U.S. multinational companies, allowing them to repatriate foreign profits to the United States at a 5.25% tax rate.^[1] Under this law, corporations brought $362 billion into the American economy, primarily for the purposes of paying dividends to investors, repurchasing shares, and purchasing other corporations.^[1] In 2011, Senate Democrats, arguing against another repatriation tax holiday, issued a report asserting that the previous effort had actually cost the United States Treasury $3.3 billion, and that companies receiving the tax breaks had thereafter cut over 20,000 jobs.^[2] A second repatriation tax holiday was defeated in the United States Senate in 2009.^[1]

Very little of the money repatriated in 2004 ended up in new productive investments that was the purpose of the low tax rate so corporation cheated.

* http://stopcontinentaldrift.blogspot.com/2010/05/effectiveness-of-taxes.html
Also see: http://stopcontinentaldrift.blogspot.com/2010/07/trouble-with-income-tax-cuts.html
http://stopcontinentaldrift.blogspot.com/2010/09/jobs-disconnect-between-business-and.html
http://stopcontinentaldrift.blogspot.com/2012/06/lowering-tax-myth.html
*** http://www.factcheck.org/2012/04/warren-ge-pays-no-taxes/
**** http://www.wsj.com/articles/u-s-companies-bring-more-foreign-profit-home-1427154070
https://en.wikipedia.org/wiki/Repatriation_tax_holiday