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Friday, December 15, 2017

QB Kirk Cousins Reminds Us Why Saving Is Imperative for Growth

Republicans are talking a big game about the impact of a reduced corporate tax rate, but they're not offering much of one.

Washington Redskins quarterback Kirk Cousins is famously frugal. Despite earning $24 million per year, and despite the near certainty that he’ll sign a multi-year contract worth in excess of $100 million sometime in 2018, he’s notoriously thrifty. So careful is Cousins about money that, according to Sports Illustrated, he and his wife live with his in-laws every offseason to shrink costs. So cheap is Cousins that the Mercedes G-Wagon he purchased in October had over 50,000 miles on the odometer. The model is from 2001. The car before the G-Wagon? SI reports that Cousins drove a “passenger van that once belonged to his grandmother.”

Without the frugal there is no economic progress.

To Keynesian economists, Cousins is the economic problem. Despite his many millions, Cousins is loath to even spend thousands. Yet the problem for modern Keynesians is that they get it backwards. Cousins is the solution. Without the frugal, there is no economic progress. We need many, many more of him.

Investment from Savings

Indeed, it’s a known quantity, or it should be a known quantity, that there are no entrepreneurs and no companies without investment first. For an entrepreneur to turn his idea into something real, someone, somewhere must save first. Applied to corporations, they’re the greatest creation of abstinence.

All of this speaks to why the corporate tax should be zero. It should be because corporations are owned by shareholders who have already paid individual income taxes. The corporate tax is not only a double-tax on individual earnings, but it’s a penalty levied on the very individuals whose abstinence leads to company and job creation.

Thinking about all this in terms of Cousins, he has choices. He can direct the fruits of his frugality to existing companies and start-ups such that wages rise (there’s no wage growth without investment), or he can subsidize government waste.

Imagine all the companies not created, and the innovations not pursued.

What’s shameful is how the tax code will reward any decision on Cousins’ part to subsidize the political class over private endeavor. Taxes levied on corporations will shrink the earnings of savers like Cousins, but if he directs his millions toward bonds supporting the frequently corrupt Washington, D.C. government, his income on those bonds will not be taxed at the federal, state, or local levels. Talk about a loophole – created for politicians by politicians. The obvious answer would be to “Call Your Congressman,” except that your congressman has made ownership of federal debt similarly beneficial to federal politicians. Sure enough, the income on Treasuries isn’t taxed at the state or local level.

In contemplating this, readers would be wise to consider the unseen. Because income from Treasuries and munis is taxed very little, or not at all, the effective rate of income from both is very high. That’s why copious individual savings are directed toward munis and Treasuries each year. Imagine all the companies and jobs not created, and the innovations not pursued, because politicians have written into the tax code the ultimate loophole; one benefiting them.

Conversely, shareholders in corporations not only pay the tax levied on them, but they face the risk of seeing their investment vanish through poor management. That’s why the savers who put their money to work in startups and corporations deserve so much praise. Without their parsimony and appetite for risk there would be no progress. The corporate tax should be zero as mentioned before. Investors whose savings fund business growth and its resulting experimentation should, if anything, be rewarded through the tax code.

Setting the Corporate Tax Rate

At the same time, it’s fair to say that conservatives giddy about the recently introduced Republican tax bills that purport to reduce the corporate rate from 35 to 21 percent overstate their case more than a lot. While there should yet again be no tax levied on that which is owned by individuals, conservatives reveal themselves as unserious when they opine that “the federal corporate income tax rate tops out near 40% – making ours the highest statutory rate in the developed world.”

The above quote was pulled from a Dallas Morning News op-ed written this week by a prominent conservative. As readers will soon see, this otherwise careful thinker is trying to have it both ways. While stressing that the U.S. corporate rate is the highest in the world, he adds that “the amount of revenue the federal government collects from corporate taxation is only 2% of GDP, one of the lowest collection rates among developed countries.”

The allegedly high tax rate is not very biting in an effective sense.

So while the corporate tax rate is quite high in the US in a headline sense, it’s apparent that it’s rather low in an effective sense. If the rate really vacuumed up anywhere close to 40% of earnings from U.S. corporations, then it’s fair to say that investment flows into US firms would be very slight. It’s also safe to say that the world’s most valuable companies wouldn’t be American. But the ten most valuable corporations in the world are, in fact, American. Lastly, it’s safe to say that tax revenues from US companies would constitute a major part of federal revenues to reflect 35 to 40 percent of profits from the world’s most valuable businesses, but that’s not the case. As conservatives acknowledge, the allegedly high tax rate is not very biting in an effective sense.

Crucial here is that any tax on corporate profits – no matter how small – is way too high, and points to a Congress that obnoxiously feels it hasn’t taxed away enough of our individual income. At the same time, readers should be skeptical about conservative excitement related to the proposed lower corporate rate. The existing one isn’t very close to 35 percent as is, particularly for companies with international earnings. But with the GOP’s introduction of a “global minimum tax” meant to target global earnings, watch out for more and more stories emerging about a more difficult tax environment for the biggest and most profitable US companies

Republicans are once again talking a big game about the impact of a reduced corporate tax rate, but there’s not much to speak of once the various layers are peeled off. Too bad their tax bill is ultimately one focused on raising revenues, rather than substantially reducing the tax burden on companies, and the Kirk Cousins of the world. As his millions in earnings combined with thrift reveal, lower income taxes for the quarterback would be particularly good for the economy overall. Investment is what drives economic growth, and Cousins would have millions more to invest if Congress weren’t so careless with money that Cousins is rather prudent about.

Reprinted from Real Clear Markets.

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.