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Many children have played hot potato, a game in which they pass a spud to other children quickly so they don’t get stuck with it when the music stops.

Taxes are like that potato. No one likes paying them; everyone tries to pass them to others. The game of hot potato sheds some light on the debate over Republican tax cutting plans, particularly when it comes to companies.

Treasury Secretary Steve Mnuchin has claimed that most of this tax savings would go to workers, in the form of higher wages, in line with the president’s argument that the plan would benefit the middle class.

With the help of hot potatoes, let me explain why he’s wrong.

WHY WORKERS WON'T GAIN

There are two ways a corporate income tax cut can trickle down to workers’ pockets: directly through higher wages or indirectly via lower prices at stores selling the things they buy.

Mnuchin contends that workers currently bear 70 percent of the corporate tax burden – or get stuck with 70 percent of the corporate tax hot potato. So, a tax cut would mean that companies pass much of their tax benefits to their employees by paying them more or by cutting prices and increasing the buying power of current workers.

Yet, based on past tax cuts, economists have estimated that only 20 percent of the corporate income tax is borne by workers, suggesting that they would get just a small fraction of any corporate tax reduction.

PAYING FOR TAX CUTS

So back to our game. When there’s a tax cut, someone still is stuck with a potato. That is, someone has to pay for it. There are two ways this can be done: increased borrowing or lower government spending.

When economies are near full employment, as the U.S. is today, additional government borrowing will increase borrowing costs or interest rates. So if the U.S. were to borrow more money to finance the tax cuts, the losers would be middle-income households borrowing to start a business, go to college or buy a home. Around 80 percent of Americans are currently in debt, with a median debt of $70,000. Homeowners would be big losers because higher mortgage rates would also lower the value of their home (they’d also get hammered by changes to the tax code that would make the mortgage interest deduction useless for most people).

Whether or not the U.S. borrows more and increases the national debt, some spending cuts would also be required.

These would likely come from Social Security, Medicare and other social programs that benefit average citizens and the poor. That’s because lawmakers won’t find much savings anywhere else, apart from the military budget, which they almost certainly wouldn’t touch.

THE BIG WINNERS

The consequence of the $1.5 trillion tax cut then would be continuing stagnant wages, cuts in government programs, higher interest rates and rising inequality. Translation: The rich get richer and average Americans get stuck holding some very big potatoes.

Adding further injury, average workers wouldn’t benefit very much from the proposed individual income tax cuts either. Only 8.3 percent of those in the House plan would go to taxpayers making $50,000 or less (which about half of all taxpayers). In contrast, millionaires, the richest 0.3 percent of the population, receive more than a fifth of the cuts.

Even worse, unlike for companies, all the tax cuts for the working class disappear after 10 years. (Paul Ryan says a future congress will ensure these cuts don't disappear after 10 years so just trust him on that one. wink wink)

More on each of the categories: http://theconversation.com/hot-potato-shows-why-workers-wont-benefit-from-trumps-corporate-tax-cut-86878

#Taxes #Winning #Losing #MAGA