The King of Sichuan comes and doesn’t pay taxes?

Source: The Surplus of the Wealthy

With the results of the House of Representatives election becoming clear, the results of the 2024 US election have come to light. According to the current vote count, the Republican Party is very likely to win 219 seats in the House of Representatives, thus locking in the majority party status.

In this way, the Republican Party not only swept the seven major swing states and won the presidential election, but also locked in the majority in the Senate election early on. The latest results of the House of Representatives election show that after Trump takes office, he will become an all-powerful president.

As early as Trump's last term (2017-2020), Trump successively appointed three conservative justices to the Supreme Court, which led to a total of six justices who tend to be Republican (there are 9 justices in the Supreme Court). This means that, unlike other presidents, Trump can exert a significant influence on the judiciary in his second presidential term.

Traditionally, the United States has five major power institutions - the president and government, the Senate, the House of Representatives, the Federal Reserve and the Supreme Court. Now, four of these institutions agree with the Republican Party's thinking in terms of concept (except for the Federal Reserve, which has always claimed to be independent). This is extremely rare in the history of American politics, which is why people are talking about the "super power" that Trump will have after taking office.

Trump is about to enter the White House, and Trump transactions in the market are in full swing.

Trump's economic promises in the 2024 presidential campaign can be roughly summarized as follows:

1) Economic: promise to "end inflation" and promise low interest rates to make Americans affordable again;    

2) Taxation: propose trillions of dollars in tax cuts and expand the scale of tax cuts;

3) Immigration: vow to block the border by building a wall and strengthening law enforcement, and to launch the largest-ever deportation of undocumented immigrants in the United States;

4) Trade: make tariffs a core campaign promise, propose a new tariff of 10-20% on most foreign goods, a 60% tariff on all Chinese goods, and other tariffs on countries that do not use the US dollar;

5) Energy and environment: promise to fully liberalize U.S. crude oil extraction and cancel environmental policies that restrict carbon dioxide emissions;

6) Other promises involving the economy and assets: support cryptocurrencies.

The framework of Trump's policy on economic taxation and trade can be simply summarized as "three lows and one high":

low income tax, low interest rates, low inflation, and high tariffs.

Next, I will divide several articles to discuss whether his three lows and one high are possible.

Let's talk about the income tax first.

On the last day of October, the US election was entering the final sprint stage. Trump came to the Capitol Hill Club and held a closed-door meeting with some Republican members in his busy schedule. He put forward an idea that shocked everyone - if we are elected president, why not exempt all federal income taxes!

Wow, Li Zicheng has been dead for 380 years, and a great leader of American imperialism actually shouted out that slogan again -

No taxes when the King of Chuan comes (no grain when the King of Chuang comes).    

Li Zicheng was just shouting to seize the power of the Ming Dynasty, but now the "King of Chuan" who has been elected as the President of the United States really intends to do so in his heart!

As we all know, the fuse that triggered the American independence incident was because the British government decided to tax the colonists, so the American people have always had a deep resistance to various taxes, and generally believe that taxes are an evil that the government has to commit in order to maintain its own operation.

Income tax, which is levied directly on corporate and personal income, makes every citizen feel painful. Therefore, from the founding of the United States to the outbreak of the Civil War, there was no income tax at the federal government level, and the U.S. Constitution did not mention taxation at all, so Americans naturally believed that they did not need to pay income tax.

It's true!

At that time in the United States, whether it was a company or an individual, as long as you had the ability to make money, it was all yours, and you didn't have to pay taxes to the federal government, not a penny.

We'll talk about how the federal government survived at that time later, and let's discuss the income tax issue first.

After the outbreak of the Civil War, in order to suppress the rebellion in the southern states, the Lincoln government emptied its purse but it was not enough for military expenditures, so what to do? It could only tax the income of companies and individuals.

So, the Lincoln government promulgated the first federal income tax law in 1861 and began to collect income tax.

However, because the American people were generally unfamiliar with and did not accept this kind of taxation, they generally believed that it was a temporary measure during the war. A few years after the end of the Civil War, the Federal Supreme Court ruled that income tax was "unconstitutional" and the government could no longer collect income tax.

However, the government always has a way to expand its power. In 1894, the United States once again promulgated the corporate income tax law, but soon someone sued the federal government for "unconstitutionality". The Supreme Court also ruled that the plaintiff won, and the taxation was naturally a failure.

To levy income tax, the U.S. Constitution must be amended!

In July 1909, some members of Congress proposed a proposal to amend the Constitution and allow the federal Congress to levy income tax. The proposal was approved by a sufficient number of states on February 3, 1913. This is the famous 16th Amendment to the U.S. Constitution: "Congress shall have the power to impose income taxes on incomes from whatever source, which shall not be apportioned among the several states, nor shall they be based on any census or enumeration."

In other words, before 1909, the United States had no corporate income tax or personal income tax.

It was not until 1909 that the federal government was first allowed to levy income tax on companies, which also became the beginning of the contemporary income tax in the United States, but the tax rate was extremely low at the beginning, only about 1.5%.

On the eve of World War I, the federal government considered participating in World War I, and the corporate income tax rate rose to about 10%.

Before and after the United States participated in World War II, in order to cope with the war, the statutory corporate income tax rate was rapidly raised to 40%. After the end of World War II, in order to compete with the Soviet Union for world dominance, the statutory corporate tax rate was further raised to more than 50%. This high statutory tax rate continued until the Reagan administration, when it was significantly reduced.

Since then, the US corporate income tax rate has basically remained at 35% until Trump came to power in 2017. The Tax Cuts and Jobs Act passed that year reduced the US federal corporate statutory tax rate to 21%. The Biden administration did not dare to raise the tax rate after taking office, and this low tax rate has remained to this day.

It is worth mentioning that after the federal government levies income tax, more than 80% of state governments will also levy corporate income tax on companies registered locally based on the federal concept and definition of income, with tax rates ranging from 1% to 12%.

The chart below shows the statutory corporate income tax rate and the actual effective tax rate at the federal level in the United States since 1909 (the comparison between the total corporate income tax and the total corporate profit in the United States).

Data source: U.S. Treasury Department.

In addition to corporate income tax, personal income tax is more important. Because it is taxed on individuals, it is necessary to accurately grasp the income situation of each person, so the collection of this tax is more complicated.

After the 16th Amendment to the Constitution was passed in 1913, the federal government began to levy taxes on personal income, and a tiered tax rate was established at that time:

People with an annual income of less than $20,000 are subject to a 1% tax rate;

Annual income of $20,000-50,000, and the tax rate on the portion exceeding $20,000 is 2%;

Annual income of $20,000-50,000, and the tax rate on the portion exceeding $20,000 is 2%;

Annual income of $50,000-75,000, and the tax rate on the portion exceeding $50,000 is 3%;

Annual income of $75,000-100,000, and the tax rate is 4% on the portion exceeding $75,000;

Annual income of $100,000-250,000, and the tax rate is 5% on the portion exceeding $100,000;

Annual income of $250,000-500,000, and the tax rate is 6% on the portion exceeding $250,000;

Annual income exceeding $500,000, the tax rate on the excess is 7%.

It was from 1913 that any American could confidently say to government officials, "I am a taxpayer," "We support you," "You serve us"...

In the past 100 years, the applicable tax rates for personal income tax have changed greatly.

The marginal tax rate for the highest-income group was as low as 7% in 1913, and as high as 94% during World War II, and is currently 37%; the tax rate for the lowest-income group was also as low as 1% in 1913, and has been stable at 10% since 2000.    

Data source: U.S. Treasury Department.

It is precisely because income has been taxed by the federal government since 1913 that Americans like to say that only death and taxes are inevitable.

Observing the corporate income tax rate and personal income tax rate charts throughout the history of the United States, we can find that these two tax rates are currently at the lowest level since the outbreak of World War II, and there is not much room for decline.

Well, we have to ask further, what is the current proportion of income tax to federal revenue?

The following chart distinguishes the proportion of various incomes of the US federal government from 1934 to 2017 - Excise Tax in the figure is consumption tax, Payroll Tax is social security tax, and there are other taxes, which are not income tax.    

Obviously, income tax from companies and individuals accounts for about 60% of the total revenue of the US federal government.

In the just-concluded fiscal year 2024 (October 1, 2023 - September 30, 2024), the total revenue of the federal government was 4.92 trillion US dollars, of which personal income tax revenue was as high as 2.43 trillion US dollars, accounting for nearly 50%; in addition, there was corporate income tax of 530 billion US dollars, accounting for about 11%.    

In theory, Trump can certainly reduce the current 21% statutory corporate income tax rate to 0, or reduce the individual minimum marginal income tax rate to 0, which means that the federal government's annual revenue will be immediately reduced by more than 60%.

Does that mean that the US federal government will survive? Social security, medical care, national defense, national debt interest, unemployment benefits, veterans' fees, education, transportation... Can 3 trillion US dollars be saved from these expenditures?

What's more, the federal government has always been spending more than it earns, and has been living beyond its means for more than 20 years. In the past year, it earned 4.92 trillion, but spent 6.75 trillion, an extra 1.83 trillion dollars. In this case, Trump is going to give up the 3 trillion dollars in revenue directly -

Is this to make America great again?

This is to make America small again!

Furthermore, from the specific implementation point of view, it is easy to reduce corporate income tax, because everyone is happy anyway, but if you want to reduce the personal income tax rate of the rich, this is probably a bit difficult under the current public opinion in the United States, especially in the minds of those redneck voters who support Trump's coming to power.

According to the research of Saez and Zucman, the top one ten-thousandth of the rich in the United States account for 10% of the total wealth in the United States, but the tax they pay is less than 5%, which itself has made most American people quite jealous. How dare Trump continue to cut taxes for the rich?

In the tax cuts led by the Trump administration in 2017, the corporate statutory income tax was drastically reduced from 35% to 21%, but in terms of personal income tax, the highest marginal income tax rate for the rich was only reduced from 39.6% to 37%, and the marginal tax rate for ordinary people was maintained at 10%.

Not to mention the amount of tax, if all income tax collection is taken into account, since Trump's tax cuts in 2017, the effective tax rate of the 400 super-rich in the United States is actually lower than that of the bottom 50% of the people. If Trump dares to further reduce the already extremely low marginal tax rate for the rich, do you think Americans will take up guns and overthrow this new Trump King?     

So, I can only say that Trump has a beautiful idea of ​​completely abolishing income tax!

It feels like I think that with my understanding of wealth, I should have a place on the Forbes list!