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US Presidential Poll: Tall promises by Hopefuls elbow economy closer to tax-doom-loop!

 

TIOL - COB( WEB) - 938
SEPTEMBER 19, 2024

By Shailendra Kumar, Founder Editor

THE first face-off between the two Presidential hopefuls was a high-decibel, heavy-in-acrimony event in America. Most global viewers like the Americans, were glued to their 'idiot-box' or online platforms, hoping to lap up a few insights which might form the broad contours of economic and foreign policies of the new occupant of the White House. Geopolitical freaks were equally keen to gather meaty substance from the in-person-debate and conjure up the future pathway for the new geopolitical order imbued with geo-economic spin-offs! But it turned out to be a despair of asteroid-size! Though the Western media tilted the verdict towards Kamala Harris but there was only 'celebrated trash' for serious political savants. The Republican hero, Mr Donald Trump, was predictably imbecile, wayward, idiosyncratic, unhinged and prone to making rabid claims - Indeed, he did not disappoint when he noisily said without a quake in his shoes - Immigrants are eating dogs and cats in the State of Ohio! His remark was quickly showcased by Harris as a 'dark lie' and a fire hose of falsehoods! In fact, Harris did not mince her words and accused him of enriching the cesspool of disinformation. Briefly, both stuck to the famous 'I am rubber, you are glue' approach to deal with each other in public!

Anyway, from the 'trash can' and also other campaign speeches delivered prior to the 'ME(A)GA' debate, I could also gather a few tax-related insights which are worth examining from two perspectives - political implications and against the rich legacy of fiscal largesse. Unlike the Global South countries, taxation is a high-premium took-kit to woo middle-class voters in the US. So, to woo the middle-class, Harris promised to expand the trolley of child tax credit besides pledging additional credit for parents of newly-born children. Aha! This is to tackle the sliding birth rate in the country - an incentive for reproduction! Given the industrial-size of the swelling housing crisis coupled with the soaring rental, she promised to provide a financial assistance of USD 25,000 to first-time home-buyers. She made it clear that there would be no hike in the incidence of taxation on income up to USD four lakh. To further promote the culture of start-ups, she hinted at raising the threshold limit of deductible business expenses from USD 5000 to USD 50,000. Harris claimed that her decision would catapult the number of small businesses from 33 million to 58 million and generate jobs in millions. Small businesses account for 44% of the American GDP. Incidentally, Indian small businesses also account for 29% of GDP and employ over 93 mn workers, including two million females.

Earlier in New Hampshire campaign, Harris had called for raising the tax-rate on long-term capital gains from 20% to 28% for income above USD one million. Such a move combined with the New Investment Income Tax (NIIT) would take the effective tax rate to 33%. Although it amounts to a significant increase but it would still be lesser than what Biden has proposed for 2025 budget - a combined tax rate of 44.6%! For capital gains, she favours a fair tax rate which rewards investment in innovators, founders and small businesses. Harris idea is to mop up an extra ounce of revenue from capital gains to fund other sops she has pledged for the working class and the middle-class households. She believes that her proposals would make the tax code more fair while according due priority to innovations. She is of the view that billionaires and corporate behemoths ought to pay their fair share in taxes but it is not happening! A large number of billionaires in today's America escape paying very little taxes owing to many loopholes in the tax code.

Interestingly, both the Presidential candidates have pledged to remove income tax on tips! Though tipping is a universal consumer behaviour but it has assumed gigantic proportions in the American economy. It is also unique in many ways in the US. It became a pronounced trait particularly during the pandemic. During the lockdowns, Americans began tipping more to food delivery men or other service workers. Even after the pandemic, it continued to spread, partly because of heavy demand for workers in the service industries like sit-down restaurants, ice-cream parlours, saloons, baristas, bars, food trucks, childcare, taxi drivers and many more. What made it bigger is the digital payment mode. As per one study, consumers paying digitally tend to tip 15% more than offline consumers who tip in the range of 15% to 25% of the bills! And such a consumer behaviour has its origin in large hues of emotions like happiness, gratitude, contentment, excitement and calmness. As per one survey, 32% consumers tip more, than prior to the pandemic! And this has propelled the tipping industry to above USD 50 billion annual turnover! As many as four million tipped workers now constitute a large constituency worth wooing. That is why both the candidates have promised to exempt their tipped income which has become a topic of intense debate. Why?

The world's largest economy has a set of weird labour laws with too many holes, which are rampantly exploited with impunity by the employers. Like every economy, there is a minimum wage threshold in America too. However, these laws also allow employers to pay wages to their service workers which also include tips. So, if the hourly wage is USD 10, and tips are USD 6, the employer ends up paying only USD 4. As per one study, tips have become the larger component of the minimum hourly wage! So, more tips actually do not enrich lowly-paid service workers but end up nourishing the employers. As per a study, since the labour laws permit the employers to pool tipped money and share equitably not only among the servers but also others working in the kitchen as chef and dishwashers, this equity-promoting rule also enables employers to pocket as much as USD 6 billion of tipped money. Therefore, most experts say that tax exemption is of no help unless the minimum wage threshold is raised concomitantly. Secondly, a large number of such workers are much below the taxable threshold. Thirdly, a good chunk of American consumers is developing 'tip fatigue' as albeit a tip is not a legal obligation, but servers do chase consumers for tips if one does not pay! Interestingly, India also has a tipping culture but it ranges between 5% to 10%, depending on the billed amount. Though its size is not yet quantified but given the growing footprints of the online food delivery, and eating out behaviour, the restaurant sector clocked above USD 55 billion gross sales in 2023. If many other service sectors are clubbed, the size of tipped income is going to be a new area for the CBDT to levy tax in the coming years!

Let's now jog across to the Republican candidate. Mr Trump is on record to go for the second round of corporate tax rate reduction. In the first round, he had scythed it from 35% to 21%. In the latest round, he pledges to make it 15% for all. However, only recently, he inserted a clause that the reduced rate will be available only if goods are manufactured inside the country. For workers, he has promised exemption to over-time pay. In 2019, Trump had passed on such benefits to 1.3 mn workers by lifting the eligibility threshold to USD 35568 from USD 23000. However, he was skewered by the Democrats as President Obama had proposed to jack it up to USD 47000 to benefit over five million workers. Mr Trump also wants to hike import tariff in the range of 10% to 20% across the board, and a punitive tariff of 60% on cheap Chinese goods to protect domestic industry. Ironically, his proposal to hike tariff is widely supported by the majority of voters as per a recent Reuters Poll. Mr Trump is tempted to set up a sovereign wealth fund to bankroll mega infrastructure and airport projects. He wants to funnel revenue from tariff-hike to this fund. Besides new proposals, what is going to emerge as the biggest challenge for both the candidates is the basket of tax-cuts which Trump had done during his previous tenure, and their sunset clauses will come into effect in 2025. If Trump extends them further, it would amount to over 3.5 trillion setback for the ballooning fiscal deficit in the next 10 years. If not extended, it would enlarge the tax burden on each household. Incidentally, both the candidates have not committed on extending the soon-to-expire tax-cuts!

The blasphemous demerit in the culture of tax-cuts emanating from political contest is that it pushes the economy towards a deep-trench fiscal-doom-loop! How? Let's examine the recent history starting with the 'Bush tax cuts'. In 2000, the US had mopped up tax revenue - as much as 20% of GDP, second highest since 1930. Riding the tiger of surplus revenue, the excess resources were drained out by President Bush who cut taxes in 2001, and again in 2003. He phased out estate duty; trimmed rates on capital gains and reduced income tax rates across all slabs. Closer to their expiry dates, President Obama extended it temporarily as the economy was sinking. After some time, Democrats feared political setbacks and preferred to join the Republicans to extend all such concessions. By 2012, about 80% of the Bush-tax-cuts became permanent. Though Mr Biden is keen to tax the rich more but he has no say in the Congress! And the tax to GDP ratio is down to 16.5% in 2023. Now that both the hopeful Presidential candidates are talking about more cuts, the US Treasury is destined to witness much bigger fiscal deficits and uncontrollable income inequality in the country, which means more racial divides and political noises in the society. In a nutshell, the operating system of the US fiscal apparatus remains woefully hacked a la USD 35 trillion national debt! What lies ahead for the soft-landing US economy is the worst genre of tax doom loop! Tax stressors are piling up! Fiscal health of its treasury is blinking red! Time for White House economists to lace up for mega crisis! Plus ça change


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