One of the primary justifications for Republican support of the Trump presidency—aggrandizing the rich—will be put to the test in the months ahead. The House Ways and Means Committee has released its first draft of large-scale tax cut legislation.
Speculation about the main features of the effort have ranged back and forth for months, with different trial balloons being floated. Like a drunken Steve Bannon, Trump himself has stumbled on- and off-message from the beginning. His lack of any legislative accomplishments this year implies that the president will sign off on just about anything in order to claim his newest great victory. The initiative is really with the Republican Congress. So what manner of treacle have they served up?
The marquee provision is a major reduction of the top rate in the corporate income tax, from 35 to 20 percent. As Mitt Romney was excoriated (incorrectly) for reminding us, corporations are people, too. But the operative question here is which people actually bear the burden of the tax. The principal possibilities are customers for corporations’ products, owners (either shareholders or direct owners), or workers.
The first possibility—that the tax is “pushed forward” like a sales tax on to the consumers of corporate goods—had some sway in the 1950s but has been abandoned by all economists.
The second seems obvious—corporations pay it, so by extension their owners do too. But same issue comes up with a sales tax—business firms selling goods pay it, but we usually assume the tax is passed along to their customers. If customers don’t pay it, some other stakeholders must be negatively affected. Doubt remains as to just how much of the tax paid actually comes out of owners’ pockets.
The table has been set for some kind of cut by Democrats.
The third possibility may seem the least likely—unless, that is, you have the imagination of an economist. In this scenario, the tax encourages business firms to move their capital—plant and equipment, or other operations—to less taxed locations, both legal and geographic. With less capital, the workers left behind are less productive and their wages eventually suffer.
Most economists by now have concluded that maybe 30 percent of the taxes levied on U.S. corporations disadvantages workers. The rest is borne by owners, who are disproportionately very well off, compared to the average person. The upshot is that the corporate income tax is the most progressive component of our federal tax system. (The state government counterpart is a different animal altogether.) So right there you have the explanation of why Republicans want to cut it. What are their justifications?
We could start with the jaundiced note that the table has been set for some kind of cut by Democrats: Remember, they like campaign contributions from corporations too. Most recently, the Obama administration bought into the premise that the 35 percent rate was inordinately high, in light of rates in other countries.
The 35 percent is technically referred to as the statutory rate (i.e., the rate specified in law) or the “headline rate.” It is gravely misleading with respect to what normal people as well as economists understand as the “effective rate”—namely, taxes paid relative to corporate income. The difference is due to the extent to which tax law permits corporations to shrink their actual income to downsize their taxable income into the bargain.
When calculated in terms of effective rate, the U.S. tax is not out-of-line with other advanced industrial nations. This is not controversial. You can find estimates of the “effective rate” much lower than 35 percent, in reports from the Government Accountability Office. (And yes, my name is in the acknowledgements.)
It will surprise no readers that the Trump administration, in the person of their grinning chief economist Kevin Hassett, has flipped the usual presumption. Instead of workers bearing 30 percent of the corporate-tax burden, Kevin and his friends claim that workers’ share is more than double that, up to 70 percent. The implication is that a cut in the corporate income has to be, ipso facto, a big cut for workers. Backers of the House plan argue the proposed rate cut, from 35 to 20 percent, will grant every worker a yearly windfall of $4,000.
The $4,000 number entails two unbelievable assumptions.
The $4,000 number entails two unbelievable assumptions—the first being the fanciful reckoning of the workers’ pre-existing tax burden. The other is an implied supply-side feedback, wherein a rate cut leads to a larger corporate sector with higher wages for workers.
The other striking feature of the plan is its attack on the bulging purses of the very well off, while letting the very rich—the American overclass that now both funds our presidential elections and fills the self-dealing Trump cabinet—skate through unscathed. This comes from the limitations on two of their most important deductions—for mortgage interest and for income and property taxes levied by state and local governments (SALT).
Both the mortgage interest change and the SALT increase have disproportionate blue-state impacts, since those states tend to have higher state and local taxes and high real estate prices. I’ve predicted such changes will lead to the utter and permanent extinction of Republican members of Congress in New York, New Jersey (highest property taxes in the U.S.), and Connecticut, among other places. At the same time, the top rate of the individual income tax—39.6 percent—is left in place. (This rate applies to so-called “ordinary income,” mainly wages and salary, but not to sources of income such as capital gains chiefly accruing to the very rich.)
There are also changes in tax brackets, the standard deduction, and exemptions that will end up lowering taxes for some ordinary folks and raising them for others. A raft of specific deductions for those who itemize deductions (usually those in the top third of households) are also eliminated. The haphazard message in all this—that if you’re well off you could suffer a major hit, and if you’re not, you could still get dinged—may suffice to blow up the bill. A possibly noteworthy sidelight is that the infamous Koch outfit—Americans for Prosperity—has also criticized the bill for disadvantaging the overseas financial machinations of the Kochs and their plutocratic cohort.
The pitfall of this effort that breaks the heart of all good neoliberals is something quite different. The package as a whole is a huge revenue loser, so the Federal deficit would be greatly enlarged, to the tune of $1.5 trillion-with-a-T (over ten years). According to the deficit-crazed Committee for a Responsible Federal Budget, that 1.5 number is a lowball estimate.
A big tax cut won’t “blow up the economy”—rather, it will inflate the net worth of many persons to little purpose.
The Republican mantra is that the growth effects of the tax cut, along with increased tax revenue notwithstanding the cuts, will overwhelm the associated increases in the Federal deficit. This revival of the ’80s supply side snake-oil will persuade nobody, but it doesn’t matter. It’s just a place-holder that will work in two-minute television debates, where the clueless moderator affords equal credibility to “both sides,” no matter how ridiculous either of them happens to be.
Both the politics and economics of the Democratic critique are dubious. On the politics, how many times have we been around the deficit merry-go-round, where Democrats sweat blood to reduce the deficit, and the Republicans take advantage by blowing it up again?
The dutiful liberal fiscal conservative needs to be moved by the economic merits. Two are most important.
- When there is slack in the economy—people without jobs who are willing to work—and when inflation is low (presently under 2 percent), higher rather than lower deficits are called for. There are better ways to raise the deficit than this tax bill, but that is the preferred field of battle for the intelligent leftists and economic populists. A big tax cut won’t “blow up the economy”—rather, it will inflate the net worth of many persons to little purpose.
- And in the long-neglected sphere of political economy, opponents of the GOP tax giveaway to the 1 percent must continue insisting that a tax bill that expands inequality “stinks in God’s nostrils,” as Roger Williams would say. It also creates some significant practical disadvantages. For one thing, it magnifies the power of the rich to exercise anti-democratic control over our politics, as rich donors continue to rack up federal tax breaks on what is now a flagrant pay-to-play basis. And as a mechanism of microeconomic policy, the GOP plan shifts after-tax income from spenders to savers, thereby retarding the retail spending that is the principal motive force in the economy. And as a side effect of stoking still greater inequality, this shift in spending to higher-income people makes the economy more volatile, since their spending is more vulnerable to fluctuations in the stock market.
Tax reform is but one gust in the current hurricane of news flashes, but it may prove to have very long-lasting effects. Nor would it disappear in the event the Trump administration is deposed by the burgeoning plethora of scandals. Quite the contrary. In the still-distant prospect of a post-Trump Republican party, tax cuts (a.k.a. “tax reform”) may be the conservative establishment’s only port in a storm.