Trump’s tax-cut plan leaves crumbs for the middle class
As they return to Washington this week from their August recess, House Republicans on the Ways and Means Committee have their work cut out for them. Their job is to draft a major tax-cut bill for Congress to pass, ideally by year-end, to avoid closing out 2017 without a single big legislative win.
The policy objective is to steeply cut tax rates for businesses and wealthy individuals. The political aim, and the point of President Donald Trump’s speech Wednesday, is to persuade the men and women in the Trump working-class base that a tax cut for the wealthy would be good for them, too.
It would not be, and to pretend otherwise, as Trump did, is to substitute propaganda for discourse. Trump’s claim that tax cuts will propel economic growth and lift wages ignores the consensus view of economists, which is that multitrillion-dollar tax cuts, as envisioned by Trump, are not a stable or reliable way to do either.
The president’s claim also defies history. Wages have long stagnated, despite tax cuts in the 1980s and 2000s, while profits, shareholder returns and executive pay have soared. Profits, whether lifted by favorable economic conditions, by tax cuts or by both, have not translated into employee raises and have instead been used for other purposes. One is to buy back stock, which lifts share prices and, by extension, executive compensation. Following a huge one-off corporate tax cut in 2004, big piles of corporate cash were also used to pay dividends to shareholders, settle legal issues and finance severance packages for layoffs.
Of all the ways that corporations have spent their profits recently, business investment has generally been low on the list. Higher wages have been even lower, if they make the list at all. It would be foolish to expect anything different if a new set of tax cuts increased corporations’ already healthy profits. Any advantages for middle-class Americans would amount to crumbs from the banquet table.
Then, too, there is the budget issue. Trump has proposed cutting the top corporate rate from 35 percent to 15 percent, a point he emphasized Wednesday despite warnings from his economic advisers that a cut that sizable would cause the deficit to explode. Separately, he and his advisers have also proposed ending taxation on the foreign profits of U.S. corporations, even though such profits are often actually earned in the United States and simply relabeled as foreign through the use of complex accounting maneuvers.
Proposed tax breaks for working people, in contrast, include relatively modest reductions in tax rates, a more generous standard deduction and tax relief for child care expenses. A recent analysis of Trump’s proposals by the nonpartisan Urban-brookings Tax Policy Center generously assumed that policymakers would end popular write-offs, including the deduction for state taxes, to offset the cost of the cuts. Even then, the analysis showed that the proposed Trump tax cuts would lift after-tax income for the top 1 percent of taxpayers by at least 11.5 percent (or an average annual tax cut of $175,000), compared with a barely perceptible 1.3 percent for taxpayers in the middle (or $760 in average tax savings).
Overall, the cuts, paired with loophole closers, would cost at least $3.4 trillion in revenue in the first 10 years and $5.9 trillion over the following decade. The question is how House Republicans will deal with those potential deficits. Many of them have built their reputations as fiscal hawks. Even if they were inclined to set aside their professed aversion to deficits to pass a big tax cut, their scope for deficit financing has now been narrowed by the floods in Houston, which will force them to borrow and spend for relief and recovery efforts. That is a responsible thing to do in an emergency. Borrowing to cut taxes — akin to taking cash advances on a credit card — is not responsible, in good times or bad.
The fixation on tax cuts is regrettable, because corporate tax reform is a worthy goal. Done right, it would lower the top corporate tax rate to 25 percent or so, bringing it more in line with the rates of other developed nations. It would also raise revenue by eliminating special-interest loopholes and enacting a small per-trade tax on financial transactions to account for the growth of financial markets in the nation’s economy. As yet, there is no sign that Republicans are prepared to take that sensible path.