US tax plan seems designed to enrich a few and weaken the nation’s ability to offer basic services or respond to global crises.
By David Dapice*
Donald Trump was elected by thin victories in a number of rust belt states. His appeal to white voters lacking a college education who had supported former President Barack Obama surprised many analysts. Trump voiced their concerns and projected an air of authenticity while his opponent spoke of “deplorables,” seemed tied to wealthy donors and struggled to gain their trust. Trump basically promised to orient policies not for the educated elites or the wealthy but for ordinary people who had been forgotten. He promised changes in health, trade and tax policies that would make these swing voters better off.
The reality so far is the opposite of what was promised, yet the base is largely still with him. About 80 percent of Republicans approve of Trump, and he still manages to get overall approval in the 35-to-40 percent range. Yet his record is largely aimed against the interests of many people who supported him.
The proposed health care legislation, which narrowly failed to pass but which he praised, would have cut Medicaid and caused tens of millions to lose health insurance. Even now, by executive order, he is reducing subsidies that stabilize insurance markets and driving up costs of insurance. He is cutting support for programs that help consumers figure out what kind of insurance suits them. Those likely to be hurt by these actual and proposed policies include exactly the groups who vocally support him.
The proposed tax cuts, introduced at a time of full employment, record corporate profits and growing federal deficits, are heavily weighted towards corporations and the wealthy while “middle class” cuts are transitory. Tens of millions living in states with high property or state income taxes can even anticipate increases. The argument that growth will permanently accelerate and hiring will drive up wages is unpersuasive to most neutral economists. First, the statutory US corporate tax rate of 35 percent is meaningless since the actual corporate profit tax rate paid is only 23 percent (compared to 21 percent for comparable nations). US multinationals pay 28 percent in US and foreign taxes of their profits, while other rich nation multinationals pay 29 percent. In reality, there is no huge gap between US and foreign corporate tax. Second, companies hold trillions of dollars in “offshore” accounts and can borrow against these holdings at 1 to 2 percent by issuing debt. If they wanted to invest, they could do so now. Third, the tax cuts come at a time of full employment and will add to the deficit without adding to capital stock to repay the debt. They basically transfer tax revenues to the wealthy – the top 10 percent hold 80 percent of financial wealth. And both the estate tax – applying to couples with more than $11 million in wealth – and the alternative minimum tax are discontinued. The “carried interest” tax break remains – with fund managers’ share of profits treated as capital gains rather than income – and there are huge opportunities for many high-income earners to shift their wages into lower taxed forms of income. In short, there are multiple tax cuts for high-income people and corporate tax cuts. The soaring stock market is discounting these gains now, though they would raise interest rates, strengthen the dollar and hurt US exports. The Senate may not approve of these changes, especially if 60 votes are needed for such major legislation.
To pay for these tax cuts and keep the rising debt to “only” $1.5 trillion over ten years, there are cuts in deductions for interest on student loans, high medical costs, adoption fees, moving expenses, personal exemptions and limitations on deductions for state and local taxes. All of these hit middle-class people, many of whom will be struggling, especially with medical expenses.
But this is not the end of it. To look only at the change in taxes is to miss the true impact of tax cuts. Taxes pay for government services. If taxes are lower, ultimately fewer services will be provided. There are both political and economic constraints to borrowing indefinitely in large amounts. The cost of the tax cuts is not only the concentration of income but also the cost of fewer future government services. Future lawmakers will have little choice but to cut funds for research and development, infrastructure, or health care or education. These too will hit the middle class that supports Trump. Popular support for the proposed tax cuts is low – less than 30 percent according to one poll – but it has 56 percent Republican support.
Beyond tax cuts, the administration’s policies on the environment to allow more pollution and put industry representatives on advisory boards while excluding scientists will harm ordinary people. Other steps to boost for-profit schools with poor productivity or reduce the Department of Housing and Urban Development through a combination of budget cuts, inaction and incompetence all hit middle-class people who benefit from effective schools or affordable housing. Proposed relaxation of financial regulations allows predation of consumers and increases risk of future crises.
Another noticeable trend is the lack of priority given to infrastructure repair and improvement. This key Trump promise seems to have disappeared from the agenda. When former President Obama asked to fund infrastructure repair, the unemployment rate was 10 percent and the Treasury bill rate was zero – this would have cost little in real opportunity cost or financial resources. Yet the Republicans argued that such investments would increase the deficit and blocked the proposal, even though the spending would have helped many workers with high school education. Now that the economy is at full employment and interest rates are rising, these former deficit hawks are fine with cutting taxes for companies and the wealthy while increasing the deficit.
Why do many Trump voters still support him? They may be slow to process the onslaught of information that contradicts their preference for him. Or, they may not know just how bad the policies are for them if they rely on Fox News and right-wing radio talk shows for news. However, the underlying reason may be that they feel neglected and “disrespected” by coastal elites in general and top Democratic politicians in particular who seem to cater to elites and minorities more than to them. If Trump continues to persuade them that he understands their problems – “I am your voice,” he said in campaign rallies – he can perhaps get away with more policies that are objectively harmful to them. Distractions about football protests and attacks on immigration and the legal system help him do this.
The question for opponents of these policies is if this bubble of ignorance, inattention or misunderstanding can be popped. Can facts penetrate the posturing? This is mainly a political and psychological question. The proposed policies are aimed squarely against Trump’s supporters, to the tune of trillions of dollars in redirected taxes and reduced services, tens of millions losing health insurance and a degraded environment. If these facts cannot be communicated clearly, the results will be more inequality and bitterness, combined with less opportunity. Even if GDP growth is no worse – and it may temporarily be higher due to more demand – the quality and sustainability of growth will be diminished and the inability to respond to future crises will grow. But by then, the Tweeter-in-chief president may not be in the Oval Office.
*David Dapice is the economist of the Vietnam and Myanmar Program at Harvard University’s Kennedy School of Government.
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