California Forum

Economists have warned us about Trump’s tax plan. Too bad Congress isn’t listening

A Wall Street sign near the New York Stock Exchange. The economist Thomas Piketty warned that policies like those in Trump’s tax plan supercharge inequality and favor oligarchs over democracies. (AP Photo/Mark Lennihan)
A Wall Street sign near the New York Stock Exchange. The economist Thomas Piketty warned that policies like those in Trump’s tax plan supercharge inequality and favor oligarchs over democracies. (AP Photo/Mark Lennihan) AP

The most lethal damage to American society embedded in the Republican tax plan now being rushed through Congress is that it will metastasize the cancerous economic inequality that has been eating away at the health and fabric of American democracy over the past four decades.

Three years ago, in his monumental work, “Capital in the Twenty-First Century,” the French economist Thomas Piketty warned that “when the rate of return on capital exceeds the rate of growth of output and income, capitalism automatically generates arbitrary and unsustainable inequalities that undermine the meritocratic values on which democratic societies are based.”

This is a tax cut engineered to fuel what Piketty warns is the most dangerous dynamic of modern market capitalism – skyrocketing gains for investors made possible by stingy pay to most people who work for a living. It’s a dynamic, Piketty forecasts, that will generate a self-perpetuating American plutocracy.

As evidence, Piketty pointed to the tumor of concentrated wealth accumulated by America’s super-rich 1 percent since the late 1970s while middle class incomes stagnated, even over a long period of growth.

His analysis pinpoints the fatal pathology built into the Republican tax plan: Its focus on corporate tax cuts will accelerate and aggravate the malignancy of economic inequality.

As President Donald Trump and Speaker Paul Ryan never tire of asserting, the central economic lever in the Republican plan is the cut in the corporate tax rate from 35 percent to 20 percent. That will massively increase the after-tax profits of corporations, which have a habit of passing on 91 percent of their profits to Wall Street and super-rich investors.

In other words, this is a tax cut engineered to fuel what Piketty warns is the most dangerous dynamic of modern market capitalism – skyrocketing gains for investors made possible by stingy pay to most people who work for a living. It’s a dynamic, Piketty forecasts, that will generate a self-perpetuating American plutocracy, like the aristocracy of Old Europe.

Quite obviously, it mocks the economic populism that powered Trump’s race for the presidency. In fact, for all his mouthy anti-elitism, Trump has now shelved his campaign rhetoric to make a de facto alliance with the Republican political establishment on behalf of the super-rich, who bankrolled campaigns in 2016 that kept Congress in Republican hands.

If indicators of a payback to wealthy campaign donors are needed, Exhibits A and B are the proposed elimination of the estate tax (only 5,219 estates paid it in 2016) and abolition of the alternative minimum tax, which was designed to keep the super-rich from escaping tax-free by exploiting tax loopholes and which in 2005, forced Donald Trump to pay $31 million in taxes.

Then there’s the decision to keep a low tax rate for hedge fund managers while canceling the tax deduction for interest paid on student loans, imposing a new tax on tuition grants from universities to teaching assistants and other employees not to mention the reduction or elimination of deductions for state and local taxes and the lid on mortgage deductions.

In all, business interests are reaping $2.5 trillion in tax cuts, paid for in part with a 10 percent tax on overseas earnings and a change in some corporate tax deductions, but mostly financed by pinching average individual taxpayers.

This desertion of Trump’s political base is being masked by inflated Republican promises of a job and wage bonanza for the middle class. “Fixing the business side of our tax code is really all about helping families and workers,” Ryan insists. “Cutting the corporate tax rate means more jobs here in the United States. It will foster increased competition, which will directly drive up wages for our workers.”

We’ve heard that Republican refrain before – for the whopping Reagan tax cuts of 1981 and the George W. Bush tax cuts in 2001 and 2003, both of which generated trillions of added wealth for America’s ultra-rich.

President Ronald Reagan called his 1981 plan “the first real tax cut for everyone in almost 20 years.” With a 25 percent cut in tax rates for all brackets, the Reagan plan had a ring of fairness. But it tilted strongly in favor of the wealthy, whose top tax rate was cut from 70 percent to 50 percent (later dropped to 28 percent by Reagan) and who benefited hugely from a cut in the capital gains rate from 28 percent to 20 percent.

In retrospect, economists calculate that the Reagan tax cuts added $1 trillion to the wealth of the top 1 percent in each decade since – nearly $4 trillion in all.

In 2000, President George W. Bush similarly vowed that “by far the vast majority of my tax cuts go to the bottom end of the spectrum.” To maintain that image of favoring working Americans, Republican House Speaker Denny Hastert’s office instructed high-priced D.C. business lobbyists to show up at a tax rally “dressed down” to look like “real workers” and offered to pass out “hard hats for people to wear.”

In fact, hard hats got only modest tax cuts while the top 1 percent reaped another $1 trillion tax-cut windfall over the next decade.

So the Trump game plan fits a pattern of middle class rhetoric and a tax riches for the elite – a pattern that many ordinary taxpayers have deciphered. A recent poll by the University of Maryland found that fewer than one in four voters, and fewer than 40 percent of Republicans, support lower taxes for people making more than $200,000. Sixty percent oppose lowering corporate tax rates.

Not that public opinion is going to stop the tax-cut steamroller in Congress, any more than the warnings of a world renowned economist.

Hedrick Smith is author of the New York Times bestseller, “Who Stole the American Dream?” and executive editor of Reclaimtheameridandream.org.

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