As the Republican Party continues to lick its wounds from the health care debacle, it is likely that the next legislative challenge for McConnell & Co. will be tax reform. Success is more likely to come when discussing taxes as Republican legislators have been salivating at the mouth for months hoping to wield the tax-slashing machete.
The divisions and perturbations in ideology within the GOP will be accentuated throughout the debate. Surely, the Freedom Caucus wing of the party will clash with more moderate forces to encumber the process. Nevertheless, with added political pressure after failure and a clear central philosophical objective the Republicans will be able to pass tax reform. I believe this is a problem for those who care about the degrading effect income inequality has on social mobility.
To understand the danger of Conservative tax reform, we will explore two dynamics: what will Republican tax reform look like and what will be the driving message at the forefront? At the end of the day, political ideology aside, the substance matters the most to constituents. Specifically, will common, middle-class Americans receive a cut?
It is hard to argue that the middle-class doesn’t deserve a break. As median household income remains stagnant and the dawn of a new economy threatens to mechanize job skills, a stimulus would go a long way. However, it is important to pay attention to the messaging as well, especially when the messaging is deceitful and ineffective. But first the contents.
When you look at President Trump’s proposed tax plans, the centerpiece is not a populist lifeboat for the middle-class. The main attraction is cutting corporate taxes down from 35 percent to an unrealistic 15 percent. The seven tax brackets for individuals would be reduced to three brackets: 33 percent, 25 percent, and 12 percent.
Recently, there has been chatter within the White House, surprisingly from Steve Bannon, considering raising taxes on top earners. Despite this thinking, all GOP blueprints, including Trump’s, eliminate the alternative minimum tax: a tax provision in place to prevent high earners from benefiting too much from exemptions.
Another key component is encouraging American businesses to repatriate more than $2 trillion stashed overseas via a one-time 8 percent tax.
Controversially, some Congressional Republicans are even considering eliminating payroll taxes. Yes, eliminating the source of funding for Social Security. It is fair to say that like the BAT tax, this is dead in the water.
Now, what is the reasoning behind these cuts? Well, the catalyst is a cornerstone policy of the Conservative movement dating back to Reagan’s 1986 tax reform effort. Call it voodoo, trickle-down, or supply-side economics, the theory postulates that tax cuts act as an economic stimulus.
Corporate tax cuts resonate throughout every corner of an economy as businesses invest that new money in goods, services, and jobs. The middle-class then receives the benefits of these cuts for corporations in the form of increased economic growth.
What is the problem with this? Well, the idea appears to be logical if you believe that businesses in the United States are encumbered by taxes in a way that has produced a detrimental economic environment. This theory also assumes that businesses will invest in activities that will impact middle-class Americans. Are these assumptions accurate?
Let’s tackle the contents first. The first concern for fiscal hawks is clear: the reduction of taxes across the board will balloon the federal debt. The Committee for a Responsible Federal Budget asserted that the Trump cuts would add $5.5 trillion to the debt over 10 years.
Furthermore, some taxpayers on the lower end and those caught in an awkward middle will actually end up paying more in taxes under the consolidated bracket framework. This is regressive and it negatively impacts those who need a boost.
The undisputed victors under any GOP blueprint are businesses and the wealthy which is fine if the core theory of supply-side is accurate. Unfortunately it is not.
The Roosevelt Institute, a left-leaning think tank, found that 40 percent of corporate earnings and borrowing in the 1980s was allocated to investment. The rate has been falling ever since with borrowing closely correlated with shareholder payouts. The same pattern is corroborated by FiveThirtyEight which finds that about 52 percent of business investments are shareholder payouts. Shareholder payouts do not help middle-class Americans invest in their future.
There is an interesting dynamic materializing behind the curtains. It is no secret to anyone who followed Trump’s first 100 days that the administration follows its “America First” policy in every sector. Aside from being headquartered in the United States, what makes corporations like Apple, Google, or Starbucks American? They have fought like hell to make sure they pay the least in taxes to fund the federal government.
In fact, corporate taxes in 2015 composed only 11 percent of federal revenues compared to anywhere from 25 to 33 percent in the 1950s. Let’s not forget the $2 trillion companies and individuals hiding overseas. If corporations fight to avoid an American duty—paying taxes—why should the “America First” policy enhance their situation?
The losers in this plan are struggling Americans who benefit from federal programs in times of need. The income inequality gap will be exacerbated dramatically under GOP tax reform and political division will intensify as a result. Bootstraps won’t help here.
