President Trump has put his version of tax "reform" on the table. Welcome to the Walking Dead version of tax policy.
Once again, the false promise of lowering tax rates to stimulate economic growth is back from the dead. Its underlying philosophy never worked, and it will shift trillions away from projects that would actually create jobs and help our country prepare for the future.
In a one-page outline released today, President Trump and Treasury Secretary Steve Mnuchin called for:
-- Cutting the number of individual tax brackets to three — 10 percent, 25 percent and 35 percent.
-- Doubling the standard deduction, which means cutting taxes on the first $24,000 of a couple’s earnings.
-- Paring most itemized tax deductions (although not specified), but keeping popular writeoffs for mortgage interest and charitable donations.
-- The estate tax, which the GOP has called the "death" tax, and the alternative minimum tax, which Mr. Trump has railed against for years (and has been subject to), would be scrapped.
How Trump's Tax Plan Punishes The Country
There's a lot to love in Trump's plan if you're ultrawealthy, a big corporation, a "pass-through" Sub-S corporation or (surprise) a real estate developer. For those folks and companies, it's a buffet of pure protein and empty calories for the rest of us. A 15% corporate rate -- slashed from a nominal 35% rate -- is music to the ears of nearly every business.
But will this create jobs, raise your salary or help you save more for retirement? In the short term, more money could flow into your pocket, which may help you pay some pending bills or buy a new dishwasher.
But the long-term impact would raise interest rates, explode the federal deficit and create a hole in the budget -- unless other sources of revenue are found. It also creates a back-door fiscal reason to carve up Social Security and Medicare, which were not mentioned in today's proposal and are always a part of the GOP agenda to "reform entitlements," which is veiled language for "cut the programs and privatize them."
Like most "supply side" or "trickle-down" tax policies pushed by Republicans in the past, it's unlikely that Trump's plan will create new jobs or put more money in middle-class taxpayers' pockets in the long term.
This back-of-the-napkin math has never been supported by any solid academic research. Uber-wealthy Americans bolster their passive income and keep gains to themselves.
Corporations also will likely hoard their tax savings, do share buybacks, pump up CEO packages or boost dividends (or all of the above). There was nothing in the Trump plan about spending that money on domestic job creation.
Trickle-down or voodoo economics, coined by President George H.W. Bush, has been a colossal failure in raising incomes and creating jobs for most Americans. According to Marshall Steinbaum, Senior Economist and Fellow at the Roosevelt Institute:
“Trump's proposal to cut corporate tax rates won't boost growth or create jobs. In fact, it will discourage corporate investment, as corporations and their shareholders earn even higher profits and pocket more of the cash -- just like they did last time we tried a big corporate tax cut.
If Trump wants to encourage investment, he should close loopholes that CEOs exploit to move profits offshore and increase the effective tax rate on corporations, their CEOs, and their shareholders.”
They (corporations or the ultra-wealthy) won't be opening new U.S.-based auto plants or coal mines, either.
"This supply-side snake oil is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy," notes the Economic Policy Institute (EPI), a progressive think tank focusing on labor issues, which deemed supply-side economics an "abject failure" for the middle class.
"Real median income has sharply decoupled from productivity gains in recent decades (particularly since 2000) and income gains have been incredibly concentrated at the top of the earnings distribution."
Translated from the argot of labor economics, those who don't need more tax breaks, get them, but won't create jobs, nor do they raise salaries for folks working for a living.
Observes former Labor Secretary Robert Reich:
"The White House says the tax cuts will create a jump in economic growth that will generate enough new revenue to wipe out any increase in the budget deficit. This is supply-side nonsense. Trump’s corporate tax cut will bust the federal budget.
According to the Congress’s own Join Committee on Taxation, it will reduce federal revenue by $2 trillion over 10 years. This will either require huge cuts in programs for the poor, or additional tax revenues from the rest of us.
The Congressional Research Service reviewed tax cuts since 1945 and found no evidence they generate economic growth. Ronald Reagan and George W. Bush both cut taxes, and both ended their presidencies with huge budget deficits."
Global Market Impact Creates Uncertainty, Possible Declines
The biggest wildcard, though, is how the U.S. and global markets will react to Trump's package -- if it even survives Congressional dealmaking.
Although the stock market initially rewarded investors who stayed the course from last November to the present, it's not clear if Trump's tax policy will play well down the road. Markets hate uncertainty, particularly if politics gets in the way of economic growth.
According to a recent survey by Bankrate.com:
"Back in September," Bankrate found, "amid the uncertainty of a contentious campaign, 61% said the outcome of the election was the biggest economic risk over the next six months. While the election was resolved, worries about the political impact on the economy were not. Currently, the political environment in Washington is the top economic risk cited by every age, income, gender, racial/ethnic group and political affiliation."
In the long run, stock prices will reflect whether Trump's policies create more disposable income, boost profits and raise salaries. Cutting taxes does that in the short term, but the long-range goal is to beat inflation through higher salaries and stronger 401(k)s, which hasn't been the case for most working families.
Worse yet, if the Trump tax plan doesn't find a way to replace lost tax revenue, the government will have to borrow trillions to pay its bills. Once the bond market gets wind of that, all bets are off, meaning interest rates and inflation could soar.
