By: Janine Jackson
Janine Jackson: The key part of the Republican tax plan, CNBC explained, isn’t the individual or even the corporate tax rates. The big news is that it doubles the standard deduction and provides significant relief and simplicity for most taxpayers.
And just to be clear, they added, “This should be the focus of the tax reform debate, not the endless old argument about benefits for the rich.” A separate report noted that administration officials are abandoning their oft-voiced deficit concerns, because of the amazing “growth” the plan will generate.
What’s a lay person to think? Here to help us understand is economist Dean Baker, co-founder of the Center for Economic and Policy Research. He joins us now by phone from DC. Welcome back to CounterSpin, Dean Baker.
Dean Baker: Thanks a lot for having me on.
To the extent that there is an “endless old argument about benefits for the rich,” it seems clear that the rich keep winning it. So this doubling of the standard deduction, does that make the case that, contrary to all expectations, this is tax reform for the little guy?
No, and it’s kind of incredible anyone really even tried to pass that off. Because coupled with doubling the standard deduction, they’re eliminating the personal exemption, so the basic story — I should have exact numbers, but the current standard deduction is roughly $6,000 and change. So they double it to $12,000 and change, and they’re getting rid of the personal exemption, which is roughly $4,800.
Now, that puts you up somewhat ahead, but there are two points to keep in mind. One is that the personal exemption increases with inflation; at least, that’s the current law. So ten years from now, it’d be roughly 20 percent higher, it’d be roughly $6,000, basically putting you even.
The other part of the story is that they’re actually raising the tax rate. The bottom tax rate is currently 10 percent; they would raise it to 12 percent. Now, one of the things they haven’t filled in is where all the rates would cut off, where exactly the brackets would be. But in any case, doubling the standard deduction is likely to mean very little for most people, which is part of the reason that most of the estimates show roughly 80 percent of the benefits going to the richest 1 percent. So I can understand the people in the richest 1 percent telling us not to pay attention, but that’s a big deal.
CNBC, that same piece, says that it’s “about as far as you can get from tax plans that supposedly only favor the 1 percent, or rely on trickle-down theories to boost the overall economy.” Hmm.
You know, the only thing I could say, if you want to be generous, is maybe they were confused and missed the part about eliminating the personal exemption, which would be kind of astounding. It’s clear the bulk of the benefits are going to the richest 1 percent. You get rid of the estate tax; you lower the top tax bracket, 39 to 35 percent; you have a special tax rate for pass-through income, like what Donald Trump gets his income through, at just 25 percent. These are benefiting the rich and no one else.
I couldn’t really think that any thinking person imagined that the plan would not benefit Trump himself. I would think his base would think he was a fool for making a plan that wouldn’t benefit himself. You know, that’s not the winner they voted for. Is there more to say about the part of the plan that CNBC says we should look away from, you know, what it does for the wealthy?
Well, in terms of benefiting Trump, it is almost as though he designed a plan that would personally benefit him. I mean, I don’t quite think that’s the case. But, again, I mentioned the estate tax, that it would get rid of that. Just to be clear, the estate tax applies to almost no one. It allows personal exemptions of $5 million. That means a couple gets to exempt $10 million, and that’s roughly two-tenths of 1 percent of estates, that get above $10 million. You have to be pretty well off, that’s not just a successful small businessperson.
He also proposes getting rid of the alternative minimum tax. And in the one tax form that was leaked or he released, however we got it, that became public, he was subject to the alternative minimum tax. This was put in place in the ’86 tax reform, saying if you manage to reduce your tax liability by getting through all these other loopholes, you’re going to have to at least pay 25 percent in the alternative minimum tax. Well he gets rid of that.
And then the pass-through business income. Basically, it makes zero sense. The notion of a pass-through corporation is the corporation itself pays zero tax, you just pass the profits on. To my view, that’s kind of an outrage to begin with, because at least if they get protection as a corporation, limited liability, why shouldn’t they pay tax? But in any case, we do that. So they pay zero tax, and then they pass it on to an individual, and you’re taxed on it just like your wage income, which is ordinary income.
What this says is, no, it doesn’t matter what tax bracket you’re in, so if you’re in the highest tax bracket, if you’re in the 39 percent bracket, or 35 under their plan, you would still only pay tax at a 25 percent rate, because it came through a pass-through corporation. It’s just kind of a head-scratcher. Why would you do that?
And, naturally, it would create a huge business in tax avoidance, because everyone — at least every wealthy person — is going to figure out how to have their income come through a pass-through corporation, so they could have a 10 percentage point reduction in their tax rates. Not what you want to do with tax reform.
A headline in the New York Times said, “In Trump Tax Plan, a Windfall for Businesses Large and Small.” Among the things that it indicates are “an easy way to bring overseas profits back to the United States without being taxed.” What am I missing about what’s so great for the country at large to let corporations bring profits back without those profits being taxed?
Well, there’s a couple issues here. First off, there’s already roughly $2 trillion — we don’t have an exact number, somewhere in the order of $2 trillion — in foreign profits of US corporations that are stashed overseas, at least on paper. Those currently couldn’t come back unless they were taxed. What they’re proposing is to have some tax holiday — we did this in 2005, where it was brought back at a 5 percent tax rate — where they could bring it back and pay very little tax on it. So it says it’s going to do that, but it doesn’t say what the rate is. That’s one of the things, I guess, to be decided later. Kind of a big thing.
But the other thing, that’s of course of more consequence going forward, is it shifts our tax to a territorial tax. And what that would mean is that corporations would only be taxed on their US profits; whatever they earn overseas, they pay zero US tax on. Now, that’s not particularly any boon to the US, but it gets worse, because we don’t know where corporations are actually getting their profits. So you’ve just given them a huge incentive to lie to us about where their profits are, and that’s become increasingly easy, because you have companies like Apple and Pfizer and others, where much or all of their profit is associated with intellectual property claims. And we don’t know where Apple’s great innovation for the iPhone came from, so they’re going to tell us it came in Ireland, where the tax rate’s just 12.5 percent. And then they don’t have to pay our tax rate; they’ll just pay Ireland’s tax rate. I have a hard time seeing why that’s good for people in the United States.
The plan, of course, is still evolving. But the New York Times says, “Business leaders were nonetheless quick to applaud the broad outlines of the proposal, claiming that tax cuts would spur new investment and grow the economy.” I wonder if I could ask you, first, what it actually means to “grow the economy,” and then, does this plan do that?
It’s an improper use of the word “grow,” but that dates back to Bill Clinton. But, you know, whatever. It’s supposed to be transitive. “Make the economy grow,” in other words, would be the way one would ordinarily say it, but that’s I guess passé, to use the correct grammar.
But in any case, it would mean more rampant economic growth. But you’re very hard-pressed to see how that would come from this plan.
So the question is, would there be some spurt of investment? And a lot of research on this issue, the idea that lower tax rates are going to lead to more investment; I can’t say it’s going to lead to zero more investment, but certainly not any big flood of more investment. And the idea it would have a measurable uptick in growth, that’s really not a plausible story. So their claims — they’re talking about increasing growth rate 5 percentage points — they’re just pulling numbers out of the air. There’s literally nothing to support that.
Finally, I find the approach of a lot of coverage disconcerting, whether Trump Republicans will get a “win” after their “loss” on ACA repeal. But also, coverage sort of separates and counterposes individuals and businesses and the economy at large, almost as if those were competing forces. But, clearly, I can gain something as an individual, but lose it again and then some if the labor market is impacted, and then again if the broader economy is harmed in some way. Is there a better way to talk about tax policy?
Certainly, again, the “win” stuff, the horse race stuff, there’s a lot of that, and that’s unfortunate. I mean, people want to read that, and that’s OK. But that shouldn’t be the dominant story, and unfortunately it takes that form. But one of the things that you and I both have alluded to — it’s not a complete plan, which is a little bit astounding, given that they’re working on it for months, and they’ve been talking about tax reform literally for years, that they throw this on the table. And, in fact, the president’s chief economic adviser, Kevin Hassett, criticized the analyses because they said, well, they’re making analyses of partial plans. And he’s right, but why are they putting a partial plan on the table?
The other point though is, yes, ultimately, at the end of the day, people want to know how this is going to affect their lives. And on the one hand, there’s sort of the immediate impact: OK, am I going to pay more in taxes? That’s kind of hard to say, at this point, for most people. I mean, odds are for most people, it won’t mean much difference. It will for the rich and the very rich.
The other part is, OK, let’s carry through their logic. What would it mean — you know, you’d asked the question before about “grow the economy.” So what would that mean, what’s a plausible story there? Well, the story they would like to tell is, OK, you’ll have more growth, that will mean higher wages, more jobs. That’s the story they would like to tell. There’s really no plausible way of getting from here to there.
And then if you add in, OK, you’re creating large deficits. I mean, they’re denying this, and I’m not the big deficit hawk, but you are creating large deficits, and there’s good reason to believe that the day after they pass this thing, they’ll start screaming about deficits, and then they’ll say, OK, we have to cut spending. And they’re not going to be cutting the military, so what that means is they’ll be cutting Medicare and Medicaid, maybe Social Security. Who knows what will be on the chopping block? But these are going to be programs that people depend on.
We’ve been speaking with Dean Baker of the Center for Economic and Policy Research. They’re online at cepr.net, where you can also find Dean’s blog, Beat the Press. Dean Baker, thanks for joining us this week on CounterSpin.
Thanks a lot for having me on.