Trump’s Dangerous Tax Plan

Nicely muffled under the sheep’s clothing of a simplified tax code as if appearing beneficial to the middle class, Trump plans to give the biggest breaks to the wealthiest — Reaganomics recycled.

Economist Roberton Williams of the Tax Policy Institute told factcheck that Trump’s plan “would save high-income people in general a lot of money.”

“That’s because it calls for abolishing the alternative minimum tax, which is designed to ensure that the most wealthy taxpayers pay a minimum tax, and the estate tax, which currently applies only to estates valued at more than $5.49 million. It also would lowering the top tax bracket from 39.6 percent to 35 percent, and it would reduce the pass-through rate for business owners (sole proprietorships and partnerships) who are taxed through their personal returns to 15 percent… and lower the corporate rate.”

Trump’s retro idea is spreading. In Canada, Progressive Conservative candidate for leadership, Maxime Bernier, proposes a copycat version of slashing tax on the corprations and eliminat capital gains tax to stimulate economic growth.

Reagan promised that similar tax breaks for the corporate and individual elite would kickstart the economy and the benefit would trickle down to all below — so say Trump and Bernier.

But they trickled up. The Reagan years were the beginning of the income gap — that cause of the populist revolt of the working class which produced Trump’s triumph and Brexit.

As the graph below shows, the income gap had peaked in the year before the Great Depression. However, the government had brought it under control after that famous market meltdown.

The great divide began to swell again in the early 1980s under Reagan and escalated into a sharper upward incline under Clinton and his deregulation extravaganza — which resulted, please note, in another peak of the graph in 2008 before the Great Recession.

Many economists are now warning that the G7 countries are reverting to developing world wealth splits — or, a plutocracy as Chrystia Freeland so aptly described our situation in her book title, The Plutocrats: The Rise of the Global Rich and the Fall of Everyone Else.

Unlike the reforms in the aftermath of the Crash of ’29 that closed the gap, the 2008 financial reforms reinvigorated the widening chasm. The curve quickly resumed its upward climb.

Source: Striking it Richer: The Evolution of Top Incomes in the United States, Emmanuel Saez, June 2015

• The above graph, hair-raising information supported by stats and graphs to satisfy the wonkiest appetite, can be found at Income Inequality. A great website! Worth a visit.

As the Reagan tax cuts kickstarted the economy, they equally kickstarted the income gap. The superrich were able to cream off the best part of the increase in GDP for themselves.

How They Do It

A prime mechanism for the upward transfer of the wealth saved by corporate tax cuts is executive pay. If you have the patience to look at another graph, see the one below that charts the rise of CEO pay. It was not always skyhigh! There was a slight lull until the Reagan tax cuts kicked in, but then it took off nearly in lockstep with the income gap as shown above.

Source: The Economic Policy Institute, 2011. Made available through the Creative Commons License.

A reasonable question is: if shareholders have the power to elect the Board of Directors, why can’t they put the outrageous CEO salaries under control? That is a long subject and will be the subject of another blog — coming soon. Suffice it for now to recognize that shareholders have tried and cannot do it; only the government has the power to right this wrong. A legislated maximum wage is the best way.

Oh, horrors you say. We can’t do that to our valuable executives.

Let’s have a look at the causes of that reaction. Have we been bluffed with a myth of the value of executive contribution to our economic success?

Banking executives are the best example. Their obscene bonuses continued while they ran their banks to the brink of bankruptcy, continued during the aftermath of the market collapse in 2008 and continue unabated today. They suffered no consequences from their gross incompetency.

It’s the same in many industries. Research has shown the towering executive pay packets have no relation to results.

Executives win even when the company loses. If they screw up so badly they eventually get kicked out, they are rewarded with a multimillion dollar golden parachute.

The high CEO pay is a recent phenomenon. Before the Reagan tax breaks for the rich, executives earned 42 times their average employees. Today it is 380 times.

The great bump up did not come about because of improved executive productivity, but from vacuuming up the profitability resulting from the tax breaks and other corporate welfare.

While there are a few (very few) true irreplaceable innovators like an Elon Musk or the late Steve Jobs, most are quite replaceable. In every corporation, there is a pyramidal structure with at least four executives equally competent to do the job of the one above them.

Against the resistance of the very powerful corporate and banking lobby, Obama made some attempt to at least get the necessary information in front of the shareholders of a corporation.

He gave a directive to the SEC. In response it passed a rule, to be effective in January 2017 for the 2018 financial statements, that all public companies must disclose the ratio of their executive pay to the median worker salary.

Recall that Dodd Frank gave shareholders only a non-binding vote on executive pay. But at least the shareholders and the public would have the information. It was a teeny, tiny step in the right direction. But the executives are not going to stand for even this miniscule incursion on their power to keep their piggish pay.

Trump supporter, Michael Piwowar, has indicated a willingness to revoke that requirement as part of Trump’s vow to destroy Obama’s legacy. The Business Roundtable wrote in happy support of eliminating it

A century ago, J.P. Morgan declared he would not invest in a company that paid a CEO more than 20:1 its average worker because that would mean the CEO was in it for himself, not the goal of the business.

If 20:1 was a law across America and the EU, executives would have nowhere to go. All it takes is breaking the myth that these guys are worth their preposterous pay and we need them. They aren’t and we don’t.

***This is a new blog dedicated to discussing unexamined causes of the income and wealth gaps. The guy holding the sign in the picture above has it right. We need to know the causes of why the system is out of control. Look for new postings every Tuesday.

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