Inside the GOP’s Destructive Tax Plan
The GOP introduced their tax reform proposal, entitled the ‘Tax Cuts and Jobs Act,’ on Thursday, Nov. 2. President Trump had previously requested a tax plan by Friday, and proclaimed that tax cuts would bring us back to the ‘Reagan-Era.’ Contrary to the opinion of many Republicans and conservatives, touting this tax plan as Reagan-esque shouldn’t be taken as a compliment. Slashing taxes for corporations and the wealthy ultimately hampers economic growth, while hurting the poor and middle class. The GOP’s insistence on tax cuts for the wealthy, coupled with the potential for this legislation to pass, force us to analyze the impact that tax cuts for top earners have had in the past, what impact this legislation will have, and why it must be stopped.
Looking back to the 1980s, when Ronald Reagan signed tax cuts into law, we get a behind-the-scenes view of the failed economic concept known as ‘trickle-down economics,’ the very same concept driving this bill. In 1981, Reagan’s administration started the first set of tax cuts, which would ultimately explode the deficit (more than doubling it from 2.6% to 6%) and triple the national debt. Unemployment rose significantly throughout this period as well. Some claim that this recession was only temporary and was not caused by the cuts. The issue with this argument is that Reagan ultimately ended up raising taxes multiple times later on in his presidency because of the negative economic impact of the original cuts, in an attempt to put the economy back on ‘solid footing.’
In addition, Reagan ended up increasing public spending significantly (see Historical Budget Data), which helped growth and increased economic stability in the later years. Certainly, increased interest rates by the Federal Reserve also acted as a mitigating factor. It is misleading to attribute the recovery to the tax cuts. George H.W. Bush, the Vice President at the time, admitted that ‘trickle down economics’ should really be called ‘voodoo economics’—they don’t make economic sense.
In fact, throughout history, tax cuts have rarely been associated with economic booms—indeed, the contrary is often true. A data analysis study by the National Bureau of Economic Research found that from 1948 to 2015, a tax cut equivalent to 1% of GDP for the bottom 90% of Americans resulted in an approximate employment boost of 5% over a two year period. Conversely, a tax cut of the same amount for the top 10% of Americans resulted in a ‘statistically insignificant change.’
Taking this historical context with us, we can more effectively analyze the GOP tax plan. The plan will ultimately hit the middle class and the poor the hardest, while significantly benefiting the wealthy. This legislation, despite what Trump and the GOP want you to believe, is not, as Trump calls it, “a rocket.” Rather, a more apt comparison would be a submarine, as this will slow our economy and plunge the poor and middle class underwater. Comparing this plan with current rates, we find some dangerous changes. While the highest bracket, 39.6% remains, the threshold for it has increased significantly. For individual filers, it jumps from $418,400 to $500,000; however, the real revenue losses will come in with the bracket’s new threshold for married couples, which increases from $470,700 to a whopping $1 million. The bill also eliminates the estate tax by 2024, something that Trump has been pushing for. Critics call it the ‘death tax,’ but the fact of the matter is that it only applies to the top 0.2% of Americans who have estates worth more than $5.49 million.
Trump and his allies claim that the estate tax hurts “millions of farmers and small businesses”—this is one of the most egregious exaggerations so far. In total, the estate tax impacts 80 farms and small businesses—eighty, not eight thousand, not eight hundred million, eighty. In addition, the effective tax rate, for those who do pay the estate tax, is only 17% (and a report by the CBO notes that the vast majority of those affected have more than sufficient liquid assets to pay the tax). Another gift to top earners is the complete elimination of the Alternative Minimum Tax, which was created to stop tax avoidance schemes by the wealthy.
At lower tax tiers, the bill attempts to paint itself as a savior, but a closer look reveals that it is just the opposite. While the bill doubles the standard deduction to $24,000, it actually ends up increasing the rates on the first $18,000 of declared income. The bill allows for property tax deductions, but completely eliminates the State and Local tax deduction, which will hit upper-middle-class families in states with higher tax rates.
The bill ends all deductions on student loans, medical debt, and moving expenses. This, in particular, will hurt college-educated individuals, the poor, and the elderly the hardest. The poor, who oftentimes are driven into debt because of high medical costs and poor healthcare quality, will suffer significantly under this plan. The elderly, who might be in need of moving assistance or medical care from a third party organization, will not be able to deduct those costs. College-attendees will now have to worry about their loan debt and increased taxes. To recap so far, in its other actions, the GOP has tried to take a wrecking ball to healthcare and remove protections for student loan holders, and then on top of that, they now want to remove deductions for the increased debt that will occur as a result—classy.
New homeowners in the upper-middle class also face negative outcomes, as this bill cuts the mortgage deduction in half, from $1 million to $500,000. The ultimate reality of this legislation is that any tax benefits initially seen by the bottom 90% of Americans will be quickly negated by cuts in public spending and economic sluggishness.
This bill perpetuates the myth of the ‘corporate job creator.’ Despite the fact that consumer spending, not investments by corporations and the wealthy, accounts for 70% of employment and economic growth in the US, this bill cuts the corporate tax rate nearly in half, from 35% to 20%. Not surprisingly, this bill leaves the key economic drivers, small businesses, in the dust, forcing many of them to pay the higher 35% rate because of their filing status.
Ultimately, we should not seek to cut taxes for the wealthiest among us, for as President Theodore Roosevelt notes, “The man of great wealth owes a peculiar obligation to the State because he derives special advantages from the mere existence of government.” Trump and the GOP’s push for this legislation, which does little other than provide tax cuts for the wealthy, is misguided and irresponsible at best, malicious and self-interested at worst.
If we really want to boost economic growth and create an economy that works for all of us, not just the few lucky enough to be at the top, then we need to make some significant changes. First, we must hone in and focus on tax avoidance schemes, like stowing money in countries with low or nonexistent taxes. This could bring in hundreds of billions of dollars in revenue. This legislation actually gives corporations a pass and allows them to deduct any money they bring back from offshore locations, defeating the entire purpose of anti-tax evasion strategies. Second, while actively closing loopholes we must increase public spending in the areas that matter: education and infrastructure. Doing this will accomplish multiple goals at once, but it will mainly 1) create an informed electorate and an educated workforce and 2) put millions of people to work rebuilding our crumbling roads, bridges, and other structures in decay. This, in turn, will increase expendable income for the bottom 90% of Americans, and consequently will boost consumer spending, growing employment and the economy. If we commit ourselves to positive economic and social reform, then we will see the benefits ripple across the country, and that starts with stopping this legislation.
