Thursday, September 28, 2017

Trump's Tax Cuts: in Real Life They're for the Rich

President Trump’s tax plan is likely to be a “huge windfall for the wealthiest Americans.” [1] But it will “not directly benefit the bottom third of the population,” and it will create only modest benefits for the middle class. So much is to be expected. Tax cuts are going to benefit those who pay the greater share thereof.  

Of course, we can expect the usual rhetoric in support of cutting taxes on the wealthy, that it will spur economic growth. And, indeed, Mr. Trump has already said that the cuts will “increase investment and spur growth, creating broader prosperity.” But he “is proposing to cut taxes during one of the longest economic expansions in American history, and it “is not clear that the economy can grow much faster; the Federal Reserve has warned that it will seek to offset any stimulus by raising interest rates.”

Moreover, the suggestion that cutting taxes on the wealthy will stimulate the economy is a dubious one, as a 2012 study by the Congressional Research Service demonstrates.

“Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the
1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.” [2]

So the proposition that cutting taxes on the wealthy will spur economic growth is a claim without proof. That won’t stop politicians from making the claim, of course. But it is useful to keep before our eyes the fact that they have no fact-based reason for making it.

Another concern is that tax cuts will have an adverse effect on the national debt. Historically the response to this concern is that cutting taxes will stimulate the economy to such an extent that there will be no loss of government revenue. Thus, there should be no surprise that the “Trump administration insists that its tax cut will catalyze such an economic boom that money will flow into the federal coffers and the debt will not rise.”

Here again we confront a claim that is not supported by the evidence. Indeed, the “Reagan and Bush administrations made similar claims,” to support their tax cuts, but the “debt soared in both instances.”

What tax cuts on the wealthy do accomplish is an exacerbation of income inequality, and the United States has the dubious distinction of being in the top third of nations in the world in that regard, being 40th out of 150 according to the CIA World Factbook. [3] As the Congressional Research Service study put it, tax “policy affects after-tax income. Since the U.S. individual income tax is a progressive tax system, after-tax incomes tend to be more equally distributed than before-tax income. Changes in tax policy would change the distribution of after-tax income.” Unsurprisingly, then, “pre-tax incomes tend to be more equally distributed and labor’s share of income larger when the top tax rates are higher.”

So while there is no reason to believe that Mr. Trump’s tax cuts will improve the economy, or that they will not worsen the national debt, they certainly will widen the nation’s already dire income gap. It is for the American people to decide if that is what they want from their leadership.