Our Red Pen Markup of the Senate Dem’s Letter on Tax Cuts
May 10, 2017
By Eric Harris Bernstein
Last Monday, Democratic Senate leadership expressed their concerns over the president’s recent tax cut proposal in a joint letter to Treasury Secretary Steve Mnuchin and Office and Management and Budget Director Mick Mulvaney. Their letter correctly criticized the plan’s lopsided benefit to the top 1 percent and pointed out the threat it would pose to key components of our national social safety net like Medicare and Medicaid, but it stopped short of a few important points.
Most notably, the letter neglected to condemn the Trump administration’s repeated false claims that the plan would pay for itself with growth and would benefit the middle class. As we know from past experience, top-heavy tax cuts do not stimulate growth, do not benefit the middle class, and, far from boosting growth, can actually slow it by incentivizing higher incomes for the wealthiest workers. I elaborate on these points below and have suggested some light edits to the letter itself, which you can see here.
Points They Hit:
- Instead of making the rich richer, we should be focused on improving the lives of all working people. As I discuss in more detail below, the claim that this plan will help the middle class is premised on trickle down ideology that has proven false time and again. It is also based on a simple lie related to small business income, which I will also get to. All of this is to say, yes – Democrats are correct to point out that this will do nothing for the middle class.
- Inequality has grown enormously and this will make it worse. Not much more to say here.
- The proposed business tax cut represents a serious threat to the payroll tax. As Democrats correctly point out, Trump’s plan would enable the wealthy to avoid income taxes by shifting their compensation from wages to business income (also referred to as ‘pass-through income’). Since pass-through pay only the employee’s share of payroll taxes, which are normally split between workers and employers, income shifting threatens the solvency of social security, Medicare, and Medicaid, which are funded by payroll taxes.
- The plan represents a massive tax cut for the wealthy. Usual experts like the Congressional Budget Office or the independent Tax Policy Center have yet to score the plan’s economic impact (because the administration has yet to put income ranges to its proposed income tax brackets), but since no recent conservative tax plan has been scored at a cost of less than $3 trillion over ten years – and since at least 75 percent of the value of these plans have gone to the top 20 percent – it is pretty clear where this is going. Tentative estimates suggest the cut would be in the $5 trillion range, with a majority going to the top 1 percent.
- The plan will greatly enlarge the deficit. Yes, but**.
**If I were in the Senate Democratic leadership (big ‘if’), I would mention this but not make it a centerpiece of my argument, since we progressives believe deficit financing can be a good thing when it is not financing tax cuts for the wealthy. Having said that, it is important for Democrats to point out that any Republicans signing on to this plan will once more be abandoning their alleged commitment to fiscal responsibility in favor of tax cuts for the wealthy.
Points They Missed:
- Top-heavy tax cuts don’t boost growth. Never have; never will.In fact, neither will bottom- or middle-heavy tax cuts: Sound, nonpartisan analysis shows that tax cuts just don’t matter as much as some would like to believe. For over 30 years, Republicans have leaned on the idea that tax cuts for the wealthy would trickle down to working Americans in the form of economic growth, and yet tax cut after tax cut has failed to do anything but make the rich richer (except raise inequality and encourage inefficient tax avoidance maneuvers). Senate Democrats shouldn’t let Republicans get away with this line any longer.
- In selling the plan, Secretary Mnuchin has lied repeatedly about its cost and top-heavy distribution. Mnuchin has said that the plan is a tax cut for the middle class and that it will pay for itself with growth. Neither of these claims is true, as even the conservative Tax Foundation will tell you. But correcting facts isn’t enough – the administration’s dishonesty about the content of their plan is arguably just as problematic as the plan itself, and Democratic leadership should not refrain from condemning the administration’s dishonesty. On that point:
- Business income tax cuts will not benefit small businesses. This is another cut at the first two points above, but it is worth repeating, since the Trump administration has so aggressively billed pass-through business tax cuts as synonymous with small business tax cuts. In reality, the business tax cuts Trump has proposed will not benefit small businesses, which already pay less than 15 percent, but will instead benefit hedge funds, private equity firms, and real estate partnerships, which are also organized as pass-through. Unlike the false trickle down narrative mentioned above, which is wrong in practice but hard to disprove in some alternative theoretical universe, Mnuchin’s claim that this plan would cut small business taxes is plainly false based on almost any conceivable tax bracket structure. Simply put, if you make enough to benefit from this plan, you are almost certainly not a struggling small business.
- The income shifting described above is even worse than it sounds. It is worth pointing out that, under Trump’s plan, not only will people dodge income taxes, but doing so will be easiest for upper income earners, most likely in law or finance, who are more adept at tax planning and have more to deduct, etc. So, not only will the rich pay less, they will actually be legally rewarded for their skills in tax avoidance. In this regard, at least, Trump has stayed true to his campaign rhetoric.
- The plan also cuts the corporate rate, which is equivalent to an additional tax cut for the wealthy. In their focus on the pass-through cuts, senate Democrats neglected to call out Trump’s concurrent proposal to cut the corporate rate. This is important to highlight since the top-heavy benefit of entity-level corporate tax cuts is not as obvious as income and pass-through tax cuts, which accrue to individuals. Despite this mental hurdle, though, research shows that corporate tax cuts
Bonus point: While the fact that tax cuts don’t boost growth – at least not nearly as significantly or sustainably as Republicans predict – is a matter of economic consensus, a growing body of work aims to describe how lower rates at the top of the income distribution may actually increase pre-tax inequality and slow growth, by encouraging high earners to bargain for additional compensation, which might have otherwise been productively invested or equitably distributed. This would most certainly be the case with a 15 percent rate on pass-through business income, which, as discussed here and in point #2, would act as a new top income tax rate for many wealthy workers. So, in addition to costing trillions and increasing inequality, Trump’s plan would likely hurt overall economic growth. Just a little icing on the cake.