Reclaim the American Dream

Another Blog Post By

Hedrick Smith

GOP Tax-Cut Feeds Cancer of Inequality

Washington – The most lethal damage to American society embedded in the Republican tax plan now being rushed through Congress is that it will metastasize the cancerous economic inequality that has been eating away at the health and fabric of American democracy over four decades – an issue some Democrats plan to take to voters in 2018.

Three years ago, in his monumental work, Capital in the 21st Century, the French economist Thomas Piketty warned that “When the rate of return on capital exceeds the rate of growth of output and income,… capitalism automatically generates arbitrary and unsustainable inequalities that undermine the meritocratic values on which democratic societies are based.”

As evidence, Piketty points to the tumor of concentrated wealth accumulated by American’s super-rich 1% since the late 1970s while middle class incomes have stagnated. Despite long-term growth, his studies show the impact of wedge economics: Trillions of dollars have shifted from the middle class paychecks to ballooning stock grants for CEOs and the bulging portfolios of billionaires.

Capitalism’s Most Dangerous Dynamic

Piketty’s analysis pin-points the fatal pathology built into the Republican tax plan: Its focus on corporate tax cuts will accelerate the malignancy of inequality.

Economist Thomas Piketty warns of the danger of growing economic inequality as workers’ wages suffer falling share of national income (see chart). Piketty by(CC) Sue Gardner

As President Trump and Speaker Paul Ryan never tire of asserting, the main economic lever in the Republican plan is the cut in the corporate tax rate from 35% to 20%. That will increase the after-tax profits of corporations which typically pass along their earnings to Wall Street and wealthy investors.

In other words, this is a tax cut engineered to fuel what Professor Piketty warned is the most dangerous dynamic of modern market capitalism – skyrocketing gains for investors earned on the backs of slow-growing pay for most people who work for a living. It’s bound to lead, he says, to a self-perpetuating American plutocracy, like the 18th century European aristocracy and “hierarchy of wealth” portrayed in novels by Jane Austen and Balzac, Dickens and Victor Hugo.

Exit Trump’s Economic Populism Stage Right

That scenario mocks the economic populism that powered Donald Trump’s race for the Presidency and that won the support of working class, blue-collar and rural Americans – the tens of millions left jobless or financially disabled by the rush of American multi-national corporations to cash in on globalization.

Speaker Ryan and President Trump form alliance on Republican tax plan calling for major cuts in corporate taxes. Ryan by: (CC) Tony Alter Trump by(CC) Michael Vadon

For all his mouthy, ostentatious anti-elitism, Trump has shelved campaign populism to forge an alliance with the Republican political establishment on behalf of the super rich, who bankrolled critical GOP campaign victories in 2016 and kept Congress in Republican hands.

The Senate bill, like the House version, was written as a payback to wealthy campaign donors. No tax bill, admitted South Carolina Republican Senator Lindsay Graham, means “the financial contributions will stop.” New York GOP Congressman Chris Collins added, “My donors are basically saying, ‘Get it done or don’t ever call me again.'”
Payback Exhibits A and B are the elimination of the estate tax (only 5,219 estates were rich enough to pay it in 2016) and doing away with the alternative minimum tax, which was designed to keep the ultra rich from dodging taxes entirely by exploiting tax loopholes and which in 2005 forced Donald Trump to pay $31 million in taxes.

Plus the decision to keep a low tax rate for hedge fund managers while canceling the tax deduction for interest paid on student loans, imposing a new tax on tuition grants from universities to teaching assistants and other employees not to mention what’s been dubbed “the Donald J. Trump loophole” – including real estate firms on the special 29.6% tax rate that lets the super-rich duck the 39.6% top bracket tax rate by qualifying for the lower rate as pass-through business partnerships.

In all, business interests are reaping $2.5 trillion in tax cuts, paid for in part with a 10% tax on overseas U.S. corporate earnings and a change in some corporate tax deductions, but mostly financed by pinching individual taxpayers.

The Box-Score on “Middle Class Tax Cuts”

This desertion of Trump’s political base has been masked President and congressional Republicans by their grandiose and inflated promises of a middle class jobs and wages bonanza. “Fixing the business side of our tax code is really all about helping families and workers,” Speaker Ryan insists. “Cutting the corporate tax rate means more jobs here in the United States. It will foster increased competition, which will directly drive up wages for our workers.”

With GOP tax plan, Trump moves away from his political supporters in 2016 campaign. Source: (CC) Gage Skidmore

That refrain has been trotted out previously by Republicans – for the whopping Reagan tax cuts of 1981 and the George W. Bush tax cuts in 2001 and 2003, both of which generated trillions of added wealth for America’s ultra-rich.

In 1981, President Reagan called his plan “the first real tax cut for everyone in almost 20 years.” With a 25% cut in tax rates for all brackets, the Reagan plan had a ring of fairness. But it was actually tilted strongly in favor of the wealthy whose top tax rate was cut from 70% to 50% (later dropped to 28% by Reagan) and who benefited disproportionately from a cut in the capital gains rate from 28% to 20%, and a tripling of the exemption from the estate tax.

In retrospect, economists calculate that overall, Reagan’s tax cuts added $1 trillion to the wealth of the top 1% in each decade since – nearly $4 trillion in all.

In 2000, George W. Bush struck a similar theme, vowing that “by far the vast majority of my tax cuts go to the bottom end of the spectrum.” That image was crucial. Organizing a tax-cut rally, Republican House Speaker Denny Hastert’s office high-priced business lobbyists to show up looking like ‘Working Americans’. “They must be DRESSED DOWN, appear to be REAL WORKER types, etc,” the office memo said. “We plan to have hard hats for people to wear.”

But in fact, the Bush tax plan had only modest cuts for hard hats (Typically $1,180 less taxes for a middle class family), compared to an annual tax cut of $520,000 for the top 0.1 percent. The Bush tax cuts rewarded the top 1% with $1 trillion in added income over the next decade.

In short, the Trump game plan fits a pattern of middle class rhetoric and elite profits – a pattern that many ordinary taxpayers have evidently deciphered. A recent poll by the University of Maryland found that fewer than one in four voters overall and fewer than 40% of Republicans support lower taxes for people making more than $200,000 and 60% of the public opposes lowering corporate tax rates. Not that public opinion is going to stop or reshape the tax-cut steamroller in Congress any more than the warnings of economist Thomas Piketty.

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