Trump "Tax Reform" Plan Revives Voodoo Economics

Posted May 3, 2017

MP3 Interview with Matthew Gardner, senior fellow at the Institute on Taxation and Economic Policy, conducted by Scott Harris

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On April 26, just a few days short of President Trump’s 100th day in office, a so-called “tax reform” plan was released by the White House that consisted of bullet points on a single printed page. Although there were few details on implementation and the net impact on families and federal revenue, it was clear that the tax plan would disproportionately benefit the wealthiest Americans, like Trump himself and the billionaire and multi-millionaire members of his Cabinet.

As his tax plan was rolled out, Trump boasted that this would be the largest tax cut in U.S. history, even larger than that signed into law by Ronald Reagan in 1981. Overall, the plan proposes a massive reduction in taxes for the nation’s richest individuals, including a drop in the top individual tax rate from 39.6 percent to 35 percent, repeal of the estate tax and alternative minimum tax, designed to ensure that the wealthiest pay their fair share, and elimination of the tax linked to the Affordable Care for those individuals making over $200,000 annually. Importantly, the plan also oproposes to reduce the top corporate tax rate from 35 percent to 15 percent.

Although Trump and his advisors maintain that the tax cuts would pay for themselves by promoting economic growth, history has shown that so-called “Trickle-down” economic theory has never worked, leading many economists to predict that Trump’s tax plan would add as much as $7 trillion in debt over 10 years. Between The Lines’ Scott Harris spoke with Matthew Gardner, a Senior Fellow at the Institute on Taxation and Economic Policy, who talks about why his group views Trump’s tax plan as a revival of “Voodoo Economics.”

MATTHEW GARDNER: There are a lot more blanks in this plan than there are specifics. But, I guess the shortest way to describe it is to say that the Trump administration has been very specific about the easy part of tax reform. How far they're gonna cut the rates down to 35 percent on the individual side, and an incredibly low 15 percent on the corporate side. They're going to repeat the estate tax. They're going to repeal the high income Medicaid tax that's part of Obamacare. They're going to repeal the alternative minimum tax which tries to make sure that the best-off Americans pay their fair share.

What they won't say is how going to pay for a lot of this. And so based on a very preliminary estimate of what's been specified, we think this amounts to a very large tax cut on the order of $7 trillion-plus over the next decade and one that will lavish almost half of its benefits on the very best-off one percent of Americans.

BETWEEN THE LINES: The justification for this kind of tax plan that would disproportionately benefit the wealthiest Americans is that – and we know this from back in the Reagan era – it was pitched as a way to get to economic growth and the deficits would disappear because this tax plan through the growth, woulud pay for itself. Matthew, can you explain to our listeners the track record of this so-called "trickle-down theory" that has been a real standard part of the Republican agenda for decades now. What do we know about the veracity of trickle-down economics?

MATTHEW GARDNER: Well, a lot of economist and a lot of other people have tried to tell a compelling story about how tax rates drive economic growth and as you mentioned, the Reagan tax cut experiment of 1981 is sort of the pioneer in that. But no on has ever shown any relationship at all between cutting taxes and economic growth. And there's a pretty good reason for that historically. A couple, actually. One is that we all know, upon reflection, that taxes aren't levied for the sake of having tax revenue. They're there because taxes provide the services that make civilization. What that means is that in a deficit-funded environment, which is of course what we've had for the last 40-odd years on and off, anytime you cut taxes by a billion dollars, or a trillion dollars, that's a billion dollars that has to be paid for. It could be paid for by hiking other taxes – that's a lot of what happened after Reagan's 1981 tax cuts, for example. It could be paid for by cutting spending across the board in a way that no one wants to see. Either of those situations where the other shoe falls after your original tax cut is actually going to hurt the economy, taken on its own.

BETWEEN THE LINES: Well Matthew, just time for one more question here. I wonder if you could tell our audience about your views on the link between U.S. federal tax policy and growing income inequality in this country. And then, a second part of that question would be, "What would be a simple way to explain how our tax policy could be shifted to reverse that many-decade long trend to really push this inequality pattern in a different direction?"

MATTHEW GARDNER: What's happened in the last 30 years is that there's been an erosion in the fairness of our tax system. It used to be substantially more progressive. We've seen cuts in the estate tax. We've seen major cuts in the capital gains tax. Top income tax rates have gone and up again. There are now tax breaks for dividends. There are tax breaks for all sorts of corporate activities: investing in manufacturing and fossil fuels and alternative fuels. All of which have basically cut in half the yield of the corporate tax, which is generally thought to be the most progressive, one of the progressive taxes out there. The result is that we've seen a gradual shift in the tax load away from the best-off Americans and onto middle- and low-income Americans. What's happening when you do that is that you're actually redistributing income away from the poor towards the rich. Just absolutely the converse of what you hear with these claims of socialism. Through that lens, the remedy is pretty clear. Let's preserve the estate tax, not cut it. Let's get rid of capital gains tax breaks - let's make sure capital gains are taxed the same way as wages, as Warren Buffett has been arguing for years. Let's make sure that the corporate tax loopholes are gone, that all corporate income is treated the same way.

These are of course, the exactly the opposite things, as what Trump is proposing. In fact, he said nothing about closing corporate loopholes, hasn't named a single one. Wants to repeal the estate tax. He's doing nothing to remedy the gaps in capital gains and which sharply reduce taxes on the best off. So it's important to be clear. The Trump tax plan as we understand it right now, would be redistributive. It would redistribute income away from the poorest 99 percent towards the top 1 percent.

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