Trickle Down Hoax Central to GOP Tax Reform Plan

Posted Nov. 1, 2017

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

taxes

The Republican-controlled U.S. House and Senate narrowly approved a joint budget resolution on Oct. 26, an important step on the way toward the party’s goal of approving major tax reform legislation by the end of the year. While the budget resolution doesn’t have the force of law, it allows Republicans to propose a tax bill that needs only 50 votes in the Senate, bypassing the threat of a Democratic filibuster that requires 60 votes for passage.

Although all the details of the GOP tax reform proposal have not yet been announced, drafts of the bill specify tax cuts that cost $1.5 trillion over the next decade, where 80 percent of tax relief will benefit the top one percent wealthiest Americans. The plan calls for slashing the corporate tax rate from 35 to 20 percent and repealing the inheritance tax on multimillion-dollar estates. Under the proposal, the number of tax brackets would decrease from seven to three or four, the standard deduction would be doubled and the child tax credit would be increased. While President Trump and Republicans say their goals is to boost the economy and provide middle-class tax relief, the elimination of local and state tax deductions and other changes to the tax code could actually increase taxes on millions of working families.

Between The Lines’ Scott Harris spoke with Matthew Gardner, senior fellow with the Institute on Taxation and Economic Policy, who assesses the winners and losers in the Republican tax reform plan, and the real world track record which proves that trickle-down economics is a lie.

MATTHEW GARDNER: The plan we're looking at right now, as following a long tradition of Republican tax cut plans, is very specific on the details of which tax rates will be cut and which taxes will be repealed. The estate tax, gone. The corporate alternative minimum tax, which is designed to make sure that all corporations pay at least something, gone. The basic corporate income tax rate would be sharply reduced from 35 percent to 20 percent.

On the personal income tax side, the top rate would go down from 39.6 percent to 35 percent. There would be a special new tax break for what's called pass-through businesses. These are often described as, by the advocates, as small businesses but really are just generally very big businesses that happen to use a different set of rules for paying income tax. Instead of paying taxes as entities, they pass through the tax on their profits to the owners of the business, who pay on the individual side. And the plan here is to drop the pass-through business tax rate to 25 percent instead of the 39.6 percent top rate that currently have.

So, they're leading with sharp reductions in almost all the taxes that upper-income Americans pay on the individual side. The big part is how they're going to pay for it. It's generally recognized that tax reform has two components in a deficit-challenged environment. One is, what are you going to do with the rates? And the other is what are you going to do to the base? The most straightforward diagnosis of what ought to be done is to close loopholes. You hear that language spoken by both sides all the time.

On the corporate side in particular, we know that maybe half of corporate profits are now being subjected to tax because of various loopholes. And so closing them seems like an important second component of this plan. Sadly, the outline we've been looking at most recently is pretty vague on many of the details of which loopholes would be closed. There's language about Indian wasteful tax subsidies, but very little specific language on which ones will go away.

On the individual side, there's a little more specificity. We know that the intention is to get rid of most itemized deductions while preserving only two: the charitable deduction and the mortgage interest deduction. Bad news is, the very limited amount of loophole closing we're talking about is nowhere enough by anyone's accounting to pay for the rate reductions. And the result is that we're looking at a multi-trillion dollar tax cut as it's currently configured, over the next ten years.

BETWEEN THE LINES: And Matthew, the rationale for Republicans for many decades now for cutting taxes for the wealthiest people in the United States is so-called "trickle-down" theory, where, if you give tax breaks to the wealthiest folks, the theory goes, you're going to create jobs and wealth and expansion that will benefit everybody in the middle and the bottom. But we have a record of these previous tax cuts, and it turns out from a lot of documentation and studies I've read, that you can expand on here – "trickle-down" is a hoax.

MATTHEW GARDNER: The harsh reality is that while this story has been told for – sometimes very eloquently for 30 years, now – we can look back to President Reagan's tax cuts in 1981. There's never been a documented case in which it actually worked. The problem is that every time we've enacted tax cuts in the last 30 years that have been based on this premise, we've had to backpedal as a nation. We've had to undo them. Sometimes, as in the case of the Bush tax cuts of 2001, it's taken a decade of pitched battle for Congress to realize in a bipartisan way that they really had just dug the hole too deep.

In other cases, as was true in 1981, although people don't want to seem to remember it too much, it took about a year for Congress to realize that they'd overstepped their bounds and to start undoing the Reagan tax cuts. But in every case, whether it's these examples at the national level or more recently the Kansas tax cuts, which a lot of people have talked about in the last few years – they end up not working. These tax cuts end up primarily costing a lot of money, bestowing huge tax benefits on the owners of businesses and their shareholders on the best-off Americans and providing little or nothing in terms of demonstrable job growth, income growth or even direct tax cuts for the rest of us.

For more information, visit The Institute on Taxation and Economic Policy at itep.org.

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