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Trump's 'Forgotten Americans' Will Get Lower Taxes on the Rich and Higher Income Inequality

November 27, 2016

Throughout his unlikely journey to the White House, Donald Trump declared himself to be a "blue-collar billionaire" who as President would be the "voice" of the "forgotten man." Rolling out the first of the three versions of his tax plan last December, the real estate tycoon and reality TV star boasted, "it's going to cost me a fortune -- which is actually true."
Of course, it's not true.

Dodging his traveling press pool, President-elect Trump on November 15 headed off to the tony 21 Club in Manhattan. There, to a standing ovation, he told the well-heeled diners the truth:

"We'll get your taxes down, don't worry."

Theirs, and his. The man who apparently hasn't paid Uncle Sam a penny in 20 years has proposed a tax cut scheme that will enrich him, his businesses and his children for years to come. Whether based on The Donald's own outline or House Speaker Paul Ryan's "Better Way" budget blueprint, the Trump Tax Cuts of 2017 will drain roughly $6 trillion from the United States Treasury over the next 10 years. Unfortunately for those forgotten men and women who supported him, decades of evidence show that Trump's massive supply-side windfall for the wealthy won't make him "the greatest jobs president that God ever created." What the 45th President and his Republican allies will accomplish, however, is the greatest expansion in income inequality since Ronald Reagan ambled into the White House.
To better understand why, it's worth looking back at recent history.

During the depth of the great recession, President Obama as promised delivered tax relief to 95 percent of working Americans. A major component of his $800 billion stimulus program of 2009, Obama's was the largest two-year tax cut in modern American history. (Nevertheless, as a 2010 CBS/New York Times poll of Tea Party supporters found, "only 2 percent think taxes have been decreased, 46 percent say taxes are the same, and a whopping 44 percent say they believe taxes have gone up.") In 2011 and 2012, working Americans benefitted from a payroll tax holiday that trimmed two percent from their payments to Medicare and Social Security. But with the economic recovery under way, a just-reelected President Obama in late 2012 pushed for an end to the Bush tax cuts for the wealthiest Americans.
As the so-called "fiscal cliff" (that is, the triple-whammy of the expiration of all of the Bush tax cuts, the end of the payroll tax holiday and the beginning of budget "sequestration) approached on January 1, 2013, the nonpartisan Congressional Budget Office (CBO) warned the overall impact could be devastating to the economy. But as I noted at the time, CBO was confident that higher taxes on the rich would have virtually no impact at all:

Letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that instant austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year.

For their parts, then-Senate Minority Leader Mitch McConnell (R-KY) and House Speaker John Boehner (R-OH) clung to their party's tall tales on upper-class tax rates. While McConnell warned Democrats are "seeking is the Europeanization of the U.S. economy," Boehner sounded the alarm that ""Going over part of the fiscal cliff and raising taxes on job creators is no solution at all." Previously, Boehner peddled the GOP's job creators myth this way:

"The top one percent of wage earners in the United forty percent of the income taxes...The people he's [President Obama] is talking about taxing are the very people that we expect to reinvest in our economy."

Ultimately. the fiscal cliff deal did raise tax rates from 35 to 39.6 percent for individuals earning over $400,000 a year (and families earning $450,000) starting in 2013. Including the 3.8 percent Obamacare surcharge, the top capital gains rate moved to 23.8 percent. But as it has turned out, Boehner and his conservative amen corner were completely wrong.
In the most recent employment report for October 2016, the White House reported that 15.5 million private sector jobs had been added to the economy since early 2010, lowering the unemployment to 4.9 percent. (In 2012, candidate Mitt Romney promised to lower it to 6 percent by the end of his first term.) "Most importantly," Jason Furman of the Council of Economic Advisers explained, "average hourly earnings for private employees increased 2.8 percent over the last twelve months."

But that's not all we've learned since President Obama boosted rates for the wealthiest taxpayers. While the historical tables of the Office of Management Budget (OMB) show that tax revenue surged, there has been progress on both sides of the income gap. A new analysis from UC Berkeley Professor Emmanuel Saez, Michael Hiltzik reported in the Los Angeles Times, found that "hiking taxes on the rich really does raise more money and help the economy."
The share of pre-tax income going to the top 1 percent had jumped from 8.9 percent in 1975 to 22.0 percent in 2015. While moving up and down with fluctuations in the economy (and especially the stock market), the share reached 22.8 percent in 2012 before plummeting to 20 percent in 2013. The cause was the Obama tax cuts, which led the rich to take their capital gains in 2012 in order to avoid those higher rates coming the next year. By 2015, the upward climb had resumed.

But that's not all Saez discovered:

What happened to top incomes in the medium-term? Figure 1 shows that the share of national income going to the top 1 percent income resumed its upward trend after 2013. By 2015, that share is back up to 22 percent. This means the 2013 tax increase depressed pre-tax top incomes only temporarily in 2013. This finding presents two important consequences. First, it means that raising taxes on the rich is an efficient way to raise additional revenue, as the rich do not respond much to the higher tax rates in the medium term. I estimate that only about 20 percent of the projected revenue increase from the 2013 tax hike is lost due to the behavioral responses over the medium term. Second, by itself, the 2013 tax increase will not be sufficient to curb the extraordinarily high level of pre-tax income concentration in the United States.
These findings echo the findings of earlier work analyzing the 1993 Clinton era tax increase, which also generated short-term retiming of top incomes into 1992 but did not prevent top income shares from surging in the mid-to-late 1990s. It is also striking that the best growth experience for the bottom 99 percent of income earners over the past 25 years took place in the mid-to-late 1990s and between 2013 and 2015--after tax increases on the rich. This suggests that taxing the rich more does not have detrimental effects on the broader economy; quite the contrary. [Emphasis mine.]

As I have previously documented, higher marginal income tax rates have only a negligible impact on income inequality. Capital gains rates are another matter altogether: the record shows that lower tax rates on capital gains and dividends don't increase investment in the economy, but fuel greater income inequality. Now, a new paper by the White House Council of Economic Advisers (CEA) has shown that the Obama administration's policy troika of economic stimulus, upper income tax increases and the dramatic expansion of health insurance coverage under the Affordable Care Act has made a significant dent in America's record-high income inequality. As Ben Casselman of FiveThirtyEight summed up Jason Furman's argument:

The CEA report argues that Obama has fought inequality in three main ways. First, the administration's actions during the recession -- extending unemployment benefits, temporarily cutting payroll taxes to stimulate growth and bailing out the auto industry, among others -- kept unemployment lower than it would otherwise have been. Since recessions tend to hit the lowest-earning workers hardest, policies that mitigate their impact will tend to reduce inequality. Second, the CEA argues that the Affordable Care Act, by making health insurance more affordable for and accessible to low-income workers, has greatly reduced disparities in health care. And third, the CEA argues that the administration's tax policies -- which raised taxes on the rich, cut them for the middle class and expanded programs such as the Earned Income Tax Credit that help poor families -- made the tax code more progressive. All told, the CEA estimates that the poorest fifth of American households will earn 18 percent more in 2017 than they would have without the administration's policies.

As Casselman noted, "There is room to argue with all of these claims." But what is very hard to dispute is this. Any agenda that rolls back virtually the entirety of the Obama presidency--and more--is going to have major negative consequences for the still-yawning income gap. And that is precisely what President-elect Trump and House Speaker Paul Ryan are promising to do.
The forgetting of Trump's forgotten Americans starts with his tax plan. Like Paul Ryan, Trump would condense the current 7 tax brackets into just 3 of 12, 25 and 33 percent. Like Ryan, Trump would repeal Obamacare, and with it, the 3.8 percent capitals gains tax surcharge on the wealthy. (Ryan seeks to further lower the top capitals gains rate to 16.8 percent.) Also, like Ryan, President Trump wants to eliminate the estate tax, a change that would blow a $250 billion hole in the budget. (With its $10.7 million threshold per family, only about 0.1 percent of estates even have to pay it. If The Donald is really worth $10 billion as he brags, this would redirect $7 billion from Uncle Sam to Trump's heirs.) In addition, Trump is seeking to lower corporate taxes and change the treatment of so-called C corporations and "pass through" businesses and partnerships. Instead of a top rate of 35 percent, these entities (of which the Trump Organization consists of hundreds), would pay only 15 percent. And their changes to personal and standard deductions could actually raise taxes for many lower income and middle class families, especially those headed by a single head of household. (Targeting the deduction for state and local taxes would be especially painful for blue-state residents who live in high-tax/high-service states.)
Now, there are certainly real differences between Ryan's "Better Way" and Trump's tax plan, especially regarding their treatment of multinational corporations. But as the New York Times explained:

There is certainly a significant overlap. Both would cut income tax rates across the board and keep rates low on income from investments, an approach intended to spur savings that effectively guarantees the juiciest cuts for the wealthy.
An analysis of Mr. Trump's latest plan by the Tax Policy Center calculated that the top 0.1 percent of the population, those with incomes over $3.7 million in 2016, would receive an average 14 percent reduction, or about $1.1 million. Households in the middle of the scale -- those earning between about $48,000 and $83,000 today -- would get a 1.8 percent tax cut worth on average $1,010, while the poorest fifth of Americans will gain about $110, or 1 percent of their income.

To help offset the torrent of red ink their plans would necessarily produce, both Trump and Ryan turn to the alchemy of "dynamic scoring," which claims that the increased economic activity incentivized by tax cuts ultimately produce more tax revenue. For his part, Trump has promised to increase defense spending while protecting Medicare and Social Security, which he comically boasts can be paid for simply by cutting "waste, fraud, and abuse." But both Trump and Ryan would slash Medicaid spending and turn what remains over to the states as block grants. As he has in his annual budgets routinely supported by 95 percent of Congressional Republicans, Speaker Ryan would privatize Medicare and go much further in shredding the safety net. As the Center on Budget and Policy Priorities recently warned:

By 2025, nearly all of the tax cuts would go to households with incomes over $1 million; low- and middle-income households would gain only slightly. Over the next decade, millionaires would receive an estimated $2.6 trillion in tax cuts.
The increase in inequality also reflects the magnitude and composition of the $6 trillion in program cuts over the next ten years envisioned in the House GOP's budget plan, which aims to balance the budget over this period. The plan's spending cuts would hit programs for low- and moderate-income people much harder than other programs, denying health insurance to tens of millions of people and reducing food assistance and other basic aid to millions more. Over the next decade, the plan would cut programs assisting low- and moderate-income households by approximately $3.7 trillion, dwarfing the very small gains these households would receive from the House GOP tax cuts. Middle-class households likewise would lose far more from the House GOP's planned budget cuts than they would gain from the modest tax cuts they would receive from the tax plan.

All told, CBPP calculated in March, the last House GOP budget got 62 percent of its non-defense cuts from programs for those with low or modest incomes.

Now, none of this is rocket science. We've been here before. As the Center for American Progress demonstrated, the U.S. economy has grown faster and produced more jobs when marginal tax rates were higher--even much higher--than today:

In a dress rehearsal for today's debate, David Leonhardt of the New York Times in 2010 raised many of the same points about the GOP's demand to extend the Bush tax cuts. "Why should we believe that extending the Bush tax cuts will provide a big lift to growth?" His answer was unambiguous:

Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7...
Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.
Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.

As we sadly look forward to replay of this debate in January 2017, one thing is for certain about the next president from the Party of Lincoln. You can fool some of the people all of the time, and that's Donald Trump's target market. Which means that Trump's voters aren't "forgotten men and women of America" at all. They're his marks.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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