The American Prospect by The American Prospect

Our Special Report on the Defining Issue for 2018

Tax

liberal intelligence

Fraud Whatâ&#x20AC;&#x2122;s buried in the Republican tax law, and how youâ&#x20AC;&#x2122;ll pay for it.

Summer 2018

contents

Special issue

volume 29, number 3 Summer 2018

Tax Fraud: the Tax Act of 2017 4 INTRODUCTion The Emblem of this Era by Robert Kuttner

PART I WHAT’S IN THE TAX ACT, AND HOW IT GOT THERE 8 The Top Ten Fallacies about the 2017 Republican Tax Act by William Rice 10 The Two Big Lies behind Donald Trump’s Tax Plan by Matt Gardner 13 How the Tax Act Embodies the Republican Culture of Corruption by Seth Hanlon 14 Sidebar the Tax Act that Lost its name by Paul Starr 17 Sidebar The Koch Brothers’ Best Investment By Kayla Kitson

PART II Language and message: MAKING IT TOXIC 18 Talking Taxes With the Voters by Guy Molyneux 22 The Broad Support for Taxing the Wealthy by Stanley B. Greenberg 27 The Democrats’ Response by Harold Meyerson 31 Op-art Party Animals by Steve Brodner

PART III the Fake Claims, DEBUNKING THE MYTHS 32 Why the Tax Act Will Not Boost Investment by Dean Baker 34 The Curse of Stock Buybacks by William Lazonick 38 Raises and Bonuses: the PR Fraud by William Rice 42 A Lost Opportunity to Help Small Business by Chuck Collins 43 Sidebar Gutting the AMT by David Dayen

PART IV THE CONSEQUENCES 45 Demonizing the IRS to Protect Tax Evaders by David Cay Johnston 48 Massive Spending Cuts: The Tax Act’s Hidden Costs by Joshua Holland 50 How the Tax Act Undercuts Health-Care Reform by Paul Starr 51 Sidebar Accelerating the Death of Real Jobs by Katherine V.W. Stone 53 the Tax Act Actually Promotes OffShore Tax Tricks by Reuven S. Avi-Yonah 56 Worsening Inequality by Heather Boushey and Greg leiserson 57 the Harm to Affordable Housing by Alyssa Katz 59 Sidebar Penalizing Marriage for the Poor by Jordan Ecker 60 How the Tax Act Sacks Puerto Rico by Manuel Madrid 63 Sidebar Denying the Child Tax Credit to Undocumented Children by Manuel Madrid

PART V THE FUTURE 64 What Else We Could Do With $1.9 Trillion by Jon Rynn 67 Want to Expand the Economy? Tax the Rich! by Nick Hanauer 71 The Long Game on Taxes by Paul Starr 73 How to restore Taxes on Inheritances by Chuck Collins 76 principles for Real Tax Reform by Robert Kuttner

from the Editors

Johnston

Boushey

Stone

Greenberg

Molyneux

Hanauer

Katz

Avi-Yonah

his special issue about the 2017 Republican Tax Act is meant to be both a primer and a political handbook. It includes both a comprehensive description of everything that is corrupt and debased in the law, as well as key insights on how this legislation can be made to backfire on its sponsors. In assigning and editing this special issue, we were able to enlist an allstar team of people who are not only experts on taxes, but who are skilled at translating sometimes daunting issues into terms that can be readily grasped and used in debate. Among the more than 20 writers in this issue are these leading experts, economists, journalists, and commentators: David Cay Johnston writes on how the Tax Act invites more tax cheating by the wealthy. David, a Pulitzer Prize–winner who has written for the Prospect previously, is author of seven books on economics and taxes, most recently It’s Even Worse Than You Think: What the Trump Administration Is Doing to America. Heather Boushey is founding executive director and chief economist of the Washington Center for Equitable Growth. Her piece, written with Greg Leiserson of WCEG, addresses how the Tax Act increases inequality. She is author, co-author, or editor of six books, including After Piketty: The Agenda for Economics and Inequality. Katherine V.W. Stone , labor law professor at UCLA and a frequent Prospect contributor, is a longtime critic of the debasement of standard employment. She writes about how the Tax Act exacerbates that trend. Her six books include From Widgets to Digits: Employment Regulation for the Changing Workplace. Stanley B. Greenberg , who also serves on the Prospect board, is one of America’s pre-eminent pollsters. He has been studying the political attitudes of the white working class for four decades. He co-directs Democracy Corps, which he co-founded in 1997. Stan writes about public opinion and the Tax Act. Guy Molyneux , leading pollster and public opinion analyst with Hart ResearchAssociates, is a longtime contributor to the Prospect. His piece addresses political language, the tax issue, and the Tax Act. Nick Hanauer , an entrepreneur, venture capitalist, and early investor in Amazon, makes the case in his piece that much higher taxes on wealthy people like himself will not deter entrepreneurship, while low pay for regular working people is what holds the economy back. Alyssa Katz , a journalist who specializes in housing, writes about how the Tax Act further undercuts America’s meager efforts to support affordable housing. Alyssa has previously written for the Prospect and is author of Our Lot: How Real Estate Came to Own Us. Reuven S. Avi-Yonah is among the world’s leading scholars of international taxation and tax evasion. He is a professor at the University of Michigan Law School, author of numerous articles and books, and a longtime Prospect contributor. Special thanks to the Schumann Center for Media and Democracy for underwriting this issue, and to Americans for Tax Fairness and the Institute on Taxation and Economic Policy for research help.

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co-editors Robert Kuttner and Paul Starr co-founder Robert B. Reich Executive editor Harold Meyerson Deputy Editor Gabrielle Gurley art director Mary Parsons managing editor Amanda Teuscher associate Editor Sam Ross-Brown Writing Fellows Manuel Madrid, Kalena Thomhave proofreader susanna Beiser editorial interns Emily Erdos, Fiona Redmond, Natalie Rowthorn, Mark Ossolinski, Jordan Ecker contributing editors Marcia Angell, Gabriel Arana, Jamelle Bouie, Heather Boushey, Alan Brinkley, Jonathan Cohn, Ann Crittenden, David Dayen, Garrett Epps, Jeff Faux, Michelle Goldberg, Gershom Gorenberg, E.J. Graff, Bob Herbert, Arlie Hochschild, Christopher Jencks, John B. Judis, Randall Kennedy, Bob Moser, Karen Paget, Sarah Posner, Jedediah Purdy, Robert D. Putnam, Richard Rothstein, Adele M. Stan, Deborah A. Stone, Michael Tomasky, Paul Waldman, Sam Wang, William Julius Wilson, Matthew Yglesias, Julian Zelizer Publisher Amy Marshall Lambrecht Comptroller Anne Beech Development Manager Justin Spees Publishing assistant Stephen Whiteside board of directors Michael Stern (Chair), Chuck Collins, Shanti Fry, Stanley B. Greenberg, Jacob s. Hacker, Robert Kuttner, Ronald B. Mincy, Miles Rapoport, Janet Shenk, Adele Simmons, Ganesh Sitaraman, William Spriggs, Paul Starr Fulfillment Palm Coast Data subscription customer service 1-888-MUST-READ (1-888-687-8732) subscription rates $19.95 (U.S.), $29.95 (Canada), and $34.95 (other International) reprints permissions@prospect.org

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The Emblem of this Era The Tax Act sums it all up — grotesque favoritism for the rich and a corrupt legislative process. And it’s already backfiring. B y Ro b e rt Ku ttn er

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his is the first time in nearly 30 years of publication that The American Prospect has devoted an entire issue of the magazine to a single topic. We are doing so because the 2017 Tax Act so perfectly displays so much of what is rotten and false about this period of Republican rule, and sets up an epic debate about what the two parties stand for. Tax cuts are invariably political winners, or so the Republicans thought. But this one is so grotesque that it is already backfiring. Whether it truly blows up on the right, and becomes a major political liability this fall, depends in large part on how skilled Democrats and commentators are at narrating all that is wrong with it. The law makes clear that the deep corruption in this era emanates not just from Trump personally. He would have signed almost any tax cut bill that made it to his desk. This bill was mainly the creation of the Republican Congress, a wish list of provisions awaiting the right political moment. In that respect, it is emblematic of the deeper venality and cynicism of the Republican Party. If the consequences are properly understood by the voters, Republican legislators will pay for both the sins of Trump and their own.

Summer 2018 The American Prospect 5

We also chose to devote an entire issue to the Tax Act because of the need to provide an authoritative primer for use in public and political argument. Some of the details are highly technical, but not so technical that they can’t be explained or understood by the citizenry if well illustrated and explained. The top line could not be clearer. This is a law by and for the top few percent, with hidden costs for the rest. How does the Tax Act epitomize Republican hypocrisy and opportunism? Let us count the ways. Begin with the process. The bill was jammed through Congress in violation of everything we learn about how American government is supposed to work. There were no hearings on its major provisions, which were cobbled together in backroom deals as House and Senate Republican leaders looked for a draft that might win a majority of votes. Tax preferences were revised helter-skelter, as Republicans first identified cuts and then sought to offset part of the revenue loss. Democrats were given no opportunity to participate in the legislative process. The final cost was estimated via back-of-the-envelope calculations, using heroic assumptions about offsetting economic benefits that might increase revenues. The sponsors put out the figure of $1.5 trillion over a decade. When the Congressional Budget Office ran the actual numbers, the cost was $1.9 trillion. As part of the sheer budget gimmickry (and in a display of real loyalties), the corporate tax cuts were made permanent and the individual ones temporary. The act reeks of hypocrisy. The bill was going to discourage offshoring of investment and jobs in line with the Make America Great Again theme. When the dust settled, it added new incentives that tax overseas investments at lower rates than domestic ones. Republicans profess to be fiscal conservatives. In April, the Republican House even voted 233 to 184 to approve a constitutional amendment requiring the federal budget to be balanced. (It failed to get the necessary twothirds.) They suspended their budget-balance mantra just long enough to pass the Tax Act—which would have been prohibited by their own amendment. Once the Tax Act increased the cumulative ten-year deficit and national debt by nearly $2 trillion, Republicans abruptly rediscovered fiscal virtue, and began demanding offsetting cuts in programs such as Social Security and Medicare. Republicans supposedly are big backers of states’ rights. But that principle has eroded into code for weakening federal laws that promote social or racial justice. In the tax bill, states’ rights were repeatedly violated. Citizens of states were denied the long-established right to deduct all state and local taxes against federal taxes owed. A $10,000 cap was put on all such deductions, a deliberate poke in the eye at states with relatively progressive taxes and decently funded services. These, of course, just happen to be states with a

6 WWW.Prospect.org Summer 2018

habit of voting for Democrats. So in those states, many middle-class taxpayers, who went into debt to purchase homes, will face significant tax increases. This nasty provision also violates the longstanding Republican gripes against double taxation. It comes as close as legally possible to imposing differential tax rates on Republicans and Democrats. The benefits are mostly corporate. In all, America’s corporations gain tax cuts that will total more than $1.7 trillion over a decade. This was billed as increasing investment and workers’ wages, but corporations have not in fact increased their investment, and most of the money has gone into stock buybacks. Taken as a whole, the bill delivers 83 percent of the cuts to the top 1 percent. It further shifts the tax load from capital to labor, and further cuts the tax on large estates to almost the vanishing point. Is there any better display of Republican loyalties? Republicans also professed to support tax simplification and economic efficiency. This is the party whose leaders once spoke of creating a tax code so fair and simple that your tax return could fit on a postcard. Well, there has never been a tax bill more complex and convoluted than the misnamed Tax Cuts and Jobs Act. The law only increases the economic inequality that is already extreme. Precious little will trickle down, and the trickle-down is negative when offsetting cuts in social outlays and increases in state and local taxes are factored in. The act should serve as the final epitaph for the claims of supply-side economics. The provisions creating additional breaks for affluent taxpayers who can reconstitute themselves as entities that qualify for “pass-through” treatment create jobs mainly for accountants. They do nothing for economic efficiency, except to thwart it—by steering activity to tax advantage rather than to entrepreneurship. The new rules on foreignversus domestic-sourced income mainly invite other gimmicks for where income is booked. The increased complexity, combined with the demonization and underfunding of the IRS, means more outright tax evasion and fewer audits of the wealthy, and a still larger share of taxes paid by everyone else. The policy and symbolism have a final rendezvous when it comes to the Evader in Chief. The Tax Act generalizes for a larger group of the very rich the same accounting games long played by this president, Donald Trump, who will save millions in his own taxes. All of this and more will be detailed in the pages that follow. Since the current era of tax-cutting began with Ronald Reagan in the 1980s, Republicans have usually taken care to make sure that some non-trivial share of the benefits actually trickled down to working people, and to find at least some Democratic allies to join them in supporting the legislation. This time the greed was so palpable that they neglected even this gambit.

The gains are overwhelmingly directed to corporations and the rich, to the point where a majority of employed voters tell pollsters that they haven’t seen any benefits in their take-home pay. Not a single Democrat voted for this bill. In past tax cuts, Republicans could count on a quarter to a third of Democrats to go along for the ride, in part because their big donors wanted their support, and in part to curry favor with large corporations. Also, many Democrats figured that if Republicans were enacting a politically popular tax bill that was going to pass anyway, they might as well share in the credit. The fact that no Democrat in either the House or Senate voted for this bill reflects how Democrats were frozen out of the legislative process, and the fact that benefits for regular people were trivial. It also suggests improved party discipline and unity on the Democratic side. Both the substance of this legislation and the way it was enacted were so reckless on the part of Republicans that it suggests a kind of Après moi, le déluge mentality. Republicans seemed to sense that their days as governing party were numbered, that Democrats were likely to take the House in 2018 and perhaps keep it for a while. This was their last chance for many years to grab as much as they possibly could for their corporate and individual predator allies of great wealth such as the Koch brothers, and many members of their own caucus who personally gained. So damn the torpedoes and take it all, regardless of the partisan fallout. The Tax Act thus sets up a defining argument between Republicans and Democrats, one that Democrats had better get right. Republicans are already sensing that their prize achievement is a political loser. Early in 2018, the White House and leading Republican strategists were urging GOP candidates to put their tax cut front and center in their messaging. But the candidates’ political ears and their on-the-ground polling told them something else. The act was not rallying voters, base or swing, to the Republican side. In the March special election for Pennsylvania’s 18th Congressional District, which was narrowly won by the Democrat Conor Lamb, the Republican Rick Saccone in the campaign’s two final weeks pulled TV ads touting the tax cut, as did other Republican-affiliated, nominally independent groups. Since then, Republicans have been uncharacteristically quiet about their prime legislative achievement. Polling and focus group interviews have found that support for the Tax Act has dwindled over time, and declines even more when voters learn additional details. Just 28 percent of voters now tell pollsters that they would be more likely to support a candidate who had voted for the Tax Act, while 37 percent say they would be more likely to

vote against them. By an immense margin of 58 percent to 12 percent, people believe that benefits under the act are more likely to go to executives and shareholders than to employees. So even before they hear political debate, voters are primed, based on their own knowledge and intuition, that the act benefits the elite and not people like them. One of the most persuasive arguments against the act, according to pollster Guy Molyneux (see page 18), is that it will increase the national debt and risk offsetting cuts in valued programs like Social Security and Medicare. The polling finds that connecting the debt to cuts in social programs is a far more powerful argument than messages about either the program cuts or increased debt alone. This also comports with core progressive values, since embracing budget balance as an end in itself is not good politics for Democrats. That ideology and rhetoric blurs partisan differences and leads Democrats into traps like the budget sequester, in which Republicans call the tune and the result is bipartisan responsibility for cuts in valued programs. A second potent argument that scores well in focus groups is a reminder of the sheer special interest corruption in the Tax Act. Republican legislators not only voted to give themselves a tax cut, but gave special breaks to allies like the Koch brothers, who are spending $400 million to elect Republicans this fall and were rewarded with more than a billion dollars in tax breaks. They gave the health insurance and drug industries billions in new tax cuts, none of which result in lower retail drug costs or insurance premiums, which are likely to rise as a result of the law. And they created new loopholes that serve developers like Trump but for which working people don’t qualify. Arguments like these gain the support of around 60 percent of people who hear them. A final winning argument is to remind voters of all the other things America might have done with $1.9 trillion. This includes investment in better schools, college debt relief, rebuilding decaying infrastructure, and the related creation of good jobs. Earlier in this election year, many Democrats bought into the erroneous premise that the tax cut would be a strong plus for Republicans, and tried to avoid talking about it. That turned out to be profoundly wrong. Not only is the tax cut potentially a winning issue, it is a defining issue—in terms of whose side Republicans are on; in terms of their contempt for cherished public services that Democrats advocate and defend; and in terms of blatant Republican opportunism. The Tax Act has turned out to be an issue on which to challenge the entire litany of Republican policies, beliefs, and practices. It was intended as a gift to grateful taxpayers. Handled properly in the coming campaign, it is more of a gift to Democrats.

The Tax Act generalizes for a larger group of the very rich the same accounting games long played by this president, Donald Trump, who will save millions in his own taxes.

Summer 2018 The American Prospect 7

the Top 10 Fallacies Like most of Donald Trump’s policy agenda (and the rest of his career and life), the GOP tax cut has been sold on bluster, exaggeration, and outright lies. Following are ten of the biggest myths associated with the 2017 Republican Tax Act. by William Rice

It will pay for itself.

Even though the Trump tax cuts were originally estimated to lose $1.5 trillion in revenue, supporters claimed the shortfall would be made up through greater economic activity generating more tax revenue at lower rates. No reputable economist agreed. Now, the latest estimate from the Congressional Budget Office is that the Tax Act will in fact add $1.9 trillion to the nation’s debt over the next ten years. We also now know how Trump really intends to pay for his tax cuts: with $1.7 trillion in spending cuts to vital public services, including Medicare, which he promised he’d never touch. Other funding cuts in Trump’s proposed budget include more than $750 billion over ten years from Medicaid (also supposedly sacrosanct under Trump) and subsidized private health insurance; $200 billion–plus from nutrition assistance; and more than $70 billion from low-income disability programs. Millions of Americans would lose services ranging from health care to tuition aid, from housing to food.

It’s meant to help working Americans.

Trump said of his tax plan last fall: “Our focus is on helping the folks who work in the mailrooms and machine shops of America—the plumbers and the carpenters, the cops and the teachers, the truck drivers and the pipe fitters.” In reality, once the Tax Act is fully phased in nine years from now, 83 percent of the benefits will go to the wealthiest 1 percent of American households.

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Nearly 70 million households making less than $100,000 a year— including plenty of carpenters, cops, and teachers—will pay higher taxes than they would have paid under the old tax law. Sample Annual Family Income

Tax Hike (2027)

Higher-income married couple, 2 kids

$92,440

$150

Single parent, 2 kids

$36,976

$339

Lower-income married couple, 2 kids

$36,976

$400

Source: tax policy center

It will boost the economy and create jobs. Last November, when the basic outline

of the Tax Act was clear, a survey of prominent economists found only 1 out of 42 believed it would substantially increase economic growth. Separate surveys of top corporate finance officers and Wall Street investors found equal pessimism that the tax plan would spur investment or hiring. Over recent decades, economic growth has actually been stronger after tax increases on the wealthy than after cuts.

The corporate tax cuts will raise worker pay a lot. One of President Trump’s top

economic advisers claimed the corporate cuts would raise average household income by at least $4,000. “There really shouldn’t be much doubt about that,” confidently opined economist Kevin Hassett. Other economists were highly skeptical. Long before the tax cuts, big corporations held record amounts of cash with which they could have boosted wages if they wanted to. And in fact, rather than raising pay, corporations are so far using their tax cuts mostly to further enrich wealthy shareholders through stock buybacks and dividend increases.

It’s already responsible for widespread worker bonuses and wage hikes.

As of mid-June, only 4 percent of workers from just 400 employers (out of the nation’s 5.9 million) had received any kind of payout linked to the tax law. Three-quarters of those payouts were one-time bonuses, not permanent wage increases. Moreover, the $7 billion that workers are getting this year represents just 9 percent of the $77 billion in 2018 business tax cuts estimated so

far. The vast majority of the tax cuts are instead going to wealthy CEOs and shareholders: Corporations have announced $484 billion in stock buybacks since the tax plan passed—69 times more than workers are getting in bonuses and raises.

The corporate tax cuts will keep jobs in America. In pushing tax changes last summer, House Speaker Paul Ryan complained that the thencurrent system “encourages companies to move operations overseas, to make things abroad, and to then sell them back into the U.S. This makes no sense, and it is costing us jobs.” But rather than curbing offshoring, the Tax Act actually creates new and stronger incentives to outsource operations and jobs, including by taxing foreign profits at half the rate of domestic earnings.

Before the Tax Act, U.S. corporations paid the highest taxes in the world. This claim is based on the former statutory income tax rate of 35 percent. (The new rate is just 21 percent.) But in reality, because of all the loopholes in the tax code, big corporations on average often paid less than half the official rate, and this “effective rate” was fully competitive with those of other advanced economies. The share of federal tax revenue coming from corporations dropped by more than two-thirds over the past 65 years, and some big companies like General Electric frequently went years without paying any federal income taxes at all.

Part I what’s in the Tax Act?

About the 2017 Republican Tax Act #8

It’s a boon to small business.

It simplifies the tax code.

Republicans claimed that cutting the taxes paid by non-corporate businesses like partnerships and LLCs was intended to protect the “hard-earned business income of Main Street job creators.” But even after “guard rails” were inserted in the final bill to prevent the even bigger giveaway to wealthy business owners envisioned in preliminary plans, the real winners from the new rules continue to be huge enterprises like the Trump Organization, which is a collection of 500 such “pass-through” entities.

As the law took shape, we heard less of the GOP’s initial dubious claim that its plan would so simplify taxes that returns could be filed on a postcard. Daniel Shaviro, a tax professor at NYU School of Law, has declared that the new law’s rules for pass-through firms—which make up 95 percent of all businesses—have made the tax system “less efficient, less fair, and more complicated.” After years of cutting the IRS budget, congressional Republicans have been forced to give the agency more money to help Americans navigate the complex new law and combat the exploitation of fresh loopholes.

#10 It doesn’t help Donald Trump.

The president claimed his tax plan would “cost me a fortune”—but the opposite is undoubtedly true, though we can’t know precisely because he refuses to release his tax returns. But it’s clear that cuts to the top individual rate, the corporate rate, and the pass-through rate all benefit Trump enormously, and the weakening of the estate tax will be a boon to his family. The new law not only failed to close any of the many realestate loopholes that Trump has exploited for years, it actually opens new ones that are particularly beneficial to the president. The new lower “pass-through” rate was meant to be denied to organizations like Trump’s that have relatively few employees and lots of passive income, since the new rate was supposed to reward “job creators” pursuing real business activity. But dutiful Republican lawmakers made sure Trump benefited from the generous new tax regime. They allowed certain kinds of passive income to qualify (rents, royalties, and licensing fees—Trump’s bread and butter) and let heavy capital investment (such as in real estate) substitute for large-scale employment. William Rice is a freelance writer and communications consultant for Americans for Tax Fairness.

$$$$$$ $$$$$$ How The President $$$$$$$ $ $ $ $ $ $ $ President Trump’s exact tax savings are difficult to estimate $ because of his refusal to release his tax returns—unlike $ $ $ $ $ $ every other president in modern memory—but it is likely to be at least $11 million $ a year and perhaps $ $ $ $ $ $ as much as The top $ $22 million. $ $ $ $ $ $ individual tax rate is cut to 37% $ $ $ $ $ $ $ from 39.6%.Trump is He$could undoubtedly in the save between $ $ $ $ $ top$bracket. $11–22 million He will profit $ from the cut in from real-estate $ $ $ $ $ “pass-through” loopholes the new $ tax rate. law failed to close, $ $ $ $ plus a few it added. $ $ $ $ $ His family could save $4 $ $ $ $ $ $ million from the As a big stock $ weakening of the $ $ $ $ $ $ market investor, estate tax. he will benefit $ from $$$$$ $taxcorporate cuts. $$$$$$$ $$$$$$$ $$$$$$$ $$$$$$$

Personally Benefits

Source: americans for tax fairness

Summer 2018 The American Prospect 9

The Two Big Lies Behind Donald Trump’s Tax Plan

The tax plan was always going to be a huge giveaway to corporations. And the individual tax cuts were always heavily tilted to the top. by M at t G a r dne r

espite a full-court charm offensive by the White House, its media surrogates, and big corporations that benefit most from the 2017 Republican Tax Act, the public stubbornly sees the truth: that President Trump’s tax bill was designed for big, profitable corporations and the wealthiest Americans. Two “big lies” drove the Trump tax cuts—the claims that corporate taxes were especially high, and that the president’s tax overhaul would be geared toward the middle class. The development of the Trump tax plan was the embodiment of the man himself: a moving target, vaguely defined, constantly changing, and sometimes reversing itself abruptly. In 2015, then–presidential candidate Donald Trump declared “tax reform” a central plank of his campaign platform, making a number of claims that subsequently fell by the wayside. For example, he said his plan would take 75 million Americans off the income tax rolls without adding a dime to federal deficits. Later in his campaign and after taking office, Trump released more iterations of his tax plan, including one on a single, double-spaced page. While details about individuals’ taxes changed over time, his desire to reduce the corporate tax rate to the lowest in the developed world remained constant. The Big Prize: Corporate Rate Cuts

Cutting the corporate rate has been a Republican talking point for decades. But this push has always been built on the inaccurate assertion that our corporate taxes are among the highest in the world. Until January 1 of this year, the federal corporate income tax topped out at 35 percent on paper, a rate higher than statutory rates imposed by other

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Organization for Economic Co-operation and Development (OECD) nations. But due to copious loopholes in the federal tax code, many corporations paid significantly less. Our corporate tax rules allow many of the biggest companies to shelter much of their income from tax. As a result, even though our statutory federal tax rate until recently was higher than most other nations’, corporate tax collections as a share of the U.S. economy have generally been below the OECD average. A series of detailed studies by my organization, the Institute on Taxation and Economic Policy (ITEP), show that the biggest and most profitable corporations have, as a group, been able to shelter nearly half of their profits from tax. Our most recent study showed that between 2008 and 2015, 258 consistently profitable Fortune 500 corporations paid an average effective tax rate of 21.2 percent, and 100 of these companies avoided paying even a dime of federal income taxes in at least one profitable year during this eight-year period. Further, more than half of big, profitable multinationals paid a lower foreign tax rate on their foreign profits than the U.S. rate they paid on their domestic profits. For clear-eyed observers, the diagnosis for this dual ailment—an above-average nominal tax rate, and a below-average effective tax rate—has always been clear. Get rid of the giveaways for industries and companies with lobbying muscle. The tax code is laden with tax breaks as targeted as the “NASCAR tax break,” which allows owners of racetracks to write off the cost of renovations faster than they wear out, and as overbroad as the research and experimentation tax

Hastily passed and sloppily assembled, the Tax Act seems likely to spur economic growth in one area of the economy: the tax-planning industry.

credit, which routinely rewards companies for making investments they would likely have made anyway. There are internally inconsistent tax breaks that nominally encourage both the development of fossil fuels and the exploration of alternative energy sources. And the tax code includes utterly ineffective provisions, such as the accelerated depreciation tax break that allows companies to write off their capital investments faster than these investments wear out. The first sensible step toward true corporate tax reform must be to conduct a ruthless audit of these corporate giveaways and weed out loopholes, no matter how politically fraught the process may be. Unfortunately, the Trump administration chose to take the easy route by cutting the statutory rate and leaving in place most loopholes that allow corporations to reduce their effective tax rate. This certainly wasn’t for lack of a target-rich environment. The accelerated depreciation tax break alone, for example, could have been the basis for a program of rate reduction. This deduction is supposed to incentivize economic development but instead has primarily rewarded companies for making investments they had been planning all along. The Tax Act, on balance, gives big corporations even more latitude to avoid paying income taxes than they had before. The war over corporate tax reform has a second front: the treatment of foreign income. Big multinationals have shifted trillions of dollars out of the United States and into foreign tax havens, emboldened by a provision of the old tax law that allowed companies to indefinitely postpone taxes on their allegedly foreign profits until those profits are repatriated, or brought back to the Unites States. In many cases, the foreign destination of these profits is an accounting fiction. In 2012, the most recent year for which data are available, U.S. multinationals reported that 59 percent of their subsidiaries’ foreign profits were earned in ten small tax-haven countries, including Bermuda and the Cayman Islands. In some cases, they reported profits in these countries that exceeded the nations’ entire GDP, a clearly impossible feat. Here as well, the sensible policy solution is ending deferral and requiring

Part I what’s in the Tax Act?

child, from $1,000 to $2,000. But what the Tax Act gives middleincome families with one hand, it takes away with the other. The new law repeals personal and dependent exemptions, increasing taxable income for a family of four by $16,600 in 2018. Many itemized deductions are pared back substantially: the deduction for state and local taxes (SALT) is capped at $10,000; the mortgage interest deduction is capped; and deductions for casualty and theft losses, employee business expenses, and union dues are eliminated outright. Deductions for moving expenses, tuition and fees, and alimony payments are also repealed. So even in the short run, the tax swap offered to middle-income families—bigger standard deductions in exchange for lost exemptions and itemized deductions—makes the president’s

companies to immediately pay a residual U.S. tax on income shipped abroad, taking away the incentive for companies to park their profits offshore. Instead, the Trump administration shifted to a territorial tax system, under which income moved abroad will be largely outside the reach of the U.S. tax system. While the new law creates “guardrails” designed to prevent abuse of this new frontier of tax avoidance, these provisions are complex and untested, and now are in the hands of an agency, the Internal Revenue Service (IRS), that has seen its ability to enforce existing laws hamstrung by a decade of budget cuts.

c h a r t s o u r c e : i t e p a n a ly s i s

Personal Income Tax: Giving With One Hand, Taking With the Other

While the Trump administration has always prioritized corporate tax cuts, the president has told the public a very different story. The White House and its allies insisted the tax overhaul would cut taxes for middle-income families and increase them on the rich—including the president himself. Last November, Trump told a Missouri audience that this “is going to cost me a fortune, this thing, believe me,” and repeatedly claimed more generally that the “rich will not be gaining at all with this plan.” House Speaker Paul Ryan claimed that the plan would be built around middleclass concerns: people “who are lowand middle-income, they’re the ones who are literally living paycheck to paycheck, who are worried about losing their job or they haven’t gotten a raise in years. This is about them and not about people who are really highincome earners getting a break.” These claims contain a half-truth and a proven falsehood. In the short run, the new tax law will provide some tax cuts to many American families. Over the plan’s first five years, between 2018 and 2023, close to 75 percent of the new law’s tax cuts ($740 billion out of $1.07 trillion) will go to individuals, not corporations. The plan shaves a few percentage points off all rates except the bottom, which remains 10 percent. More salient for middle-income Americans are a big boost in the standard deduction, from $13,000 to $24,000 for married couples, and a doubling of the credit most families get for each school-age

From 2008 to 2015,100 profitable Fortune 500 companies paid zero dollars in federal income taxes in at least one profitable year. Of those, 18 paid nothing during the entire eight-year period. 18 Corporations Paying No Income Tax From 2008–2015, amounts in millions Company

Profit Tax Rate

Pepco Holdings

$3,022 –$843 –27.9%

PG&E Corp.

$10,843 –$1,569 –14.5%

Wisconsin Energy

$5,894 –$592 –10.0%

NiSource

$4,399 –$352 –8.0%

International Paper

$5,010 –$386 –7.7%

FastEnergy

$8,842 –$465 –5.3%

Priceline.com

$698 –$31 –4.4%

Atmos Energy

$2,826 –$114 –4.0%

General Electric

$40,057 –$1,369 –3.4%

American Electric Power $17,170 Ryder System

–$464

–2.7%

$2,045 –$55 –2.7%

Duke Energy

$19,767 –$422 –2.1%

NextEra Energy

$21,518 –$313 –1.5%

Xcel Energy

$10,291 –$111 –1.1%

Ameren

$7,243 –$48 –0.7%

CMS Energy

$4,666 –$26 –0.6%

Sempra Energy

$7,000 –$34 –0.5%

Eversource Energy

$6,703 –$11 –0.2%

Total

$177,995 – $7,205 –4.0%

middle-class-tax-cut claims an empty promise. Some families stressed by high housing costs in higher-tax, blue states like California and New York will likely see a federal income tax increase as soon as this tax year, thanks to the tax bill’s sharp reduction in the itemized deduction for state and local taxes. But the best-off Americans generally don’t face the same trade-offs. For the wealthy, the deal is sweetened with a trio of tax breaks that are largely irrelevant to working families: a deduction for “pass-through” business income, estate tax cuts, and a sharply weakened alternative minimum tax. Most businesses in America now operate as pass-through entities, which are not required to pay taxes as entities on their income, but instead pass their profits through to their owners, who individually pay income taxes on their share of the profits. The Tax Act creates a new deduction for 20 percent of “qualified business income” of these pass-through businesses. This provision has never been tested at the federal level, but has been well-documented as an utter failure as a state tax reform. A similar tax cut, pushed through by Kansas Governor Sam Brownback in 2012, had no discernible effect on the state’s economic growth, but did major damage to the budget, forcing Brownback to eventually accept the repeal of the pass-through break. By all accounts, the main effect of the Kansas experiment was to encourage enterprising Kansans, including University of Kansas basketball coach Bill Self, to start their own sham pass-through businesses so that they could restructure their wages as business income, eligible for the tax break. Incredibly, the federal tax law now includes a provision with the same harmful tax avoidance incentives, but also adds more tax-dodging opportunities for unscrupulous businesses. The new law weakens the alternative minimum tax (AMT), a backstop tax designed to ensure affluent taxpayers cannot use tax breaks to zero out their tax obligation, by increasing the amount of income exempt from the tax. Ensuring the wealthy keep more of the riches they will accrue as a result of the new tax law, the Tax Act also

Summer 2018 The American Prospect 11

Corporate Taxes as Share of GDP in 2016 New tax rules will give the U.S. the lowest corporate tax level of any developed OECD country

4.7%

2.9%

1.6%

1.5%

New Zealand Luxembourg Australia Chile Japan Slovak Republic Czech Republic Mexico Korea Belgium Norway Netherlands Canada Israel Portugal Switzerland All OECD but U.S. United Kingdom Denmark Ireland Iceland Sweden Austria Spain United States Finland Hungary Greece Italy France Germany Poland Estonia Latvia Turkey Slovenia

U.S. in 2018

2.2%

2% 1% 0

dramatically increases the estate tax exemption. As though exempting 99.8 percent of estates from tax weren’t enough, the tax law doubled the estate tax exemption for married couples from $11 million to $22 million in 2018. On balance, these tax changes reshape our tax system in a way that bears no resemblance to the president’s promises, but rather in a way that seems tailor-made to benefit Trump personally. Far from validating Treasury Secretary Steven Mnuchin’s claim that Trump’s tax would result in no “absolute tax cut for the upper class,” the new law reserves the biggest tax cuts, by any measure, to the wealthiest few. The top 1 percent of Americans will see, on average, a tax cut equaling 2.7 percent of their income in 2018. The next richest 4 percent will enjoy an even larger tax cut, averaging 3.5 percent of income. Middle-income Americans will see a 2018 tax cut about half as large, as a share of income, at 1.5 percent. Short-Term Tax Cut, Long-Term Tax Shift

If President Trump’s middle-class tax cuts are a complicated mix of cuts and increases in the short run, the longerterm picture is quite clear: Trump will increase personal income taxes on just about everyone. After 2025, when every last one of the new law’s tax cuts for individuals will expire, the only remaining effect of the Tax Act on working families will be an across-theboard tax increase, thanks to the new law’s (permanent) adoption of a lessgenerous measure of inflation. Each of

12 WWW.Prospect.org Summer 2018

Republicans propose to extend the individual tax cuts, to provide equality with the corporate cuts. That’s a terrible idea. Both are regressive, and the cuts in valued social spending driven by even larger deficits would only worsen.

the tax breaks middle-income families rely on, from exemptions to deductions, will gradually lose their value over time. And when taxpayers file their 2026 income tax returns, they’ll be paying hundreds of dollars more than they would have if Trump’s plans hadn’t been enacted. Needless to say, the corporate tax cuts in the new law have a much longer shelf life. Virtually all of the corporate cuts are permanent. This double standard—a temporary visa for the individual tax cuts, and permanent residency for corporate breaks—is the product of a hard fiscal reality: Republican tax writers were unable to convince congressional revenue estimators that their tax cuts would pay for themselves. After a congressional budget resolution defined the upper bounds on this tax cut—$1.5 trillion over ten years—lawmakers immediately set about finding a way to squeeze as much tax-cutting as possible into their $1.5 trillion box. Their solution is sacrificing every last dime of the tax cuts for families, in the long run, to achieve permanent tax cuts for big corporations. The individual-side tax cuts are all set to expire at the end of 2025, leaving only huge corporate reductions as the permanent legacy of Trump’s tax-cutting ambitions. Congress cannot remedy this problem without either scrapping the law and starting from scratch or blowing a bigger hole in the federal budget. This double standard does not mean, however, that we should make the individual cuts permanent, as many Republicans have suggested. The fact is that even the individual

cuts are on balance regressive, as well as a pretext for spending cuts to defray the cost of enlarged deficits. These temporary individual provisions are sometimes called the “middle-class” tax cuts, but most of their benefits actually go to the rich: a cut in the estate tax, the new deduction for businesses that are mostly owned by the richest 1 percent, and cuts in the top income tax rate, to name a few. An ITEP analysis zeroed in on these temporary provisions and examined what would happen if Congress extended them at least through 2026. It found that 65 percent of the benefits of that extension would go to the richest fifth of Americans. This is nearly as unfair as the current law, which provides 71 percent of its benefits to the richest fifth of Americans in 2018. In other words, anyone who opposed the Tax Act should not be deluded into thinking that the temporary provisions are the “good” parts of the law and therefore should be made permanent. What makes far more sense is for the next Congress to start from scratch and think about enacting a genuine tax reform. Hastily passed and sloppily assembled, the Tax Act seems likely to spur growth only in one area of the economy: the tax-planning industry, for whom the new law resembles a fullemployment guarantee. But there’s a path forward that is even more apparent in light of the new law’s flaws. The next Congress should do what President Trump claimed he would: root out the many tax breaks available only to the wealthy and to big multinationals, making it so that middle-income families and small businesses can operate on a level playing field. Ending the experiments with a territorial tax system and passthrough tax breaks, achieving permanent reforms on the individual side so that families can have stable expectations about how vital services will be paid for, and creating a simpler tax code are all attainable goals. And each can be meaningfully advanced by dismantling the Trump tax law. Matt Gardner is a senior fellow at the Institute on Taxation and Economic Policy.

Part I what’s in the Tax Act?

How the Tax Act Embodies the Republican Culture of Corruption

Top donors like Texas financier Doug Deason explicitly threatened to stop the money flow for Republican incumbents unless they enacted the tax bill. “It’s just disappointing when you help put people in office and they don’t do anything,” he explained. The Tax Act is a Christmas tree of special-interest tax breaks. The only Another donor issued an ultimatum to thing more corrupt than the substance was the way it was enacted. GOP leaders that no movement on tax cuts and other donor priorities “means by Se t h H a nl o n no funding from supporters like me. No meetings, calls, contributions until he Trump era has been defined we see progress.” Oil industry CEO fair share. Last year, Gallup found that by corruption: secret hush Dan Eberhart, a top Republican bun63 percent of Americans believed that money payoffs, financial dler of contributions, had said that upper-income Americans pay too little entanglements with foreign earlier legislative failures had pushed in taxes, and 67 percent believed that governments, constant grifting, and him to his “breaking point”—but “if corporations pay too little. Last fall, abuse of power to reward allies and meaningful tax reform passes, I would as the tax push began to heat up, more punish enemies. And the most signifido a rethink of my position.” than twice as many Americans wantcant legislation that President Trump Alfredo Ortiz, the head of a front ed to raise tax rates on large businesshas signed into law—the 2017 Tax group, the Job Creators Network, which es and corporations as Americans My donors are Act—is best understood as another lobbied for the tax bill, wisecracked: who wanted to lower them. Even basically saying, ‘Get product of Washington’s culture of “When it comes to the donor class, I most Republicans wanted to it done or don’t ever corruption under Republican control. jokingly say this: A lot of these donors either raise corporate tax rates call me again.’ The law showered massive new tax are RINOs in the sense that they are or keep them where they were. Republicans In Need of Outcomes.” cuts on the wealthy and corporations at These preferences are not terribly Faced with congressional buda time of rising inequality, record after- surprising at a time when both afterThe financial get rules that prevent bills from tax corporate profits, unmet domestic tax corporate profits and inequalcontributions increasing long-term deficits—as needs, and rising deficits. These tax ity are at record highs. will stop. the House bill did—Senate Repubcuts were deeply unpopular with the Yet the new administration licans chose to make all of the tax American people, but demanded by the and the congressional majority cuts for individuals temporary, Republican Party’s political donors. not only put cutting corporate while ensuring that the tax Given the basic mismatch between taxes at the center of their agencuts for corporations were what the American people wanted da—they viewed it as an absolute permanent. They paid for on taxes and what Republicans were must-do priority, one where failthe permanent tax cut for delivering, congressional leaders made ure posed an existential threat. corporations by imposing a two strategic decisions to force their Presumably part of this broad-based tax increase on bill through Congress: They fundadesperation stemmed individuals (through slower mentally misrepresented its contents, from the Republiinflation adjustments) and and they sought to move it through cans’ need simply by sabotaging the Congress as fast as possible with minito avoid the embarAffordable Care Act mal public scrutiny—creating a process rassment of failing by repealing its soaccessible only to well-funded lobbies. to pass any major legislation despite called “individual The result was a massive windfall for controlling the White House and Conmandate.” corporate America and the wealthy, gress. But some tax bill proponents The end result was a tax law that, one that preserved some of the most candidly admitted that what they Many Republicans, like Representative Chris Collins by slashing corporate taxes, imposing egregious tax loopholes while carving were really afraid of was the wrath of (left) and Senator Lindsey a broad-based tax increase on individout new ones, at the long-term expense their campaign donors. Graham, frankly admitted uals, and sabotaging the health-care of working Americans. New York Representative Chris that they were rushing to system, produces shocking results in Large tax cuts for corporations and Collins told The Hill, “My donors are pass a tax cut under pressure the long term: By 2027, 83 percent of wealthy Americans are extremely basically saying, ‘Get it done or don’t from their wealthy donors. the benefits flow to the top 1 percent, unpopular. According to a Pew poll ever call me again.’” Senator Lindsey while most households actually see taken in April 2017, the thing that Graham admitted that if Congress their taxes go up. Only a political systroubled people most about the federal failed to pass the bill, “the financial tem deeply corrupted by corporate tax system was not the amount they contributions [to Republicans] will political spending could have propaid in taxes, nor the complexity of the stop.” The head of Mitch McConnell’s duced such a result. system. By huge margins, the top com- SuperPAC said that donors “would be mortified if we didn’t live up to what Faced with the challenge of needplaints were that some corporations we’ve committed to on tax reform.” ing to pass a tax plan that turned and wealthy people do not pay their

collins: bill cl ark / cq roll c all e via ap images; g r a h a m : m i c h a e l h o l a h a n / t h e a u g u s ta c h r o n i c l e v i a a p i m a g e s

Summer 2018 The American Prospect 13

Americans’ actual tax priorities on their head, proponents resorted to brazen lies to sell the bill. The lies went far beyond puffery or shading of the facts; proponents lied about what the bill was fundamentally about. Trump’s Treasury Secretary Steve Mnuchin promised that the tax overhaul would produce “no absolute tax cut for the upper class.” “This is not a bill that is designed primarily to benefit the wealthy and the large businesses,” asserted Senator John Cornyn. Trump claimed that “the rich will not be gaining at all” under the bill—in fact, according to Trump, his accountant told him he would “get killed.” Mnuchin sacrificed the U.S. Treasury’s credibility by making absurd claims, such as “Not only will this tax plan pay for itself, but it will pay down debt”—something that no credible economist believes. Mnuchin repeatedly promised to back up that assertion with an economic analysis from the Treasury staff, claiming at one point that 100 of his staff members were “working around the clock” on it. But it turned out the analysis never existed. Mnuchin made it all up. Meanwhile, he removed from the Treasury website a study by career economists that had concluded that shareholders, not workers, are the main beneficiaries of corporate tax cuts. The need to shield the bill from public scrutiny, given its contents, also

Not only will this tax plan pay for itself, but it will pay down debt!

Treasury Secretary Steve Mnuchin resorted to absurd claims and fabrications to promote the tax legislation.

led to a compressed, secretive process. In this respect, the 2017 tax reform contrasted sharply with the 1986 tax reform. The 1986 act was enacted through a laborious, bipartisan process over years; it eliminated numerous special-interest loopholes and tax shelters over the fierce objections of their well-heeled beneficiaries; and, by ending special tax preferences, resulted in corporations paying more in taxes, allowing for broad-based individual tax cuts without increasing deficits. In 1986, a bipartisan group of legislators froze out the special-interest lobbyists. In 2017, it was the public—and Democratic legislators—who were shut out of the process. After releasing the first version of the tax bill on November 2, 2017, congressional Republicans jammed the bill through in a 50-day sprint—an unheard-of pace for a bill of this magnitude and complexity. The House and Senate held a total of zero public hearings on the legislation. They deliberately compressed the legislative schedule to avoid having to face constituents at town halls. At various points during the process, they plunged ahead without analysis of the tax bill’s distributional and macroeconomic effects, even though Republicans had spent years emphasizing the need for such “dynamic scoring.”

Major legislative changes were done on the fly at each stage of the process. On the day that the Senate considered the bill, for example, K Street lobbyists were informed of last-minute changes well before Democratic senators. Those changes were unveiled only hours before the full Senate voted on a Friday evening, giving senators virtually no chance to read them or comprehend their effects—let alone hear from outside tax experts who would find myriad glitches and loopholes in the bill (unintended or not). Some amendments were added to the legislation in illegible handwriting. Senate Democrats sought to have the Senate adjourn for the weekend so that Senators could review the legislation, but Republicans voted in lockstep to deny them that chance. Not surprisingly, Senate Republicans’ eleventh-hour changes included malodorous last-minute favors for special interests. These included a special tax break for oil and gas investment partnerships, added to the bill at the last minute by Cornyn, which not only rewarded the concerns that lobbied heavily for favorable treatment, but enriched more than a dozen members of Congress with personal investments in those types of partnerships. Cornyn’s former chief of staff was one of the lobbyists who apparently pressed Congress on the issue. The cruise-ship industry protected

The Tax Act That Lost Its Name The Senate parliamentarian scotched the Republicans’ plan for a simple bill title.

epublicans like to call the tax legislation they passed at the end of 2017 the Tax Cuts and Jobs Act. That was the original name of the bill, but as a result of a ruling by the Senate parliamentarian, the abbreviated title had to be dropped in the final legislation, which calls it

14 WWW.Prospect.org Summer 2018

instead, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Even with that lastminute decision, however, nine other sections of the legislation refer to the Tax Cuts and Jobs Act, although, as a matter of

law, no such act exists. A strict textualist in the tradition of Justice Antonin Scalia might rule that such provisions are void. This is just the sort of literal reading that conservatives have used in asking the courts to strike down sections of the Affordable Care Act or the entire law. There are other prob-

lems as well in the 2017 Tax Act that stem from the rush to enact it at the end of December. Some of these “glitches” are drafting errors, while others involve conflicting policy choices. Major pieces of complex legislation often require Congress to pass a “technical corrections” bill later to

By Paul Starr

deal with errors. Because Democrats lost control of Congress in 2010, they were never able to pass a technical corrections bill for the Affordable Care Act. Whether Democrats can use any of the problems in the 2017 Tax Act to negotiate substantive changes in the law remains to be seen.

c h r i c m a d d a lo n i / c q r o l l c a l l v i a a p i m a g e s

Part I what’s in the Tax Act?

a coveted loophole that allows major cruise lines to pay virtually no U.S. income tax by incorporating offshore. (Royal Caribbean, Carnival, and Norwegian are legally incorporated in Liberia, Panama, and Bermuda, though all three companies’ actual base of operations is in Florida.) The industry spent more than $3 million lobbying Congress in 2017, according to OpenSecrets.org, and successfully persuaded Alaska Senator Dan Sullivan to insert an amendment to protect the offshore loophole. Sullivan was one of the biggest recipients of cruise lines’ political donations in 2016. The politically powerful autodealer industry also secured a special exemption from restrictions on interest deductions, thanks to an intervention from Kentucky Senator Rand Paul. (As a presidential candidate in 2015, Paul had pledged to “eliminate nearly every special-interest loophole.”) Car dealers spent $5.7 million on lobbying in 2017. The industry gave nearly $9 million to candidates for Congress in the last election cycle, 78 percent going to Republicans. The tax bill process was a bonanza for Washington’s lobbying industry. More than 7,000 lobbyists worked Congress on tax issues in 2017, according to a report by Public Citizen—more than 60 percent of Washington’s lobbyists. They included former aides to Trump, Vice President Pence, and the key members of Congress who crafted the bill. Three industries—drugmakers, insurers, and tech companies—engaged more lobbyists than there are members of Congress—and secured billions in tax cuts. The U.S. Chamber of Commerce alone deployed 115 lobbyists. Tax lobbyists have paid nearly $15 million into the campaign funds of members of Congress during this election cycle, according to OpenSecrets.org, and have raised additional funds for lawmakers. In July, Speaker Paul Ryan traveled to Massachusetts ostensibly to discuss tax reform at a shoe factory—but made sure to stop off in Nantucket for a large-dollar fundraiser hosted by D.C. tax lobbyist Ken Kies, whose clients include Pfizer, Anheuser-Busch, and many other corporations and trade groups. In August,

allies of Senate Finance Committee Chair Orrin Hatch hit up corporations and trade associations for six-figure contributions to the Orrin G. Hatch Foundation—a tax-exempt organization established to honor the legacy of the man who was then in the process of writing the Senate’s tax bill. The fundraiser for the foundation, giving donors the chance to spend two days with Hatch at an exclusive golf resort, was held the day after Hatch had held a campaign fundraiser at the same location. “[H]is fundraising team and allies … targeted lobbyists and consultants with business before Hatch’s committee to attend the events,” Politico reported. Contributors to Hatch’s foundation included Merck, Visa, and the Pharmaceutical Research and Manufacturers of America (PhRMA). Some corporate contributions remain secret, since corporations often fail to disclose payments to such nonprofits, as an investigation by the Center for Public Integrity found. Corporations lobbying for tax cuts also steered secret contributions into “dark money” groups that were backing the push for tax cuts. One such group was America First Policies, a tax-exempt organization employing several members of Trump’s campaign team, including advocacy director Carl Higbie, a Trump campaign surrogate with an extensive history of racist, sexist, homophobic, and anti-Muslim statements. In May, an investigation by MapLight uncovered contributions to the group by three Fortune 500 companies that were then lobbying on the tax bill—CVS Health, Dow Chemical, and Southern Company. But those companies donated just $1.6 million of the $26 million that America First Policies raised in 2017; the vast majority of its backers remain secret. (CVS Health, which has told investors that it will pay $1.2 billion less in taxes because of the new law, and Dow Chemical have since sworn off future contributions to America First.) For the lobbying industry itself, the tax legislation will be the gift that keeps on giving. It created dozens of tax breaks that will expire, with other tax-raising provisions whose implementation is delayed for several years. “Tax lobbyists purchased an annuity

Th e Revolving D o o r

he Senate Finance Committee’s longtime Republican chief tax counsel, Mark Prater , is the new managing director of tax policy for powerhouse accounting and consulting firm PwC (formerly PriceWaterhouseCoopers). Brendan Dunn , former top aide to Mitch McConnell, joined law and lobbying firm Akin Gump Strauss Hauer & Feld in May as a partner. Shahira Knight, who represented the White House in tax bill negotiations, is heading to The Clearing House. Knight has previously worked as both a lobbyist and a Ways and Means committee staffer. Drew Maloney, assistant Treasury secretary for legislative affairs, will become the head of the American Drew Investment Council, the lead trade Maloney association for the private equity industry, which is subject to new rules under the tax act. White House legislative affairs director Marc Short called Maloney “indispensable to passing the largest tax cut in American history.”

Three industries— drugmakers, insurers, and tech companies— engaged more lobbyists than there are members of Congress— and secured billions in tax cuts.

that will provide benefits for years,” quipped lobbyist and former Senate tax aide Russ Sullivan. K Street is already raking in fees from clients interested in making “technical corrections” to the bill. The bill itself might provide lobbyists and other high-paid professionals a new opportunity to lower their own tax bill by turning their businesses into corporations, and thus claiming the lower corporate rate that many of them secured on behalf of their clients. One influential congressman even walked through the revolving door between Congress and K Street while he was still working on the tax bill. In October, Ohio Representative Pat Tiberi, the fourth-most senior member of the Ways and Means Committee majority, announced that he was leaving Congress to assume the helm of the Ohio Business Roundtable, a lobbying group representing “the CEOs of the state’s largest and most influential business enterprises.” Having secured this plum position, Tiberi remained in Congress for several more months—continuing

Summer 2018 The American Prospect 15

16 WWW.Prospect.org Summer 2018

Ohio Representative Patrick Tiberi secured a plum job for himself as head of the Ohio Business Roundtable at the same time as he was serving on the Ways and Means Committee. He continued to work on and vote on the tax bill while being lobbied for tax cuts by his future employer, a stunning and cynical conflict of interest.

of members of Congress who voted to cut their own taxes substantially, including several who played important roles in the bill’s enactment. Corker’s Wisconsin colleague, Senator Ron Johnson, used his vote on the bill to negotiate a lower tax rate for owners of pass-through businesses: owners like himself. Johnson warned, rightly, that the international tax provisions of the bill would create “a real incentive to keep manufacturing overseas.” But days later, having secured a deal with Majority Leader McConnell to enlarge the new pass-through tax break, he got on board. And, of course, one of the biggest winners from the tax cut was the man who signed it into law. Trump and his family, including his son-in-law Jared Kushner, stand to benefit enormously from the new pass-through deduction and estate tax cut. The commercial real-estate industry, where the Trump and Kushner families built their fortunes, was perhaps the biggest winner in the tax overhaul, securing the new passthrough deduction and protecting its most important tax breaks. The most notorious tax loophole for America’s plutocrats survived the tax reform process essentially unscathed. The carried interest loophole has long allowed private equity barons and fund managers to avoid paying regular income tax rates, and instead to pay lower capital gains rates on much of their income. Trump campaigned on closing the carried interest loophole, which he said let fund managers “get away with murder.”

But after arriving in Washington, Trump went silent on the issue. Neither the White House’s blueprint for tax reform, released to much fanfare in April, nor his budget, released in May, included any proposal addressing carried interest. When the administration and congressional Republicans released a joint framework for tax reform in September, it too was silent on carried interest. Repealing the loophole was never seriously on the table as the Republicans rewrote the tax code. The Republican Congress’s failure to close the one tax loophole that Trump had campaigned on eliminating reflected Wall Street’s entrenched influence and the power of its prodigious campaign contributions. The private equity industry—the primary beneficiary of the carried interest loophole—donated nearly $100 million to political campaigns in the 2016 cycle. The industry trained its contributions on key Republicans in 2017. The three biggest private equity firms contributed $1.3 million to Republicans in 2017. Recipients of this cash influx included McConnell, Ryan, Hatch, and House Ways and Means Chair Kevin Brady, and influential members of the Senate Finance Committee like Rob Portman and Dean Heller. After the fact, Trump’s team claimed that he had tried valiantly to close the loophole, but that the lobbying was just too intense on Capitol Hill. In fact, the White House did nothing, while Treasury Secretary Mnuchin, a former private equity executive, worked to undermine meaningful reform. The financiers “won on carried interest,” said one industry lobbyist, because they “pushed all the right levers along the way.” President Trump signed the tax bill into law on Friday, December 22. He then took an early afternoon flight to Mar-a-Lago, where he announced to members of his private club, “You all just got a lot richer.” Seth Hanlon, a former special assistant to President Obama for economic policy, is a senior fellow at the Center for American Progress Action Fund, where he focuses on federal tax and budget policy.

bill cl ark / cq roll c all e via ap images

to work on and vote on the tax bill. Around the same time that Tiberi was negotiating his new job, several of the group’s members, including Marathon Petroleum, were lobbying Congress and Tiberi’s committee for tax cuts. This stunk to high heaven, but Tiberi claimed that the House Ethics Committee had blessed the arrangement. And, in fact, House ethics rules merely “strongly encourage” members to abstain from voting on legislation if it “provides a benefit targeted to any entity with which the Member is negotiating or from which the Member has accepted future employment.” Apparently, a massive tax cut benefiting the corporate sector writ large is not “targeted” at any one specific entity, so Tiberi saw no conflict of interest in using his committee post and his vote in Congress to push the bill forward. Tiberi was a unique example only in that he managed to walk through the revolving door even before leaving Congress. Undoubtedly, many more of his colleagues who shepherded the tax bill will soon follow him. Many of the Capitol Hill staff members and key administration officials who crafted the tax bill have already left for lucrative jobs on K Street. After a truncated House-Senate conference committee, which held its only public meeting after Republicans had already struck a final deal behind closed doors, the final bill was released on a Friday evening in advance of the final vote days later. Over the weekend, tax lawyers discovered that the conference committee had slipped in a new tax break largely benefiting the real-estate industry, allowing pass-through business owners to claim a special new deduction even if they do not have a substantial payroll. It soon became known as the “Corker kickback,” after Tennessee Senator Bob Corker, who had promised to oppose any final bill that “added a penny to the deficit”— and who owns millions in real estate assets—unexpectedly flipped his vote from no to yes. (Corker claimed he was unaware of the addition benefiting him because he had only read a twopage summary of the final bill.) Congressional financial disclosures indicate that Corker was one of dozens

Part I what’s in the Tax Act?

The Koch Brothers’ Best Investment How a $40 million political outlay yields a $500 million tax cut. By Kayla Kitson

he sprawling political network backed by billionaire brothers Charles and David Koch will spend $20 million ahead of the midterm elections to convince voters that the Trump tax cuts are good for the country and the middle class. That’s on top of the $20 million they spent to promote the 2017 Republican tax bill’s passage. All told, the network plans to spend $400 million on candidates and issues this election cycle, up from $250 million in the last one. Most of the money will be spent on TV ads targeting vulnerable Democratic senators for opposing the tax cuts. As of early May, the Koch network’s political advocacy arm, Americans for Prosperity (AFP), had already run more than 8,000 ads targeting Democratic Senators Heidi Heitkamp of North Dakota, Joe Donnelly of Indiana, and Claire McCaskill of Missouri. The campaign also includes door-to-door canvassing, in which AFP employees and volunteers talk up the new tax law with voters. AFP is calling the campaign the “American Pay Raise.” Of course, if you have to spend tens of millions of dollars to convince working families that tax cuts are good for them,

that should tell you there’s something fundamentally wrong with your tax cuts, which go mostly to corporations and the rich. Nobody better personifies this tilt better than the Koch brothers themselves. The immense amounts shelled out by the Koch network to pass and promote the GOP tax law are just drops in the bucket compared with the tax windfall the Koch brothers will reap from the new law. Americans for Tax Fairness estimates that the Kochs and their conglomerate Koch Industries will likely save between $840 million and $1.4 billion in income taxes each year. That’s a return on investment of at least 4,100 percent on the $20 million they spent to pass the law. Estimating the potential tax savings for the Koch brothers is not an exact science. Koch Industries, the nation’s second-largest private corporation, does not publicly reveal its financial statements or how its individual companies are structured for tax purposes. Some may be C corporations, which would benefit from the lower corporate tax rate. Others are likely passthrough entities, so their tax savings would flow directly through to the

individual tax returns of their owners, primarily Charles and David Koch. Koch Industries brought in about $100 billion in revenue last year, according to Forbes. Assuming the conglomerate has a (relatively modest) pretax profit margin of 10 percent, Koch Industries’ profits would be around $10 billion before taxes. Let’s say that all the Koch companies are

couple—from 39.6 percent to 37 percent. Under the new law, Charles and David Koch could pay about $1.5 billion in taxes each on their business income, versus the nearly $2 billion they would have owed under previous law. These two provisions alone could save

Estimated Pass-Through tax cut for each Koch Brother, 2018 Income

Prior Law Current Law $5,000,000,000 $5,000,000,000

20% pass-through deduction $1,000,000,000 Taxable Income

$5,000,000,000 $4,000,000,000

Tax liability at 39.6% and 37% $1,979,944,144 $1,479,939,379 Tax Cut from Current Law $500,004,764 Note: Prior-law tax liability is calculated according to the IRS’s 2018 tax bracket tables (released Oct. 2017), and current-law tax liability is calculated according to the tax bracket tables in the Tax Cuts and Jobs Act text (page 2).

organized as pass-through entities, so all the income is taxed at the individual level. Let’s further assume that these profits are divided equally between the two brothers, so each reports $5 billion of business income. Under the new law, the Kochs will be able to deduct 20 percent of that income, so each will have $1 billion in taxfree income. The tax law also reduced the top income tax bracket—which now applies to income over $600,000 for a married

them about $500 million each, or $1 billion in total. To be fair, each brother owns a 42 percent stake in the business, so 16 percent of the profits will pass through to the other owners. Assuming that each brother reports 42 percent of the $10 billion in estimated profits doesn’t significantly change the magnitude of the estimated tax savings—each brother would still get about $420 million. If we instead assume that all the Koch companies are taxed at the

corporate level, the tax savings for Koch Industries could be up to $1.4 billion. This assumes that the Koch companies previously paid the statutory 35 percent corporate tax rate, in which case Koch industries would have owed $3.5 billion in taxes on its $10 billion in profits. Under the new law, it would only owe 21 percent, or $2.1 billion. Most corporations pay less than the statutory rate due to myriad tax loopholes. Koch Industries could have already paid a low effective tax rate under prior law, meaning its benefit from the tax law would be less than estimated here—especially if loopholes that it relied on were closed. Even so, the lower rates in the new law will save them a bundle. And luckily for Koch Industries, which has substantial oil and gas operations, most of the loopholes for this industry remain wide open. The propaganda for the Republican Tax Act portrays it as good for investment. It’s hard to find an investment in the real economy that paid off as handsomely as the Koch brothers’ political spending. Kayla Kitson is the research and policy director at Americans for Tax Fairness.

Summer 2018 The American Prospect 17

Talking Taxes With the Voters The more people learn about the Tax Act, the less they like it. B y G uy Moly n eux

s they prepare to face the voters and defend their congressional majorities, Republicans face serious challenges. Positioned as the in-party in an off-year election, they can anticipate enhanced Democratic turnout that creates an unfavorable battlefield. An unpopular president, weak fundraising, and a wave of incumbent retirements further stack the deck against the GOP. Republicans, however, believe they have an ace in the hole that will preserve their majorities: the tax law they passed in December 2017. Republicans tout the tax law as both their most important policy accomplishment and the best political weapon they have. Matt Gorman, communications director for the National Republican Congressional Committee, says, “It’s very clear that tax reform was going to be the biggest legislative crown jewel of this Congress. That is a massive centerpiece of our campaign.” In the eyes of veteran Republican pollster David Winston, the Tax Act “defines what this Congress is about.” However, a wealth of public opinion data suggests Republicans actually have a rather weak hand to play on the tax front. In a typical result, Gallup’s latest poll (April 11) reports that just 39 percent approve of the law while 52 percent disapprove. As of publication, the Real Clear Politics national average of public polls on the issue registers 37 percent approval and 43 percent disapproval, a net negative rating of 6 points. Still worse for Republicans, support for the legislation appears to have eroded after some gains earlier in the year (opinion was evenly split in February, when the tax cuts first impacted paychecks).

Disapproved: Will That Gap Widen? Republican Tax Act opinion Poll averages (compiled by real clear politics) 50

43.1% Disapprove 45

+6.0

40 35

37.1% Approve

November

December

2018

February

March

April

May

June

Moreover, a national poll on the Tax Act conducted by my firm reveals that no electoral advantage is conferred on the bill’s congressional supporters. On the contrary, just 28 percent of respondents say they would be more likely to vote for their member of Congress if they learned that they had voted for the law, while 37 percent

18 WWW.Prospect.org Summer 2018

say less likely (a 9-point net negative). Significantly, the tax issue is more motivating to Democratic voters (68 percent less likely) than to Republicans (57 percent more likely). In the competitive battleground House districts, a yes vote on the tax law yields a 10-point net negative response from voters (30 percent more likely, 40 percent less likely). This weak support reflects a strong belief by the public that the law’s tax cuts go mainly to the wealthy and big corporations, rather than to the middle class. In our poll, voters expect by a 43-point margin that the law will benefit the wealthy (60 percent) more than the middle class (17 percent) and by an even larger 46-point margin that the law’s corporate tax cuts will benefit corporate executives and shareholders (58 percent) more than employees (12 percent). In what must be deeply disappointing news for Republican strategists, far fewer Americans believe they personally received a tax cut from this legislation than actually received one. Just 18 percent told Gallup in April that their federal taxes had declined, and a Morning Consult/Politico poll the same month reported that 22 percent noticed an increase in their paycheck in recent weeks. While these numbers could potentially change after people do their 2018 tax returns (not likely), that will be far too late to help this year’s GOP candidates. Conservatives believe the problem here is not the product, but rather an insufficient sales effort. Bloomberg reports, for example, that groups backed by the Koch brothers are funding television ads and paying canvassers to knock on doors “to convince voters of the benefits of the GOP ’s central achievement.” We should be skeptical, even if Republican donors are not, that TV ads and earnest canvassers can sell this law after all the favorable press coverage generated at passage—plus the reality of tax cuts arriving in tens of millions of paychecks—could not. Indeed, the fact that Republicans need to sell the law at all signals the depth of their problem. When you have a winning issue, you spend your time educating voters that your opponents voted against it, and characterizing their motives in the most noxious terms possible. The merits of the measure can simply be asserted without explanation—indeed, that’s essentially the definition of a winning political issue. There is little time remaining for Republicans to make the Tax Act such an issue, and little reason to think they can succeed. But while Republicans seem unable to gain political traction with the tax issue this year, perhaps Democrats can. Our opinion research suggests some real potential for Democrats to deploy the tax vote as a substantial negative issue in campaigns, and make it an actual liability for Republicans. This would be important for this year’s elections, where Republicans still enjoy important advantages that may

Part II language and Message

permit them to hold one or both chambers: an extremely favorable Senate map, gerrymandered House districts, and relatively solid job growth. Republican weakness creates an opportunity, but hardly ensures Democratic success. Longer term, transforming a massive tax cut into a political liability in 2018 could change the politics of taxes for a generation. Fundamental assumptions that everyone “knows” to be true about tax cuts—they are always popular, the consequences for spending are too distant to matter, voters don’t care about cuts for the wealthy as long as they get their own—would be overturned. The calculus regarding what is politically possible regarding tax policy would be transformed. There is no guarantee this effort would succeed, but if it did, the payoff for progressives would be enormous. Converting the tax vote into an electoral negative is a task distinct from simply making the strongest possible policy case against the law. It requires telling a larger story about the consequences of the law for our country and the motives of the public officials who voted for it, and framing a choice for voters about the future. I think an aggressive campaign by Democrats to go on offense on taxes—focused on the themes of cuts, corruption, and choices—has the potential to achieve these goals. Cuts. The first line of attack against Republicans should focus on the large cuts to Medicare, Medicaid, and Social Security that their Tax Act will ultimately cause. The tax cuts’ long-term impact on these vital spending programs is less intuitive to voters than its skew toward the wealthy and corporations, but may be even more important politically. In our poll, voters find the claim that the tax law will increase the budget deficit, which will result in large cuts to Medicare, Medicaid, and Social Security, to be very plausible—fully 70 percent believe it is definitely or probably true. They also rank it as their top concern about the law. The consequences of the Tax Act for core public services is concern number one for women (67 percent), white voters (62 percent), voters over age 50 (65 percent), and noncollege white women (74 percent). Making the connection to services gives many voters a more personal stake in this issue, and encourages them to think about the law’s longterm impact on the nation, rather than just the short-term gratification that tax cuts may provide. It also works in the electoral context. When we test voter reaction to potential campaign attacks on a candidate’s vote for the Tax Act, fully 62 percent express strong concern that “Republicans’ tax breaks cost $1.5 trillion, and now they want to cut Medicare, Medicaid, Social Security, and education in order to pay for their tax breaks for big corporations and the richest 1%.” This is one of the three highest-rated criticisms out of 18 tested. In our research, the impact of the tax law on projected

deficits per se does not emerge as a top-tier public concern. However, mentioning that the tax cuts increase the budget deficit proves a critical element for making a message about cuts to Medicare, Medicaid, and Social Security maximally effective. While 70 percent believe it is true that the law “will increase the budget deficit, which will result in large cuts in Medicare, Medicaid, and Social Security,” belief drops to just 60 percent if we remove the first five words referring to the deficit (making it one of the less credible criticisms tested). For many voters, the ultimate damage that tax cuts do to vital services is not obvious unless we connect the dots by highlighting the fiscal impact. Citing the economic damage that cutting Medicare, Medicaid, Social Security, and education would entail can also serve as an effective rebuttal to Republicans’ claim that the Tax Act is helping to grow the economy. By a solid 14-point margin (57 percent to 43 percent), voters find the second claim in this exchange more convincing: Tax reform is growing the economy by putting more money in people’s pockets and creating a level playing field for American business; OR The law will weaken our economy by increasing the national debt, which will force deep cuts to Medicare, Medicaid, Social Security, and education. Here again, including the connecting element of “increasing the national debt” amplifies the power of our message. When we pose this same choice to survey respondents without referencing the national debt, the 15-point advantage vanishes and we earn only a draw. While we should not allow Republican claims about the economic benefits of their Tax Act to go unanswered, it would be a mistake to allow Republicans to frame this as a debate about jobs. While their jobs message is not especially powerful, it is still relatively favorable terrain from Republicans’ perspective. Democrats should never concede that the tax bill was a genuine (if flawed) attempt to create jobs. This was not a “jobs bill,” but rather a massive tax cut for the wealthy and large corporations, which Republicans will pay for by cutting health care, Social Security, and education. Every minute we spend debating the bill’s economic impact is time not spent delivering that message. We want voters to consider the question “Is it right to cut Medicare and Social Security in order to give tax cuts to the rich and large corporations?” rather than “How many jobs did the tax cuts really create?” Donald Trump likes to talk about his “big, beautiful tax cut.” By this November, Democrats want to make sure that the first “cuts” voters associate with Republicans are the Medicare, Medicaid, and Social Security cuts that will constitute the true legacy of their tax bill.

By November, Democrats want to make sure that the “cuts” voters associate with Republicans are the cuts to Medicare, Medicaid, and Social Security that will constitute the true legacy of their tax bill.

Summer 2018 The American Prospect 19

Corruption. Our research suggests the systemic Republican corruption underlying the design and passage of the tax bill can be a second compelling campaign theme. When voters consider specific criticisms of Republicans who supported the tax bill, they respond particularly strongly to evidence that the bill was designed to benefit special interests—especially interests that help fund their own campaigns, or themselves. Four corruption-related attacks emerge as particularly effective at raising concerns about Republicans: ■ Dozens of Republican politicians voted for a special tax loophole that will cut their own taxes by an average of more than $50,000 per year. (63 percent expressed extremely serious concern.) ■ Republicans gave pharmaceutical and health insurance companies billions in new tax breaks, but now those companies are raising drug prices and our insurance premiums. (62 percent) ■ Republicans gave a tax cut of more than $1 billion a year to the billionaire Koch brothers, who promised to spend $400 million to re-elect Republicans who voted for the law. This was a political payoff. (57 percent) ■ Republicans opened up a huge new loophole that gives billions to wealthy business owners and realestate developers like Donald Trump who can game the system—but working people don’t qualify. (56 percent)

Rising health-care costs is at the forefront of voters’ economic concerns today, which likely explains their extremely negative reaction to new tax breaks for pharmaceutical companies and health insurance companies. The common denominator here is that Republican members of Congress are not looking out for the interests of their constituents, but instead are looking out only for themselves. The personal gain may show up on their tax return or in their campaign coffers, but either way, voters get the message: These officials cannot be trusted to look out for the public interest. Even before hearing these messages, 69 percent of voters believe the law gave big tax cuts to special interests and Republican campaign donors, so we know this critique enjoys inherent credibility. Republicans’ corrupt intent and dishonesty are also powerfully revealed when voters hear that the Tax Act provides permanent tax cuts to large corporations, while the tax cuts for working families are only temporary. This basic fact about the legislation communicates three ideas in a few efficient words: 1) Voters’ own tax cuts will expire in a few years, 2) Republicans in Congress care more about helping corporations and CEOs than working families, and

20 WWW.Prospect.org Summer 2018

3) advocates of the bill have been dishonest and deceptive in selling it to the public (by hiding the temporary status of tax cuts for average people). Almost three in four voters (73 percent) believe this claim is true (making it the single-most credible criticism tested in our poll), and it ranks as voters’ top concern about the tax law (tied with cuts to Medicare and Social Security). It is the top concern for many key voter groups not predisposed to oppose the bill, including political independents (60 percent), men (62 percent), ambivalent Trump voters (69 percent), and non-college white men (67 percent). The temporary/permanent disparity effectively rebuts the Republicans’ strongest message, that the law provides tax relief averaging $2,000 to families. By a solid 16-point margin (58 percent to 42 percent), voters say Tax Act opponents make the more convincing case in this exchange: Our tax reform is providing much-needed tax relief to middle-class families, an average of $2,000 per family; OR The law gave large permanent tax cuts to corporations, but the middle-class tax cuts are only temporary. This element also helps to raise doubts about the honesty of GOP candidates, who routinely brag about the tax cuts delivered to average Americans without mentioning that only the corporate tax cuts are guaranteed to survive. Significantly, the phrase voters select at the end of our survey as the best description of the Tax Act is “dishonest and deceptive.” Why is this corruption theme so electorally powerful? It puts the candidate we are trying to defeat at the center of the story. Progressive narratives on taxes often center on the wealthy and corporations, who manipulate the legislative process for their own benefit. This is understandable, insofar as economic elites benefit the most from the policy. But by casting corporations and billionaires as the supervillains of our tale, and treating elected officials as mere instruments of entrenched economic power, we risk letting congressional Republicans off the hook. Let’s remember that members of Congress—unlike corporations and billionaires—promised to represent the interests of average people. Their constituents hold them to a higher standard, and we should encourage voters to hold them accountable. Don’t be surprised if Democratic campaign messages in this election cycle boil down to “It’s the corruption, stupid,” with the tax cuts serving as people’s exhibit A. Choices. So far, I have focused on deploying two powerful attacks against Republican candidates. And to some extent, the 2018 election will inevitably serve as a referendum on unified Republican control of Washington (not a bad frame for Democrats). However, elections are always

Part II language and Message

a choice about the future, and we need to frame it in the most favorable terms we can. Our research indicates that by promising to make corporations and the wealthy pay their fair share of taxes, in order to fund essential domestic priorities, Democrats can draw a sharp contrast with Republicans who voted for the Tax Act, and provide voters with a clear choice on our terms. When voters face a choice between a Republican candidate who strongly supports the Tax Act and a Democrat who favors repealing it and making the wealthy and corporations pay their fair share, they prefer the Democrat by a commanding 16-point margin (50 percent to 34 percent). This Democrat is strongly favored by independents (by 25 points), moderates (40 points), and swing voters (17 points). Voters say they will reward candidates who advocate an alternative, progressive tax reform agenda. Large majorities say they are more likely to support a candidate who advocates the progressive tax priorities below, while less than 20 percent are less likely to vote for these candidates. Voters are far more likely to support candidates who embrace these positions: ■ Make sure wealthy investors are taxed at a rate at least as high as workers pay on their wages. (69 percent more likely) ■ End tax breaks for corporations that outsource jobs or shift profits offshore. (68 percent) ■ Close the loophole that benefits wealthy business owners like Trump and use the revenue for infrastructure. (64 percent) ■ Repeal the tax cuts for the wealthy and corporations, but keep the tax cuts for the middle class. (58 percent)

Support for these positions is true even in deep red Senate battleground states. While progressive revenue measures enjoy strong support, linking the revenue to important public purposes can further increase the popularity of this approach. When Democrats commit to making the rich and corporations pay their fair share so that we can make the investments that our nation needs, voters embrace their message over that of Republican defenders of the law by an overwhelming 20-point margin. This margin is even larger among political independents (26 points) and 2018 swing voters (28 points). Republicans say: Our tax reform law means that Americans will have a simpler, fairer tax code that lets them keep more of their hard-earned money. A typical family of four saves $2,059 a year. The law doubles the standard tax deduction and the child tax credit, and simplifies your taxes. This reform lets job creators and

workers compete and win, which will create hundreds of thousands of new American jobs. Republicans kept their promise, and now middle-class families are seeing higher wages and bigger paychecks. (40 percent agree.) Democrats say: We will pay a price for these huge tax breaks to corporations and wealthy campaign donors. Republicans are already proposing cuts to Medicare, Medicaid, Social Security, and education. Instead, we should make sure the rich and corporations pay their fair share of taxes, so we can protect these priorities. And we should invest in our communities to have better schools, fix roads, bridges, and transit systems, make health care more affordable, and provide a secure retirement with dignity. (60 percent agree.) Taking into account all of this polling data, the bottom line seems clear: Republican candidates who supported the 2017 Tax Act are very vulnerable to attack on tax issues. What’s more, vigorous engagement on the tax issue strengthens Democrats’ standing with voters. At the beginning of our survey—before any debate or messages—28 percent said they would be more likely to vote for a member of Congress who had voted for the law and 37 percent said less likely (a net negative of 9 points). Significantly, after voters are exposed to extensive debate and messages from both sides, a “yes” vote becomes an even greater liability. After the debate, just 29 percent say they are more likely to support and 45 percent say less likely (a 16-point net negative). The issue does even more post-debate damage in competitive House battleground districts (a 22-point net negative). At the end of our survey, swing voters told us the tax law is a “time bomb for the middle class.” What they mean is that while immediate tax cuts are all well and good in the short term, this is far outweighed by the harm this law will inflict in the medium and long term. If we fail to make needed investments in education, health care, and infrastructure, the middle class will eventually pay the price. If Republicans succeed in paying for this by cutting Medicare, Medicaid, and Social Security, middle-class families will be hurt. But we may not have to wait a generation to see the impact of this “time bomb.” Voters seem ready to punish elected officials who put the nation’s long-term interests at risk in order to benefit their own careers and political interests. If Democrats play their cards right, this bomb may blow up the Republican majorities in 2018.

The systematic Republican corruption underlying the design and passage of the tax bill can be a compelling campaign theme.

Guy Molyneux is a partner with Hart Research Associates, where he conducts public opinion research for labor unions and other progressive causes.

Summer 2018 The American Prospect 21

The Broad Support for Taxing the Wealthy Why Democrats should run on rolling back the tax cut and raising taxes on the rich B y S tan ley B. Greenberg

he 2018 elections in November could be as important to Democrats as the anti-Obamacare 2010 wave election that shaped American politics for almost a decade was to Republicans—if Democrats don’t let ’em hide from their tax scam for the rich. And we do not yet know whether Democrats will get it right. As Democrats allowed issues of health care, Medicare, Medicaid, and the tax cuts to move to the sidelines, the national generic vote has narrowed and Trump’s approval rating has crept up. Democrats have deferred to the Republicans on the economy, even though it remains the simplest, most important determinant of the off-year congressional vote, and even though the Democratic base and swing voters are deeply suspicious of what Trump and the congressional Republicans are doing passing a tax cut for the rich. Am I really recommending that we run in 2018 on raising taxes? Yes. We will raise taxes on the rich. Count on it. Voters view that as the most important thing we can do to reverse the Republicans’ corrupt course. Three-quarters of voters want to reverse the tax cuts or raise taxes on the rich to invest in or help the middle class, according to a June survey. And critically, a candidate who makes this statement—“I want to be very clear: Their huge tax giveaway is wrong and I will vote to put back higher taxes on the richest so we can invest in education and make health care more affordable”—increases opposition to the tax cut and pushes up the Democratic vote and engagement. Does anybody remember that Bill Clinton and Barack Obama ran their elections and re-elections promising to raise taxes on the rich? The Trump and GOP tax scam for the rich is the Obamacare of 2018. They packed into this one piece of legislation their hatred of Obama, of the country’s rapidly accelerating diversity, and of the government takeover of health care that benefited millions of those they see as newly dependent minorities. For the base of progressive voters and for most swing voters, conversely, the 2017 Republican Tax Act is the ugliest and most deceptive face of trickle-down yet, a corrupt deal that will do nothing for working people who face rising costs. It threatens Social Security, Medicare, Medicaid, education, and health-care investments. It also puts the spotlight on wages and pay gains, and that is the biggest political gift of all. Democracy Corps’ surveys for the American Federation of Teachers (AFT), Women’s Voices Women Vote Action Fund (WVWVAF), and The American Prospect make so clear what should have been obvious. People are still living in the real economy that leaves them struggling. That economy is still defined by stagnant wages and people holding down jobs that don’t pay enough to cover the costs of health care, child care, housing, and education. If we fail to focus on the tax cut, the Republicans get to talk unchallenged about their tax cut reforms and a growing economy that is benefiting the middle class.

22 WWW.Prospect.org Summer 2018

What a scandal that would be, when our voters know the tax cut is a scam, are deeply suspicious of the damage it will cause, and think it is an inside deal for the rich and big corporations that will jeopardize our ability to invest in education and protect our retirement. The tax cut presents us with a vehicle for defining President Trump and the Republican Congress. What voters now believe is that the Republicans divided the country to get power and that their corrupt deal has allowed the rich to gorge themselves, creating reckless and unsustainable deficits that will come back to kill the middle class. That is why just as many Democrats and tax-cut opponents say the tax cut will be a voting issue for them as Republicans and proponents do. When college graduates and African Americans in focus groups are given a dry factsheet on the tax cut, they respond emotionally and intensely. At the end of the survey we’ve put before them, the Rising American Electorate of African Americans, Hispanics, unmarried women, and millennials become much more engaged and intent on voting. That is why the Tax Act has the potential to be the Democrats’ Obamacare. Defining and fighting the tax cut enables Democrats to fight everything Trump and the GOP are trying to do. The more voters hear about it, the more it is debated, and the more they consolidate behind Democrats—key to an off-year victory. Putting the tax cut at the center of the Democrats’ message platform clarifies what’s at stake in this election—unless that is obscured by Democrats’ caution and cowardice on tax increases for the rich or by their inability to see how much working people continue to struggle in the real economy and how suspicious they are of this corrupt political deal. It allows Democrats to demand change, to decry insider political deals for the richest and corporations, to demand more affordable health care, and to protect the programs people desperately need. That is why Democrats cannot allow the politicians in Washington to hide from their tax scam for the rich. The real economy Republicans are depending on the macroeconomy breaking through to dominate voters’ consciousness—but that smashes immediately into the real economy, where nothing has really changed. President Obama tried to get credit for an improving economy and job and wage gains, but Trump—not Hillary Clinton—is president. Now, Trump is playing the same card, and Democrats should know better. Only 40 percent of voters say that “the economy is strong and families like mine are beginning to be more financially secure,” according to a recent national survey conducted by Democracy Corps and AFT. A majority say it is not strong, and most say so with intensity, because their

Part II language and Message

“salaries and incomes can’t keep up with the cost of living.” Importantly, they are very aware the macroeconomy is growing faster (62 percent agree) and that there are more jobs available. In focus groups, they told us the economy is better than what it was and is improving because “unemployment is down, people are working, people aren’t losing the house or anything like that.” Those perceptions are banked, and more reporting of the strong economy does not change their own perception of a lower-wage economy and fewer pay increases that painfully can’t keep up with costs. Nine out of ten voters say “health-care costs are out of control,” and 73 percent agree with that strongly. Most important, 64 percent say their “wages aren’t keeping up with the rising cost of living”—43 percent strongly. That must be the heart of Democrats’ economic analysis and context for the tax cut debate.

Economic Anxiety Persists National phone survey of registered voters, March 25–April 2, 2018

percentage wh0 ■ agree ■ disagree with each statement

92% 64%

62% 31%

53% 33%

39%

48%

44%

Healthcare costs are out of control.

My wages aren’t keeping up with the rising cost of living.

The economy is growing faster than before.

There are more good jobs in my area.

My wages are rising.

People, and especially those who provide Democrats their off-year votes, are genuinely struggling in this economy. According to Democracy Corps’ recent 12-state battleground survey on behalf of WVWVAF, nearly two-thirds of African Americans and unmarried women and more than half of millennials say, “The economy isn’t very strong for families like mine because our salaries and incomes can’t keep up with the cost of living.” Fewer than one-quarter of African Americans, Hispanics, and unmarried women report seeing any benefits from the macroeconomy’s progress; only one-third of white working-class women and suburban voters report any personal benefit. But that is not what matters. What matters is the Republicans passed a huge tax cut for corporations and the rich that the middle class will pay for, and they did nothing about people struggling with rising costs, especially unaffordable health care. And it is the economy, stupid! In our regression models that test the impact of party competence in different issue areas, the economy was stronger than any other issue, just above health care, in predicting changes in the 2018

Six Out of Ten Swing Voters Say Their Wages Don’t Keep Up Web panel of registered voters in 12 battleground states, Conducted April 4–16, 2018

The economy isn’t very strong for families like mine because our salaries and incomes can’t keep up with the cost of living.

The economy is strong and families like mine are beginning to be more financially secure.

■ percentage wh0 agree with this statement

64%

62%

56%

36%

38%

African american

Hispanic

62%

55% 44%

45% 36%

millennials

white millennials

unMarried women

57% 38%

unMarried white women

43%

white working-class women

congressional vote. So, getting heard on the economy is a prerequisite for driving up the Democratic vote. In one scenario that plays well for Republicans, they campaign by heralding the tax cut, wage gains for working people, and the Trump economy to raise GOP enthusiasm, while Democrats talk about other things. In the other scenario, Democrats express anger that Republicans trumpet wage gains as health-care costs spike, and anger about a corrupt and expensive tax cut that will lead the GOP to cut Social Security, Medicare, and Medicaid. That’s the one that works for the Democrats. The tax cut: “It sounds good.” When Republicans describe their tax cut with all their rhetoric on how it will help the economy and middle class and how it raised deductibles and the child tax credit, it is met with a lot of skepticism and ambivalence. People suspect there are cards in a hand kept out of sight and that in the end, the rich will be the big winners and the middle class will pay the price. Just listen to this exchange among the African American women whom AFT and Democracy Corps interviewed in Detroit after hearing the president sell his tax cut in the State of the Union:

It sounds good, but we don’t think it’s going to happen. There’s more to it. I’m thankful for it but I know I’m going to pay for it later. Let’s wait and see if you get a refund. Because somehow or another you’re going to pay for it. Even when it comes to Trump voters, the tax cut is no call to arms. Trump voters are constantly looking for evidence that they cast the right vote, yet the tax cut barely came up when talking about good things about Trump. For them, issues like immigration are much bigger and more defining.

Summer 2018 The American Prospect 23

The white working-class Obama-Trump voters Democracy Corps and AFT spoke to in Macomb County, Michigan, say that they don’t want to “look a gift horse in the mouth because it’s still savings” regarding the Tax Act, but they insist on “not mak[ing] it more than it is” (white working-class older woman, Macomb). They “expect a lot more” (white working-class man, Macomb), and they began looking for the bad news: I think just like with anything else, there’s always pros and cons to every single bill or tax break or— there’s always the good with the bad. So you have to figure out what’s real good and what’s real bad. (White working-class older woman, Macomb) I’m a little skeptical. … How is that going to pan out? If you’re getting more money in your paycheck, you’re paying less in taxes. Is it going to even itself out by standardized deduction? And then, how are people going to be able to itemize? (White workingclass older woman, Macomb) Those initial reactions in focus groups hint at a deeper suspicion that will animate a powerful critique of Trump and Republicans. Just the facts In focus groups, you watch respondents of all persuasions devouring the facts about the tax cut proposal. Voters do not start the conversation about the tax cut with passionate views, but they end up in a very different place when presented with just a little information. As Democracy Corps, the AFT, and the Prospect found in focus groups, simply introducing a list of negative facts produced a powerful reaction among African Americans, college

Tax Cut Facts from Democrats National phone survey of registered voters, conducted March 25–April 2, 2018

the tax cut facts that are the most concerning for respondents Adds $1.5 trillion to the deficit and now Donald Trump and Republicans say we must pay for it with cuts to Medicare, Medicaid, and Social Security.

48% 42%

Costs $2.2 trillion over the next decade, which could have funded public schools, health care, or infrastructure.

38% 39% 38% 35%

Gives 83 percent of the cuts to the wealthiest 1 percent, including billionaires like Donald Trump. Cuts taxes for corporations earning profits overseas, giving them more incentive to outsource jobs.

24%

24 WWW.Prospect.org Summer 2018

38% 27% 26% 28%

19%

41%

Prioritize investment: The tax law costs $2.2 trillion over the next decade, which means even less funding for investments the middle class needs for a better future. Instead of a law that gives 83 percent of the cuts to the top 1 percent, that money should be used to invest in our public schools and infrastructure and bring down health-care costs. This expensive tax cut that primarily benefits the top 1 percent adds trillions to the deficit and will be a time bomb for the middle class. It means Republicans will slash Social Security, Medicare and Medicaid to pay for it, and will mean less money for the things we need, like investment in education and help with health-care costs.

28%

19%

Gives corporations a permanent tax cut, but the cuts for families are less and expire in 8 years. Undermines the state and local tax deduction which prevented double taxation and helped fund public education and services.

54%

graduates, and younger white working-class women. Many requested to take their copy home so they could use it to inform their neighbors and organize against the new law, and many wrote post–focus group postcards to Trump to challenge him about the tax cut. In the hyper-polarized political environment Trump has created, this new information becomes fuel for the resistance. This is such a significant message opportunity because the facts are simple and form the heart of the main attack on the tax cut. The facts are a nearly $2 trillion increase to the deficit that has now made cutting Medicare, Medicaid, and Social Security more likely under Republican rule. These Democracy Corps-AFT survey findings make clear that people want to prioritize investment in education, health care, and infrastructure over expensive tax cuts that primarily benefit the rich. That’s also confirmed by the massive public support for the teacher walkouts happening across the country and in states where voters have paid the price for cuts to investments, particularly in education. Fully 65 percent say they are more likely to vote for the Democrat who emphasizes the $2.2 trillion price tag for a law that gives 83 percent of its cuts to the top 1 percent—meaning less money for education, infrastructure, and help with health-care costs. That includes nearly 40 percent who say they are much more likely to support the Democrat who says this. Nearly as many, 58 percent, react positively to an attack that characterizes the new law as a time bomb for the middle class. The two attacks:

24% 30%

■ all registered voters ■ tax cut opponents ■ tax cut supporters

The tax cut’s ugly choices and consequences have set up a litmus test for GOP candidates. According to Democratic base and swing voters (the Rising American Electorate and white working-class women) surveyed by Democracy Corps for WVWVAF, the most damaging positions that Republican candidates could take are listed below:

Part II language and Message

Fully 65 percent of those surveyed say they are more likely to vote for the Democrat who emphasizes the $2.2 trillion price tag for a law that gives 83 percent of its cuts to the top 1 percent.

Defining the Tax Act for Voters National phone survey of registered voters, March 25–April 2, 2018

nicknames for the new tax law that most resonate with voters

“Rigged for the rich”

“Time bomb for the middle class”

■ tax cut opponents ■ democrats ■ independents/gop

6 6 5

15 14 15

If they did cut [Medicare and Social Security], I think I would have to sue them because I paid into that. That’s my money. (White working-class younger woman, Macomb) There’s just a lot of negative things in it. Like to hear about them making cuts to Medicare, Medicaid, and Social Security, when the people who already receive those benefits are already struggling as it is. Especially our seniors. (White working-class older woman, Macomb) So we’re talking about poor people who cannot afford health care to not be able to receive free health care, that’s even scarier. (African American woman, Detroit) How can you take away money from public schools, while hiring Betsy DeVos who wants to privatize our

The big deficit increase is a powerful symbol that something is wrong with this tax cut: If it is not paid, then it is stealing from their future and from their urgent needs today, like assistance with health-care costs and better schools.

Branded: Tax scam for the rich At the end of a national message survey conducted by Democracy Corps and AFT, those opposed to the Tax Act called it “garbage” and a “bad deal” or a “scam” “for the rich” in their open-ended responses. When we gave them choices based on what we learned in the focus groups, they went strongly to rigged for the rich, followed by time bomb for the middle class. It is easy to imagine Democrat messaging evolving to rigged for the rich.

14 14

I think that the difference is going to have to be made up at some point and it’s going to come from the middle class, not from the .1 or .01 percent that just are retaining billions. We’re getting $250. We’re going to pay back those trillions. (White college-educated woman, Southfield, Michigan)

29 28 27

Short-term binge for the rich that the middle class will pay for Across the different focus groups of both Trump and Clinton voters, almost no one contested any of the “facts” in the factsheet, or that Republican leaders now plan to put entitlements and critical investments on the chopping block. They begin to wonder, where is the snake in the grass? They know how much they may receive if they are lucky— a few thousand dollars, according to the Republicans— and that doesn’t square with the massive price tag and deficit increase.

They are especially upset that a tax break goes to those same companies that are increasing costs. “I don’t think the pharmaceutical companies need tax breaks,” said one African American woman. “You make enough money. … So you’re really just robbing us for no reason, just for fun; it’s like a sick game or something.” They start to see their tax savings as “a façade” to “make it seem like [Republicans did] something good” to cover up the fact that the rich and powerful are “getting billions and billions,” and that in the end, “they’re really gonna screw you a little bit more,” says one African American women in Detroit. In short, the tax cut defines what people hate about Trump and Republicans and their vision.

These attacks were voting issues, and much more impactful than a candidate’s position on the Dreamers, the special counsel’s Russia investigation, or Trump’s policies that discriminate against minorities.

education system? How can you lie about taking away Medicare, Medicaid, and Social Security? (White college-educated woman, Southfield) I mean, [Trump] could give you like two or three thousand [dollars a year], but when we’re paying twelve thousand a year for insurance, the two or three is nothing. It doesn’t mean anything. It just doesn’t make any difference to me. Unless you’re going to put something into health care for me, I don’t care. (White college-educated woman, Southfield)

36 39

Supports cuts to Medicare and Social Security to address the budget deficit (55 percent strongly oppose) Opposes universal background checks and an assault weapon ban (52 percent) Supports the attempts to cut Medicaid, raise premiums, and eliminate ACA protections for pre-existing conditions (48 percent)

“Trickledown tax cut”

“Tax scam”

“Rigged for donors”

Summer 2018 The American Prospect 25

Comparing Democratic Messages Web panel of registered voters in 12 battleground states, Conducted April 4–16, 2018

Short-Term Politics and Tax Cuts for the Rich Threaten Our Future

Fed Up with Rigged Economy

My state needs a plan for a better future, not more short-term political deals and short-sighted cuts to the things we need. We need to invest in education and infrastructure, not cut them. We need to protect Social Security and Medicare, not threaten your retirement with more tax cuts for the rich and corporations.

I’m fed up. Our economy and politics are rigged against hard-working people here in my state. Corporate donors are spending unlimited sums supporting my opponent to get their way. I will say no to big money and trickle-down economics and make sure the rich and corporations pay their fair share of taxes so we can help people with the rising cost of health care, childcare, housing, and student debt, and protect Social Security and Medicare.

■ percentage wh0 are more likely to support a democratic candidate who says this

83%

79% 66% 64%

African american

60%

Hispanic

67% 56%

61%

67% 54%

62%

61%

50%

white millennials millennial unMarried millennials women Women

56%

55%

50%

unMarried white white working class women women

New message platform for 2018 Throughout the years that Democracy Corps has been testing election messages for WVWVAF, we have been recommending some bolder version of a message evolved from our work with the Roosevelt Institute: a message that says Democrats are “fed up” with the rigged political and economic system, and want to rewrite the rules. But after Trump’s attempts to divide the country, repeal the Affordable Care Act, and destroy Medicaid, as well as this brazen tax cut for corporations and billionaire supporters, the message we recommend has become bolder still. Americans now see the politicians trying to steal as much as possible for the wealthy, while the future is sacri-

Increasing Interest in the Midterm Elections National phone survey of registered voters, conducted March 25–April 2, 2018

respondents’ level of interest in the november elections, before and after hearing tax act facts

+33

+12

+30

+13

Hispanic

26 WWW.Prospect.org Summer 2018

unMarried women

The electoral impact of battling the tax scam for the rich with a new message platform After a balanced tax cut debate, as simulated in the recent Democracy Corps-AFT national phone survey, the opposition margin grows 9 points nationally and grows 7 points in the battleground districts. Intense opposition to the tax cut grows 7 points among Democrats, but more importantly, GOP opposition to the cuts grows as well. Support collapses with unmarried women, white workingclass women, and seniors. Critically, interest in the 2018 midterm elections among Democrats grows 4 points after hearing a tax debate, increasing their enthusiasm margin over Republicans from 7 points to 11 points. The new message about the tax cut is a game-changer for Democrats. In WVWVAF ’s web survey in 12 battleground states with key gubernatorial and Senate races, we see a big increase in the number of Democratic base voters choosing the highest point on our turnout ladder after having heard a debate featuring this message. That matters because Democrats are winning African Americans by a nearly 10-to-1 ratio, and Hispanics, millennial women, and unmarried women by 2 to 1. It is these kinds of shifts in engagement that can turn 2018 into a 2010-type wave, but it requires embracing the attack on the tax scam for the rich as Republicans did the repeal of Obamacare. That is the opportunity we have—if we don’t let them hide.

The Message: The Washington politicians are dividing the country and using their government takeover to enrich their rich friends—political deals that will blow up on the middle class. Their huge tax cuts for big corporations are a tax scam for the richest, while hardworking people struggle to pay the bills and skyrocketing health-care costs. They are recklessly driving up the deficit and using that excuse to cut Social Security, Medicare, and Medicaid, and to block investments in education, infrastructure, and health care.

re-ask

initial

millennials

initial

re-ask

init. 24

41 re-ask

initial

31 re-ask

African american

52 40

■ republican ■ democrat

initial

re-ask

+76

ficed. That new focus proves strongest for all groups that are key to winning in November. The aversion to short-term political deals and shortsighted cuts is an opening for a more developed message that drives Democrats in 2018.

white working-class women

Stanley B. Greenberg is a founding partner of Greenberg Quinlan Rosner Research and Democracy Corps, and author of America Ascendant: A Revolutionary Nation’s Path to Addressing Its Deepest Problems and Leading the 21st Century.

Part II language and Message

The Democrats’ Response Far from giving Republicans bragging rights, the Tax Act presents Democrats with a potent line of attack. But can they stay united when they put forth their own alternatives? B y Harold Meyerson

n a summer day in 1981, a disconsolate House Speaker Tip O’Neill sat “slumped in a chair far to the rear of the House floor” (as Thomas Edsall recalled the scene in his 1984 book The New Politics of Inequality) and watched his colleagues vote to end the New Deal order. The vote was on a Republican substitute to a tax bill sent to the floor by the Democratic majority on the House Ways and Means Committee; the substitute cut taxes by $749 billion, bringing down the rate on the highest incomes from 70 percent to 50 percent, lowering the capital gains tax, and reducing the inheritance tax—the first tax reduction since the 1920s, Edsall wrote, “skewed in favor of the rich.” To O’Neill, the unkindest cut was not that the Republican measure passed, but that it passed with the support of 48 of his fellow House Democrats. Most of them represented majority-white districts in the South—districts that today are represented by Republicans—but some Northern-state Democrats voted for the substitute as well. And when the bill went over to the Senate, which unlike the House was under Republican control, 37 Democrats voted for it on final passage, while just ten voted no. Plainly, Ronald Reagan’s victory on an anti-tax platform and the GOP capture of the Senate in the 1980 election had shaken many of O’Neill’s fellow Democrats. So had California voters’ passage of Proposition 13 in 1978, which heralded an era of tax and spending rollbacks. That era was still going strong in 2001, when another newly elected Republican president, George W. Bush, signed into law a bill that further reduced the taxes on high-income Americans—this time, with the votes of 12 Democratic senators. The Revolt of the Haves (the all-too-prophetic title of my colleague Robert Kuttner’s 1979 book on Proposition 13) had not yet run its course. For Republicans, apparently, it will never run its course. The tax cut that all but 12 Republicans voted for and Donald Trump signed earlier in this session remains the one significant piece of legislation that an otherwise fractious GOP could agree upon—and, in grand Republican tradition, it will deliver 83 percent of its benefits to the wealthiest 1 percent by 2027. But this time around, no Democrat in either house supported the legislation. Even though many Democrats had at times supported lowering corporate tax rates, the GOP bill was so overwhelmingly tilted toward the rich that no Democrat crossed party lines on the vote. The Democrats’ solidarity was doubtless strengthened by their battles against Trump, and “their success in defeating the Republicans’ attempts to repeal the Affordable Care Act,” says Frank Clemente, executive director of Americans for Tax Fairness (ATF), “really stiffened their spines.” More than that, their unanim-

ity was a reflection of the political transformations their party and nation had undergone since 1981, with the Democrats no longer representing any part of the white South, and with the share of party members identifying themselves as liberals growing from 28 percent in 2000 to 46 percent today. It was also a reflection of the economic transformation the nation had undergone since that 1981 tax cut, with the era of broadly shared prosperity now a dim memory, with the decades-long stagnation of wages, and with levels of economic inequality not seen since just before the 1929 crash. Their opposition to the tax cut notwithstanding, it has taken the Democrats a while to figure out which arguments against the cuts work best on the 2018 campaign trail. And while they now appear to have reached a consensus on that, they have been slow to specify what changes they’d make to the law should they return to power. Their reticence is partly due to their calculation that such proposals might cost them votes come November. But it’s also due to their disagreement on what changes they should make. Though revisiting the cuts to corporations may look to be politically unassailable to voters, there are still many centrist Democrats who fear for their campaign funding should the party offend their corporate donors. Despite all the coverage the 2017 Republican Tax Act received in the media, despite all the hype about corporations passing along their new savings to their workers, when Democrats talked to their constituents in town meetings and neighborhood coffee shops in the weeks and months following the bill’s enactment, they made an important discovery: Most people didn’t think the cut mattered very much to their own pocketbooks. Indeed, it was far from the top of list of issues that concerned them. “If I didn’t raise the tax cut at my town halls, I don’t think it would even come up,” says Oregon Senator Jeff Merkley. “People bring up gun safety, the need for livingwage jobs, the cost of housing and education. And they bring up corruption—the stranglehold that money has on our politics.” And the tax cut, says Merkley, is a perfect illustration of that corruption. “I describe the bill as a reflection of the fundamental corruption of Congress,” he says. “I say it borrowed $1.5 trillion from your kids to give 80 percent of that to the richest Americans. I get hardly any pushback when I say that—even in the most conservative counties.” Precisely because the cut confirms most Americans’ beliefs that big money controls politics and that corporations don’t pass along their profits to their workers, Democrats have seized upon a number of the bill’s enrichthe-rich particulars, and on the way it illustrates how wealth does not trickle down. The record level of share

Summer 2018 The American Prospect 27

Texas Representative Lloyd Doggett introduced an antioffshoring bill that repeals the law’s provision taxing overseas profits at half the rate of U.S. profits. His bill would set one equal rate.

wages or creating jobs.” (It’s not clear that the structural deficiencies of American capitalism would have become quite such a Democratic mantra absent the Tax Act.) Another widely held American belief underpins the Democrats’ other line of attack against the cuts: That having just added mightily to the nation’s fiscal deficit, the Republicans will use that deficit as a pretext for going after Medicare and Medicaid. That charge, every poll shows, sticks—not least because the Republicans did try to go after Medicaid in their efforts to repeal the Affordable Care Act. In the face of polling showing nearly 80 percent of the public didn’t want Medicaid slashed, Republican Speaker Paul Ryan went after it repeatedly, obsessively, as Ahab did the whale. It requires no imaginative leap to envision Republicans seeking to fill the budget hole they created by reducing Americans’ access to medical care. It requires nothing more than a short-term memory. It took some time for the Democrats to realize that these three lines of attack—that the tax savings are going to the rich, that the corporations’ bounty is going only to

28 WWW.Prospect.org Summer 2018

shareholders, that Republicans will use the deficits they created to cut health care, retirement income, and education—were the ones that resonated most widely and deeply with the public. “Initially, Republicans got away with the argument that the cuts would bring jobs back,” says one senior Democratic Hill staffer. “The early reports after the bill passed focused on bonuses: Home Depot gives its workers $1,000 bonuses. Then we saw what corporations were actually doing with their savings: Home Depot admits it’s only for employees who’ve worked there for 20 years. That’s why Democrats have to keep talking about the buybacks, have to keep the drumbeat going.” “It also took a while for the media to pick up on the threat the cut posed to Medicare and Medicaid,” he continues. “Our attacks on the cuts weren’t fully resonating until we zeroed in on the implications for Medicare and Medicaid and Social Security. Then the media got it. And the public got it.” The public certainly did. In a Gallup poll from April, 39 percent of Americans approved of the Republican tax cuts, while 52 percent disapproved of them. “I doubt there’s ever been a tax break bill in the whole course of American history that’s been this unpopular,” says Texas Representative Lloyd Doggett, the ranking Democrat on the Tax Policy Subcommittee of Ways and Means. “It’s easier to be unified when you’re on defense, opposing something,” says ATF ’s Frank Clemente. “It’s hard when you’re proposing something, on offense.” Precisely because the Democrats’ attacks on the Republican tax cut appear to be working, the course of least resistance, thus far, has been to stay on the attack rather than propose concrete alternatives. Yet arguing, as the Democrats do, that the cuts endanger education, affordable health care, and retirement security automatically begs the question of what Democrats would do about the cuts if they’re returned to power. Roll them all back? Perhaps only the corporate cuts? Or maybe just some particularly indefensible provisions? Among some more centrist Democratic politicos and consultants, any talk of countering what all agree is a disastrous Republican tax cut is nonetheless seen as a risky venture. When Pelosi remarked in a meeting of reporters that, of course, the Democrats would seek to roll back some of the cuts, some Democratic staffers hastily put out the word that the party’s real commitment was simply to extend tax cuts to the middle class. But the cognitive dissonance involved in attacking the cuts as dangerous yet failing to promise to do anything about them is ultimately too great for any but the most petrified of pols. (Who most certainly exist. Asked whether the cuts should be rolled back, one of the few House Democrats who

a l e x e d e l m a n / p i c t u r e a l l i a n c e / d pa v i a a p i m a g e s

buybacks and mergers on which corporations have spent their new largesse has now become a standard Democratic talking point. In mid-May, for instance, Democratic House Leader Nancy Pelosi responded to a study that showed S&P 500 companies are on track to spend $1 trillion on buybacks and dividends this year by issuing a broadside against both the law and American corporate behavior. Contrary to Republican claims, she pointed out, the tax savings were going to “wealthy investors instead of raising

Part II language and Message

represents a district that Trump carried came up with this masterpiece of nothing: “I think we ought to do what makes sense, and what passed does not make sense.”) Not every Democrat is so exquisitely noncommittal. Asked the same question on rollbacks, Tim Ryan, the Democrat who represents Youngstown and Akron in the House, and who at times has been touted as a more culturally centrist (or at least, less demonized) alternative to Pelosi to lead the House Dems, replied, “For the top—yeah, absolutely. We need to ask the wealthiest people to pay more to help us rebuild the country and put these communities back into the global economy.” In other words, to get some much-needed funding to places like Youngstown and Akron. “It’s important to tie the opposition to cuts to what we’d do with the money,” says one House Ways and Means Committee staffer. In late May, Pelosi, Senate Democratic Leader Chuck Schumer, and a number of their House and Senate colleagues did just that. In response to the support for greater education outlays that the public demonstrated in backing the teachers’ strikes, they called for spending $100 billion on raises for teachers and improvements to school infrastructure. “Democrats propose paying for this critical investment,” the accompanying press release stated, “by repurposing the money used to provide tax cuts to the top one percent. Instead of allowing millionaires, billionaires, and massive corporations [to] keep their tax breaks and special-interest loopholes, Democrats would invest that money in teachers and students.” Nothing too specific there on which breaks and loopholes would be closed, but Doggett has noted that rolling back one late insertion in the GOP ’s bill, which reduced the tax rate on the highest-income Americans from 39.6 percent to 37 percent, would yield the same amount of funds that Trump’s budget cut from education. Doggett also authored the first bill that would roll back a portion of the tax cuts—a portion he views as especially indefensible. Though the Republicans touted their bill as enabling corporations to bring jobs they’d offshored back to America, in fact the new tax law sets the rate for profits corporations earn abroad at about half that of the rate for the profits they earn in the United States. Doggett’s bill— the No Tax Breaks for Outsourcing Act—would equalize those rates, as well as compel companies based in the United States that divert their profits to tax-shelter nations such as the Cayman Islands to pay the U.S. tax rate on those profits. “We hadn’t introduced any bills that make corrections here or there to the Republican tax bill, but this issue is so significant in terms of impact, we thought we needed to get it out there,” Doggett says. “This bill is something our candidates can talk about not just to progressives but to a broader public, including across the Midwest.”

I ask Doggett whether that means his bill will get the unified support of the Democratic caucus. “No,” he replies. “There’ll be some opposition in the caucus; we have our corporate wing, as we saw in the vote on weakening DoddFrank. With campaign dollars flowing from the corporate sector, there’s more reticence about raising corporate taxes than there is about raising taxes on individuals. There’ll be more members willing to take on individuals who make more than a million a year than to take on corporations.” “The multinationals have been so successful at moving their profits across borders they’ve come to think of it as an entitlement,” Doggett adds. “They have a lot of influence in both caucuses.” Indeed, as ATF ’s Clemente points out, when Republicans first outlined their tax cuts last year, congressional Democrats were united in opposing the cuts for the wealthy, but a number were reluctant to oppose the drop in corporate tax rates. “There are 7,000 corporate lobbyists who work on taxes,” Clemente says. “They hold the Democrats back.” In the end, responding in large part to the increasingly militant liberalism of the Democratic base, every member opposed the GOP bill, but that doesn’t mean every member would support revisiting corporate tax rates should the Democrats regain congressional majorities—even if, as with Doggett’s bill, public sentiment would almost surely favor such action. In late May, Colorado Representative Jared Polis introduced the second bill to roll back the GOP tax cuts—in this case, all of them. Polis’s Students Over Special Interests Act would restore the tax rates the Republicans cut and redirect the funds to pay off student debt and make colleges more affordable. This idea cuts through the mind-numbing detail of the Tax Act, and proposes, by contrast, a big idea that Americans can immediately grasp—billionaires versus students and graduates hobbled with debt. Unlike Doggett’s bill, Polis’s hasn’t really been written with an eye to its eventual passage should the Democrats retake Congress. Indeed, even if the Democrats retake Congress, Polis won’t be there, since instead of seeking re-election, he’s running for governor of Colorado. His bill is plainly intended to boost his prospects in his politically purple home state. And in that, Polis is on to something. For at the state level—in red states as well as purple and blue—many Democrats are running for office this year not just by demanding a greater commitment to funding schools and other necessary services, but to paying for them with higher taxes. What changed the political calculus for those Democrats were the teachers’ strikes in a string of red states, which not only compelled Republicans to violate their Norquist oaths never to raise taxes, but convinced Democrats that rais-

Colorado Rep. Jared Polis’s bill rolls back the entire GOP tax cut and redirects the funds to paying off student debt and making college affordable.

Summer 2018 The American Prospect 29

Following the teachers’ strikes, red-state Democratic candidates have pledged to raise taxes on the rich to restore school funding.

ing taxes was no longer a sure ticket to political oblivion. The change was particularly notable in West Virginia, home to the strike whose success ignited similar actions in Kentucky, Oklahoma, and Arizona. Democrats had controlled the statehouse there as recently as 2014, but while in power had no interest in raising taxes to help the state’s beleaguered schools. Indeed, earlier in the decade, when Democrat Joe Manchin was governor, they’d cut business taxes, creating a deficit of roughly $350 million. When the teachers shuttered all the state’s schools, however, with demands for funding not only to make their imperiled health insurance system sound again but also to upgrade the condition of public education—demands that won wide support from the schoolchildren’s parents—they derailed a Republican bill that would have cut taxes on the state’s energy companies. They also called for a severance tax on natural gas to fund their demands. “We had thousands of members outside the capitol chanting, ‘Tax the Gas!’” says Ryan Frankenberry, a key strike organizer. “In West Virginia—where coal and oil and gas have dominated the state since its creation. This was a game-changer.” The proposal didn’t come to a vote, as the state’s Republican governor simply declared that he’d change his budget estimates, thereby creating (on paper, anyway) the funds to cover the health insurance fund deficit. But most Democratic legislators supported the teachers’ proposal. Mick Bates, a member of the state assembly who heads the state Democrats’ House Campaign Committee, says: “We will campaign this fall on raising revenues. A little more than half of the state’s $4 billion budget goes to K–12 schools; we view that as an investment we need to increase.” Two revenue sources Bates believes the Democrats will likely back are the gas severance tax and a tax on marijuana. (To general amazement, Bates steered a medical marijuana legalization bill into law last year.) He’s upbeat about the Democrats’ prospects in the November elections, not only because of the high level of parental support for the teachers’ demands and more school spending. He also cites the defeat in this year’s Republican primary of one longtime legislator who opposed tax hikes to increase school funding by a more moderate Republican who supported them— much as the parents of Kansas schoolchildren ousted antitax lawmakers in that state’s 2016 Republican primaries to win better funding for their children’s schools. In contesting for state offices by advocating raising taxes to boost such services as education, the West Virginia Democrats are anything but alone. In Georgia, Democratic gubernatorial nominee Stacey Abrams is calling for rolling back a state tax cut that Republicans enacted earlier this year. The changing political climate around taxes and edu-

30 WWW.Prospect.org Summer 2018

cation in red and purple states “is part of a larger trend of Democrats coming around to the idea that raising taxes on the wealthy is actually not only a good idea but a popular one,” says one senior Senate staff member. But the forces that have compelled even red-state Republicans to recalibrate their thinking on taxes, Doggett cautions, haven’t trickled up to his Republican colleagues in the Capitol. “The only thing the Republican caucus can agree on here is more tax cuts,” he says. “The Norquist ideal still holds.” Indeed, Doggett is concerned that the Republicans may try to pass yet another tax cut shortly before the November election—responding to the Democratic criticism that their tax bill reduced corporate taxes permanently but individual taxes only for ten years by making the cut to individual taxes permanent, too. In a speech in late May, Trump promised to do just that. Doggett fears that if the Republicans do attempt to make that change, “the response of my Democratic colleagues would be mixed. We’d need to emphasize that this would dig us into an even deeper hole, jeopardizing Social Security, Medicare, and education even more. We’d need to say, rather than extend this flawed bill, extending tax cuts to the richest Americans, let’s wait until January. If Democrats take the House, we could draft a bill with progressive provisions, but not extend benefits that go to the very top.” “Still,” Doggett adds, “if this comes on the eve of the election, it could be a significant challenge for the Democrats.” The Democrats face a different kind of challenge going into the 2020 election, Clemente points out. With the party abuzz with talk of Medicare for All, affordable college, and bringing the nation’s infrastructure up to (or even close to) 21st-century standards, the Democrats need to develop plausible plans for how to pay for such necessities. “The party base is into these programs; it’s not into taxes,” Clemente says. But progressive taxes will be the sine qua non behind these programs if these programs are to emerge and thrive. He’s encouraged that polls show millennials—the generation most scarred by the Great Recession, employment insecurity, and low wages—are especially supportive of a more progressive tax code. Millennials, he points out, will be the nation’s largest voting bloc ten years hence. Does that augur an end to the era of Proposition 13, which was enacted 40 years ago this June? Perhaps. A new poll by the Los Angeles Times shows that 54 percent of state voters would support a proposed initiative for the 2020 ballot that would roll back Proposition 13’s tax cuts on businesses. Would that mean the revolt of the haves will have finally run its course? Not likely. But it could be a sign—as the forces for a more equitable economy come into their own— that it will be a lot more contested.

Part II language and Message

Why the Tax Act Will Not Boost Investment

spur enough investment to boost the capital stock by roughly a third after a decade over its baseline growth path, increasing output and wages by 10 percent over the baseline levels. That forecast is the basis for the 3 percent annual GDP growth assumed in the Republican projections, as compared with a growth rate of under 2 percent projected by the Congressional Budget Office. It is also how the Republicans could claim that a tax cut amounting to a bit over $1,000 per year per household would raise family incomes by more than $4,000. The claim depends entirely on the additional growth that will result from the lower tax rates. The distribution of the initial tax cut itself is trivial by comparison. Looking at a limited set of countries over the last few decades, Hassett’s work finds that lower corporate tax rates are associated with higher real wages. Other research on variations in state tax rates in the United States and provincial tax rates in Canada finds similar results, so there is some basis for the claim about growth and higher wages. These studies, however, have to be put up against a larger body of research that examines the determinants of investment. The primary channel through which a lower tax rate would boost investment is by reducing the after-tax cost of capital. Paying a lower tax rate effectively makes it cheaper to invest. The research on this issue is extensive, and most of it finds that investment is relatively unresponsive to

Will lower corporate taxes generate an investment boom? The evidence suggests not. by De a n Ba k e r

32 WWW.Prospect.org Summer 2018

getting into the good graces of a notoriously capricious president. However exciting this shareholderversus-worker scorekeeping might be, it actually is beside the point if we take the Republicans’ claims about the tax cut seriously. Their argument was not that if we give tax cuts to corporations, the corporations would pass them on to workers. If that were the case, it would be much simpler just to give the tax cuts to workers. They argued that the big gain to workers would be through an indirect channel. Their story was that lower corporate tax rates would lead to a huge increase in investment, which would in turn increase productivity, which would then lead to higher wages. Kevin Hassett, the head of Trump’s Council of Economic Advisers (and a friend), was the leading promulgator of this view. Hassett was not just arguing this position to justify the Trump tax cut; he is a true believer. He has been doing research for decades that finds investment to be hugely sensitive to tax rates. Hassett argued that the reduction in the corporate tax rate would

Tax cuts have not led to investment booms. Investment has been far more responsive to demand than to either tax cuts or the cost of capital. 40%

U.S. investment as a share of GDP

35%

■ years tax cuts

30%

were enacted

25% 20% 15% 10%

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

Source: world bank

1969

1967

1965

he centerpiece of the Republican Tax Act signed into law at the end of last year was the cut in the corporate income tax rate. The reduction in the tax rate from 35 percent to 21 percent, along with other reductions in business taxes, accounts for almost 40 percent of the $1.6 trillion projected gross cost of the tax cuts. Since the law passed, most of the discussion has focused on the division of the benefits of the corporate tax cuts between shareholders and workers. On this score, the shareholders look to be the big winners. According to an analysis by Americans for Tax Fairness that focused on the public announcements from the country’s 500 largest corporations, share buybacks announced since the law’s passage have totaled more than $400 billion compared with $6.1 billion in announced bonuses or pay increases, with the vast majority of this money falling in the category of one-time bonuses. It is also worth noting that companies were effectively getting paid to announce bonuses as soon as the law was passed. A bonus announced in calendar year 2017 could be written off against the 35 percent corporate income tax rate in effect that year even if it would be paid in 2018. In contrast, bonuses that were not announced until 2018 could be deducted only at the new 21 percent corporate income tax rate. As a result, a company like AT&T, which announced one-time bonuses of roughly $200 million in December for its employees (equal to less than 10 percent of its annual tax savings), was effectively paid $28 million to make its announcement in 2017 rather than wait until January. This is in addition to the benefits of

m i c h a e l b r o c h s t e i n / s i pa v i a a p i m a g e s

Part III Debunking the Myths

changes in the cost of capital. This is part of the story of weak investment in the recovery from the Great Recession. The interest rate that companies have had to pay in recent years on borrowed money has been at historically low levels. For example, the interest rate on AAA bonds is currently at 4 percent and has been as low as 3.5 percent. With an inflation rate of around 2 percent, this comes to a 2 percent real interest rate. That compares with a real interest rate near 4 percent during the late-1990s investment boom. The story is the same with lowerquality BAA bonds, which now have a yield of 4.8 percent for a real interest rate of 2.6 percent. In the late 1990s, the real interest rate on these bonds averaged over 5 percent. Investment, in other words, has been far more responsive to demand growth than to the cost of capital. The same story emerges from careful micro-level analysis of firms’ investment decisions. A series of studies that Washington University professor Steve Fazzari did in the late 1980s with Glenn Hubbard, George W. Bush’s chief economic adviser, found the cost of capital to be a minor factor in determining firms’ investment decisions, especially for new firms. Sales growth was a far more important determinant. There is another reason for questioning the impact that cutting the corporate tax rate will have on investment: We tried this trick before. The 1986 tax reform lowered the corporate income tax rate from 46 percent to 34 percent. This is almost as large a reduction as the one in the new law. (The way to think about the size of the cut is the share of profit pocketed by the company. The 1986 tax cut increased the share from 54 percent to 65 percent, a 20.4 percent increase. The 2017 tax cut raised the share from 65 percent to 79 percent, a 21.5 percent increase.) Unfortunately, no investment boom followed the 1986 tax cut. In fact, investment fell slightly when measured as a share of GDP, going from 13.2 percent of GDP in 1986 to 12.6 percent in both 1987 and 1988. This history does not seem

consistent with the view that investment is hugely responsive to the corporate tax rate. But we don’t have to rely on history, since for better or worse, the tax cut is now in place. While it is still early in the game, if the Republicans’ story were true we should already be seeing higher capital goods orders. Keep in mind, their story is not that the tax cuts would lead to a modest rise in investment; they claimed the tax cuts would increase the size of the capital stock by one-third after a decade. To hit that level would require an increase in annual investment of roughly $600 billion over baseline growth of 25 percent. Although the bill was signed into law at the end of December, businesses already knew in September that a large cut in the corporate tax rate was likely. If tax rates were a large factor in investment decisions, we would expect that dynamic firms would have begun planning for investments they would make if the tax law passed. The bill then passed the Senate in the middle of December, at which point it was absolutely certain that corporations would be paying a lower tax rate. To be sure, it takes time to get investment in place, but if there is really going to be a flood of additional investment, it should show up in companies’ plans for investment. The best national measure of those plans is the Commerce Department’s data on capital goods orders, which is released monthly. The data for December through March don’t support the investment-boom story. If we pull out aircraft, orders for non-defense capital goods were just 0.5 percent higher in March than in December, translating into a meager 2 percent annual rate of growth. Even including aircraft orders, the yearover-year increase was 12.4 percent. This is a respectable growth rate, but very far from a pace that would increase the capital stock by a third over baseline growth in a decade. In fact, there have been many times where spending increased more rapidly in the recent past without the benefit of a huge tax cut. For example, in the first half of 2012, the

growth in orders compared with the prior year averaged 17 percent. Going slightly further back, capital goods orders grew an average of 9.4 percent in the first six months of 2007 compared with year-earlier levels, and 12.2 percent in the first half of 2006. These were not years in which anyone thought we were experiencing an investment boom. The National Federation of Inde-

Wishful Thinker: Kevin Hassett, chair of Trump’s Council of Economic Advisers

pendent Business provides another measure of intended spending based on a survey of its members. This measure showed a slight increase in the percentage of members planning to increase capital expenditures in the next three to six months immediately following passage of the tax cut, with the share going from 26 percent in November to 29 percent in February. But it then fell back to 26 percent in the March reading. By comparison, the share had been as high as 29 percent back in August 2014 when Barack Obama was in the White House. The index averaged over 30 percent in the years preceding the recession. Several of the regional Federal Reserve banks conduct surveys of business conditions in their districts that also ask about plans for investment. The results from the New York district, the Philadelphia district, and the Chicago district all tell pretty much the same story. Investment is expanding at a moderate pace along with the overall economy, but there is

Summer 2018 The American Prospect 33

zero evidence anywhere of an investment boom induced by the tax cut. The tax cut proponents will undoubtedly object that it is too early to make much of the data we have, but remember, their claim was the tax cut would lead to a huge surge in investment, implying that businesses are very responsive to changes in the tax rate. If investment decisions really depend on tax rates to the extent they claim, it is difficult to believe we wouldn’t be seeing evidence, at least in businesses intentions, of more rapid investment growth. And without this growth in investment, the corporate tax cuts look like just another way to give money to the richest people in the country who own most of the stock in the corporations getting the tax cuts. One additional point about the Republicans’ projection of 3 percent GDP growth ought to be mentioned. Contrary to what many economists have claimed, the idea of growth at that pace is not outlandish. GDP growth is the sum of labor force growth and productivity growth. Given the demographic trends, labor force growth will average less than 1 percent, but the productivity part of the story is much less certain. Although productivity growth since 2005 has averaged just over 1 percent annually, it averaged 3 percent from 1947 to 1973 and again from 1995 to 2005. It could approach that level once more. After all, this is what job-killing robots are all about. If just a small portion of the claims about massive displacement from robots and artificial intelligence prove to be true, the resulting productivity growth could push GDP growth to the 3 percent range promised by the tax cut proponents. But it would have little, if anything, to do with a tax cut that will needlessly transfer hundreds of billions of dollars to the country’s richest people. Dean Baker is senior economist at the Center for Economic and Policy Research. He is the author of several books, including Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

34 WWW.Prospect.org Summer 2018

The Curse of Stock Buybacks

For the past three decades, the overriding priority of American corporations has been paying their shareholders. That’s just what they’ve done with their tax cut. by W i l l i a m L a z o n i c k

n slashing the corporate tax rate from 35 percent to 21 percent, the Republicans’ Tax Act is supposed to provide companies with extra after-tax profits that, through productive investments, will create jobs for Americans. Instead of helping to rebuild the vanishing middle class, however, the tax savings will further enrich shareholders through stock buybacks and cash dividends. With share prices inflated by stock buybacks, the richest U.S. households will extract even more value from the economy, making America’s rampantly unequal income distribution even worse. Even before the adoption of the Tax Act, it was no secret that corporations would use the corporate tax breaks to increase distributions to shareholders. At the Wall Street Journal CEO Council in November 2017, a moderator asked the roomful of top executives: “If the tax reform bill goes through, do you plan to increase your company’s capital investment, show of hands?” Only a few CEOs half-raised their hands, prompting Trump’s then– chief economic adviser, Gary Cohn, a featured speaker at the event, to ask: “Why aren’t the other hands up?” As evidenced in later interviews of some of the CEOs, they already knew that the tax breaks would end up as buybacks and dividends. It should come as no surprise that corporate executives’ top priority for the tax cuts has been to increase distributions to shareholders, for three reasons: First, senior executives’ stock-based pay provides them with strong incentives to distribute corporate cash to shareholders. Annual mean CEO remuneration at the 475 Standard & Poor’s 500 companies that remained on the index from 2007 through 2016 ranged

from $9.4 million in 2009, when the stock market was in the dumps, to $20.1 million in 2015, when the stock market was booming. Most of this total remuneration—ranging from 53 percent in 2009 to 77 percent in 2015— came in the form of realized gains from stock-based pay (stock options and stock awards). Second, since the 1980s, corporate executives have proclaimed that their only corporate responsibility is to “create value” for shareholders. Most recently, over the decade of 2007 to 2016, stock repurchases by 461 S&P 500 companies totaled $4 trillion, equal to 54 percent of profits; in addition, these companies declared $2.9 trillion in dividends, which came to 39 percent of profits. Indeed, in the name of “maximizing shareholder value,” corporate executives are often willing to take on corporate debt, terminate employees, reduce wages, sell assets, and diminish cash reserves to do buybacks. Third, since the mid-2000s, hedge fund activists, with billions of dollars of assets under management, have increasingly pressured corporations to do buybacks. Armed with their huge “war chests,” these new-style corporate predators use a corrupt proxy-voting system, “wolf pack” hook-ups with other hedge funds, and once-illegal engagement with management to compel corporations to hand over profits that the hedge funds did nothing to create. In short, the expectation that corporations will use the Republican tax cuts to hire more employees and invest in productive capabilities flies in the face of the financialized business model that a large and growing number of major U.S. corporations have adopted over the past 30 years.

Part III Debunking the Myths

Non Equity Issues Net Equity Years US Non-financial Corps, Issues as in 2015 Billions % of GDP 1946–1955 $143.2 0.56% 1956–1965 $110.9 0.30% 1966–1975 $316.0 0.58% 1976–1985 –$290.9 –0.40% 1986–1995 –$1,002.5 –1.00% 1996–2005 –$1,524.4 –1.09% 2006–2015 –$4,466.6 –2.65% Sources: Net equity issues data are the same source as in the top chart, adjusted to 2015 US dollars, using the consumer price index in Council of Economic Advisors, Economic Report of the President, January 2017, Table B-10.

The Buyback Economy

Net equity issues, U.S. nonfinancial corporations, 1946–2017 $100 0

billions of dollars

-100 -200 -300 -400

nonfinancial business corporations

-500 -600

-800

1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

-700

Source: Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1, Table F-223: Corporate Equities, June 7, 2018

the Rise of Dividends as a proportion of corporate profit Mean cash-dividend and stock-buyback distributions for 232 companies in the S&P 500 Index that were publicly listed from 1981 through 2016 $600 500 400

■ dividends ■ buybacks

300 200 100

2015

2011

2013

2009

2007

2005

2001

2003

1997

1999

1995

1991

1993

1987

1989

1985

1981

1983

market, which constitute the vast majority of all buybacks, are nothing but manipulation of a company’s stock price. That should be illegal, but it is obviously not. Companies are permitted to engage in this practice because in 1982, the Securities and Exchange Commission (SEC) adopted Rule 10b-18, which permits a company to do buybacks that can amount to hundreds of millions of dollars per day—trading day after trading day—without fear of being charged with stock-price manipulation. SEC Rule 10b-18, which remains in force, is a license to loot the U.S. business corporation. Stock buybacks are massive—so much so that it is not at all sarcastic to call today’s U.S. corporate economy a “buyback economy.” The top chart at right shows net equity issues (new stock issues minus stock taken off the market through stock repurchases and mergers and acquisitions) of U.S. nonfinancial corporations from 1946 through 2017. Over the decade of 2008 to 2017, net equity issues of nonfinancial corporations averaged negative $371 billion per year. Net equity issues were negative $577 billion in 2016 and negative $379 billion in 2017. As can be seen in the top chart, net equity issues first became significantly negative in 1984, following the SEC ’s adoption of Rule 10b-18. Using the numbers in the chart, the first data column of the table below shows the amounts of net equity issues by nonfinancial corporations, decade by decade, from 1946 to 2015, in 2015 dollars. For the first three decades after World War II, net equity issues were moderately positive in the

billions of 2009 dollars

Repurchases done on the open

Source: Standard and Poor’s Compustat database; calculations by Mustafa Erdem Sakinç and Emre Gomeç of the Academic-Industry Research Network.

corporate economy as a whole. In the following decades, however, net equity issues became increasingly negative (even after adjusting for inflation). As a gauge of their growing importance in the economy, the second data column of the table shows net equity issues as a proportion of GDP. Over the past three decades, in aggregate, dividends have tended to increase as a proportion of corporate profits. Yet in 1997, buybacks first surpassed dividends in the U.S. corporate economy and, even with dividends increasing, have far exceeded them in recent stock-market booms. The bottom chart shows 36 years of dividends and buybacks for the 232 companies in the S&P 500 Index in January 2017 that were publicly listed from 1981 through 2016.

Up to the beginning of the 1980s, buybacks were minimal, and from 1981 through 1983 buybacks for these 232 companies absorbed only 4 percent of net income, with dividends representing 49 percent. The buyback proportion of net income increased to 17 percent in 1984, 31 percent in 1985, and 27 percent in 1986, while the dividend proportions were 45 percent, 52 percent, and 57 percent. Thereafter, by ten-year periods, the buyback proportions of net income increased from 27 percent in 1987–1996 to 45 percent in 1997–2006 and 50 percent in 2007–2016. Even though dividend payout ratios were lower in 1997–2006 and 2007–2016 than in 1987–1996, total payout ratios to shareholders rose from 76 percent to 84 percent to 92 percent over these three periods. And not included among these companies are some of the largest “New Economy” repurchasers publicly listed after 1981, including three of the top ten repurchasers for the decade of 2007 to 2016: Microsoft ($120 billion in buybacks, equal to 68 percent of net income), Cisco ($63 billion; 78 percent), and Oracle ($57 billion; 67 percent). Retained earnings—profits not distributed to shareholders—have always been the financial foundation for business investment in innovation and sustained employment. In a “retain and reinvest” corporate resourceallocation regime, retentions can fund investment in plant and equipment, research and development, and, of critical importance, training and retaining employees. If dividends alone are too high, investments in the company’s productive capabilities will suffer. The addition of buybacks to dividends over the past three decades reflects a failure of corporate executives to develop strategies for investing in the productive capabilities of the companies over which they exercise control. The results have been stagnant wages, insecure employment, and worker terminations, as corporate resource allocation has increasingly transitioned from “retain and reinvest” to “downsize and distribute.” Dividends are the traditional and legitimate way for a publicly listed corporation to provide income to shareholders. Dividends provide

Summer 2018 The American Prospect 35

A retain-and-reinvest corporate

resource-allocation regime was central to the 20th-century ascendance of the United States to global industrial leadership. Through retain and reinvest, a relatively small number of very successful business enterprises in a range of critical industries grew to employ tens, or in some cases hundreds, of thousands of people. Companies retained corporate profits and reinvested them in productive capabilities. First and foremost were the collective and cumulative learning

36 WWW.Prospect.org Summer 2018

processes essential for generating high-quality, low-cost products. With these companies dominating the industries in which they operated, in the years leading up to the 1980s the norm of a career with one company prevailed. Shareholders had an interest in retain and reinvest, given a steady stream of dividend income and the prospect of higher future stock prices based on innovative products. Since the 1980s, a downsize-anddistribute resource-allocation regime has increasingly replaced retain and reinvest. Under downsize and distribute, the corporation lays off experienced, and often more expensive, workers, while pressing down the wages and benefits of those who

American companies announced

$201.3 billion in stock buybacks

and cash takeovers in May alone. buybacks

do nothing for the economy—

they just boost stock prices, artificially enriching executives and shareholders.

The Top 15 Companies (so far)

Stock buybacks announced since the Tax Act passed Apple $100,000,000,000 Cisco Systems

$25,000,000,000

Wells Fargo

$22,572,000,000

UnitedHealth Group

$17,654,150,000

PepsiCo

$15,000,000,000

Broadcom Inc.

$12,000,000,000

Oracle

$12,000,000,000

Micron Technology

$10,000,000,000

AbbVie

$10,000,000,000

Amgen

$10,000,000,000

Facebook

$9,000,000,000

Qualcomm

$8,800,000,000

Alphabet (Google)

$8,590,000,000

Adobe Systems

$8,000,000,000

Booking Holdings

$8,000,000,000

remain, and distributes corporate cash in the forms of dividends and buybacks to shareholders. Since the beginning of the 1980s, the move from retain and reinvest to downsize and distribute has been precipitated by three major structural changes in employment relations in U.S. industrial corporations, all of which have eliminated existing middle-class jobs in the United States. From the early 1980s, permanent plant closings wiped out the jobs of high school–educated blue-collar workers, most of whom had been well-paid union members. From the early 1990s, a growing number of U.S. corporations deliberately and explicitly put an end to “a career with one company” as an employment norm, thus jeopardizing the job security of middle-aged whitecollar workers, many if not most of them college-educated. From the early 2000s, globalization of employment accelerated, with the movement of formerly U.S.-based jobs offshore to lowerwage nations, leaving all members of the U.S. labor force vulnerable to displacement, irrespective of their educational credentials and work experience. For the most part, these changes in employment relations began as corporate responses to changes in industrial conditions related to technology, markets, and competition. But instead of repositioning their organizations to generate innovative products, U.S. corporations often continued these changes in employment relations in order to cut current costs simply to increase the amount of profits that could be distributed to shareholders. Trillions of dollars that these companies could have spent on investment in productive capabilities over the past three decades have instead been used to buy back stock for the purpose of boosting stock prices. The dramatic transformation of U.S. corporate resource allocation from retain and reinvest to downsize and distribute that has taken place over the past four decades was not preordained. Rather, the rise to dominance of the corporate-governance ideology of “maximizing shareholder value” (MSV) imposed the proclivity to downsize and distribute on the American people. Following tenets of MSV, business executives have enriched themselves,

c h a r t d ata s o u r c e : a m e r i c a n s f o r ta x fa i r n e s s

shareholders with an income for (as the name says) holding shares. Moreover, if the firm retains enough of its profits to finance further investment in the company’s productive capabilities, there is the possibility (although by no means the certainty) that it will generate competitive products that, through innovation, will help lift its future stock price and the value of the shares held. In contrast, by creating demand for the company’s stock that provides an immediate manipulative boost to its stock price, buybacks reward those shareholders who are best positioned to sell their shares. Under SEC Rule 10b-18, companies do not publicly disclose the precise days on which they are doing open-market repurchases, creating opportunities for insider gains by corporate executives, investment bankers, and hedge fund managers who can access this type of information to time their stock sales to take advantage of buyback activity. Buybacks also automatically increase earnings per share (EPS) by decreasing the number of shares outstanding. The rise in EPS tends to stimulate additional demand for a company’s stock, thus creating further opportunities for stock-market traders to sell their shares at a gain even in the absence of increased corporate revenues or profits. Over the past three decades, U.S. stock markets have enabled the extraction of trillions of dollars from business corporations in the form of stock buybacks. Of course, some companies do raise funds on the stock market, particularly when they are doing initial public offerings (IPOs). But these amounts tend to be relatively small, swamped overall by stock repurchases.

ng han guan / ap images

Part III Debunking the Myths

as well as other financial interests, by extracting value that the companies that they control created in the past, rather than investing corporate profits in productive capabilities that could create value in the future. Proponents of MSV contend that by “unlocking” value for shareholders, companies reallocate resources that improve the performance of the company and the economy as a whole. These MSV claims, however, have their roots in two misconceptions of the role of public shareholders in the U.S. business corporation. The most fundamental error is the flawed assumption that public shareholders invest in the productive assets of the corporation. As a general rule, they do not. Rather, they simply allocate their savings to purchase shares outstanding on the stock market. They are willing to buy and hold shares because the liquidity of the stock market enables them to sell them whenever they choose to do so. Public shareholders are portfolio investors, not direct investors. The generation of innovative products requires direct investment in productive capabilities. When, as in the case of a start-up, financiers make equity investments in the absence of a liquid market for the company’s shares, they are direct investors who face the risk that the firm will not be able to generate a competitive product that can yield a financial return. But so, too, and to a far greater extent as the firm grows to dominance, are taxpaying households and workers, and hence they—and not just, or even primarily, shareholders—have an economic claim on the distribution of profits. Taxpayers also have claims on the distribution of profits. Households as taxpayers regularly fund government agencies that make investments in productive resources and provide financial subsidies that benefit companies. Yet taxpayers do not have a guaranteed return to this funding. The National Institutes of Health (NIH) is an important example (and only one of many). In 2017, the budget of the National Institutes was $33.1 billion, part of a total NIH investment in life-sciences research spanning 1938 through 2017 that adds up to just over $1 trillion in 2017 dollars.

Buyback King: Apple CEO Tim Cook (Has Apple run out of things to invent?)

Trillions of dollars that could have been spent on productive investment have instead been used to buy back stock in order to boost share prices.

Businesses that make use of NIHfunded research benefit from the public knowledge that it generates. Through the tax system, households as taxpayers can extract a return from profitable corporations that have gained from government spending. But taxpaying households run the risk that predatory value extractors— financial interests that “take” far more than they “make”—may convince government policymakers that businesses such as pharmaceutical companies need tax cuts or financial subsidies if they are to have the resources to invest in productive capabilities. Workers regularly make productive contributions to the companies for which they work through the exercise of their skill and effort, with the expectation that they will be rewarded through ongoing employment at the company, with increased job security, wages, and benefits. Yet these expected rewards through continued employment are not guaranteed. Indeed, under the downsize-and-distribute resource-allocation regime legitimized by MSV ideology, employment security and its expected benefits have been undermined. Workers also confront the risk that the institutional environment that conforms to MSV ideology will empower corporate executives to lay off some workers and cut the wages of others for the sake of extracting value for shareholders that those very same workers helped to create.

MSV has had a profound influence on the real world of corporate resource allocation, and hence on the performance of the economy. A key to the implementation of MSV was the capture in 1981 of the SEC by free-market Chicago economists through Ronald Reagan’s election as president. Reagan appointed E.F. Hutton executive John Shad as chair of the SEC, putting the agency that was supposed to eliminate fraud and manipulation from the nation’s financial markets under the leadership of a Wall Street banker, who staffed the agency with Chicagoschool economists. It was under Shad’s rule that on November 17, 1982, the SEC promulgated Rule 10b-18, giving companies that do open-market repurchases “safe harbor” protection against manipulation charges. Under the safe harbor, the company will not be charged with manipulation if, while also complying with some other stipulations, the volume of buybacks done on any single day is no more than 25 percent of the previous four weeks’ average daily trading volume. The safe harbor means that under Rule 10b-18, the company is not presumed to be engaged in manipulation of its stock price even if its repurchases exceed the 25 percent daily limit. Apart from one very informative Wall Street Journal article, the adoption of Rule 10b-18 went unnoticed by the media and the public. Yet, alongside the much more visible cuts in personal tax rates for the rich, Rule 10b-18 was profoundly important to Reagan’s “supply side” revolution. Over the subsequent decades, stock buybacks have channeled the productivity gains of U.S. business into the hands of the richest households, while the persistent gushers of corporate cash have played a major role in the rise of the financial sector over the once-dominant manufacturing sector. As buybacks have now been an axiom of U.S. corporate conduct for the past three decades, the selling point that Republicans invoked to promote their 2017 corporate tax cut—that it would create investment and jobs— was never even remotely plausible. Rolling back the tax cut, then, should be only the first step in diminishing the

Summer 2018 The American Prospect 37

squandering of the nation’s economic resources. It must be accompanied by scrapping the rule that has enabled buybacks to flourish. There is a straightforward and practical way to accomplish this second objective: Congress should ban corporations from doing stock buybacks. The justification for Rule 10b-18 has never been debated, nor have its provisions been legislated, by Congress. That may, however, finally be changing. A number of Democratic senators, including Tammy Baldwin, Elizabeth Warren, Bernie Sanders, Brian Schatz, Charles Schumer, Chris Van Hollen, Cory Booker, and Sherrod Brown, have voiced criticisms of buybacks, as has former Vice President Joseph Biden. The most persistent challenge to this corrupt practice has come from Wisconsin’s Baldwin, who has recently challenged the prescription drug lobby group PhRMA to reconcile its claim that the pharmaceutical companies need high drug prices to fund R&D with the fact that the major companies spend virtually all their profits on buybacks and dividends. Baldwin also wrote letters to the two most recent nominees for SEC commissioner—Democrat Robert Jackson Jr. and Republican Hester Peirce—demanding that they make clear their positions on buybacks. And most importantly, on March 22, Baldwin introduced legislation known as the Reward Work Act, which would rescind Rule 10b-18 and, for the sake of retain and reinvest, mandate that all U.S. publicly listed business corporations have one-third of board members be representatives of workers. Rolling back the 2017 corporate tax cut is imperative. In addition, a ban on stock buybacks would be a giant step in resurrecting corporate employment as a foundation for a prosperous and expanding middle class. William Lazonick is president of The Academic-Industry Research Network and professor emeritus at the University of Massachusetts Lowell. His research on corporate governance, innovation, and economic performance is currently being funded by the Institute for New Economic Thinking, European Commission, and Gatsby Foundation.

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Raises and Bonuses: The PR Fraud

Republicans and corporations tried to convince Americans that their employees would be rewarded. But only 4 percent of workers have gotten bonuses or raises. by W i l l i a m R i c e

hirty seconds into the president’s remarks at a South Lawn White House event last December celebrating congressional passage of the Republican Tax Act—with virtually the entire Republican caucus standing behind him—Donald Trump held up a piece of paper. “This just came out—two minutes ago—they handed it to me.” He reported AT&T was making a capital investment of a billion dollars and giving 200,000 employees each a $1,000 bonus. Paul Ryan smiled over Trump’s left shoulder, Mike Pence over his right. “And that’s because of what we did. So that’s pretty good. That’s pretty good.” It was more than pretty good. As public relations, it was brilliant. Corporate America had begun rolling out a propaganda campaign aimed at transforming the image of the leastpopular tax cut in history. Soon other corporations had piled on. Comcast said that thanks to the tax bill (and the death of net neutrality) it would give its own $1,000 bonuses to 100,000 employees, plus make $50 billion in infrastructure investments over five years. Boeing declared it would invest $100 million in employee training, and another $100 million to upgrade facilities. Wells Fargo and Fifth Third banks announced they were each hiking their minimum wage to $15. The media ate it up. “Major US companies say workers will see some of tax windfall,” ran an AP story the day of Trump’s announcement. “Companies are rushing to announce special bonuses and pay hikes after the GOP tax plan,” was the headline from Business Insider two days later. The happy news trailed into the new year.

“Home Depot giving $1,000 bonuses to U.S. workers after Trump tax cut,” USA Today informed us in January. Not surprisingly, right-wing media particularly warmed to the story. “Tax Cuts Spark Big Bonuses for Workers,” blared the headline from Christian Broadcasting Network that first week. The Washington Times explained the basic transaction (“Big business backs Trump tax cuts with bonus payouts”), while The Washington Free Beacon heralded that “3 Million Americans to Receive Bonuses Due to Tax Reform.” And of course, no one was happier than Fox News. Type “corporate bonuses” into YouTube’s search engine and a bouquet of Fox clips blooms, with headlines like “Tax cuts lead to corporate bonuses, growth.” Fox also took the lead in attacking House Democratic Leader Nancy Pelosi when she, accurately but indelicately, called the worker payouts “crumbs.” Americans for Tax Reform—founded to help pass Ronald Reagan’s tax reforms three decades ago by Grover Norquist, a man who never met a tax cut he didn’t like—began an exhaustive running tally of companies, regardless of size, promising tax-cutrelated worker payouts. Norquist’s group relied mainly on public announcements and media reports to maintain its list, but sometimes it had to do its own reporting: It was ATR that broke the news, for instance, that Anfinson Farm Store in Cushing, Iowa (population 223), was awarding its presumably modest staff $1,000 bonuses and 5 percent raises. (ATR offered no comparable list of corporations using their tax cuts to enrich wealthy shareholders through stock buybacks.) Throughout the publicity blizzard,

Part III Debunking the Myths

campaign was itself a sign of the Tax Act’s toxicity. After 35 years of trickledown, supply-side orthodoxy (only occasionally broken by lapses into more sensible policies), Americans were all too aware of the stagnant wages, widening economic inequality, and neglected public needs that resulted. They had understandably become weary, wary, and wise. Corporations knew that this time they would have to show them the money up front.

a l e x e d e l m a n / p i c t u r e a l l i a n c e / d pa v i a a p i m a g e s

some news outlets retained perspective. “Bonuses Aside, Tax Law’s Trickle-Down Impact Not Yet Clear,” cautioned The New York Times, while The Washington Post noted, “Companies that tie announcements to tax bill earn goodwill with Trump” and added that “Economics may not be driving corporate generosity.” Nonetheless, it was now out there in the political ether: Maybe, just maybe, the GOP and their big-money support-

ers had been right when they claimed corporate tax cuts help the little guy. It proved to be a tough sell. Tax cuts are traditionally popular (who doesn’t like free money?), but opponents of this bill had done a good job letting people know it was the rich and corporations who gained from the new law, not working families—millions of whom would actually pay higher taxes once the law was fully phased in. The bill was so unpopular that for the first time in recent legislative history, not a single Democrat—not even conservative senators up for re-election in states Trump won—voted for a Republican tax cut. Indeed, the very necessity of the corporate bonus propaganda

Rocket Man: President Trump, pictured after the signing ceremony, claimed that the tax law would be “rocket fuel for the economy.” It wasn’t.

When the bill was on the verge of passage in December, Gallup found that only 29 percent of the American people supported it. By March, after the wave of corporate bonus publicity, that share had grown to 39 percent. Polling done for The New York Times found an even more dramatic improvement over a shorter period: Popular approval of 37 percent in December had grown to 51 percent by February. A Monmouth poll reflected an even bigger, 18 percentage-point jump in approval over that time. Though effective at lifting the new tax law’s popularity, the burst of apparent corporate generosity wasn’t as spontaneous or altruistic as it may have seemed to innocent observers.

Though as far as we know there was no explicit memo from the White House or the congressional Republican leadership detailing which companies should be giving out how much in bonuses and when (“OK, Comcast, you’re up: Issue that $1,000 bonus announcement tomorrow!”), still there were forces behind the bonus bonanza more powerful than corporate kindness. For instance, the AT&T announcement that began the whole trend came after the union representing company employees—the Communications Workers of America (CWA)— had demanded the company and half a dozen others fulfill the rosy scenario predicted by the administration if its corporate tax giveaway passed. Trump’s top economic adviser, Kevin Hassett, had issued a bold prediction in October that cutting the corporate tax rate by 40 percent would result in at least a $4,000 raise for every worker. Trump himself began pushing that enticing idea as he campaigned for the tax bill. While most economists rejected the prediction as fantasy, the CWA decided to call the administration’s bluff. It formally requested eight companies where it has members to sign contracts guaranteeing a $4,000 pay boost if the corporate tax cut passed. AT&T never signed the $4,000 pledge, but the union says just asking for it prompted the smaller bonus. Pressure, if not detailed instruction, also came from the administration. A communications consultant who participated in meetings of a corporate coalition pushing for tax cuts recalled that “in the weeks leading up to the bill’s passage,” the White House “was pushing for as

Summer 2018 The American Prospect 39

40 WWW.Prospect.org Summer 2018

company, provided the starkest example of how the That $4,000 wage increase the corporate taxWhite House said the Republican cut money is really being Tax Cut would create? Between divvied up. May 2017 and May 2018, the After garnering lots of favorable publicity of American workers in with its Janunon-supervisory positions— ary announcement of $2,500 80 percent of the workforce— employee bonuses (which will cost the From $22.62 an hour company about to $22.59 an hour. $300 million), Apple in May announced $100 billion in stock buybacks, worth more than 300 times what Apple paid its workers. None of this should be surprising to anyone aware of the real purposes behind the corporate tax cut. Big companies had been lobbying for years to cut the corporate tax rate—which at 35 percent, as they never tired of noting, was the highest in the developed world. What they never mentioned was that very few firms actually paid that much: After exploiting all the special breaks in the tax code, companies on average often paid less than half the official rate. In their Tax Act, Republicans decided to address the problem by making it worse. Instead of closing the loopholes that allowed so many companies to pay so little, the law largely left special breaks in place while chopping the corporate rate down to 21 percent. In consequence, corporations can now pay low taxes without having to work so hard at it. The most immediate corporate giveaway was the huge tax discount granted the firms’ accumulated offshore profits. Under the old law, corporations owed taxes on all their worldwide profits every year, with a dollar-for-dollar credit for foreign taxes paid to avoid double taxation. But a loophole called “deferral” allowed companies to indefinitely delay paying what they owed on profits they booked and kept offshore.

That’s some increase!

average real wage

actually declined

It’s hard to imagine a greater encouragement for companies to shift as much profit overseas as possible, mostly to low- or no-tax havens. By the time the tax debate began, the corporate offshore profits pile had grown to $2.6 trillion, on which the companies owed more than $750 billion in unpaid U.S. taxes, according to the Institute on Taxation and Economic Policy and the U.S. PIRG Education Fund. Rather than close the loophole and collect the money due, Republicans decided to reward corporations by declaring a partial tax amnesty on their offshore loot. With a stroke of Trump’s pen, the companies’ U.S. tax bill on their accumulated offshore earnings suddenly dropped to about $340 billion—a tax cut of over $400 billion. It was in hopes of distracting the public from these outrageous realities of the corporate tax cuts that the feelgood announcements began. The first person many of the compa-

nies wanted to seduce with their supposed generosity was Donald Trump. Firms with business in front of the president used a time-tested strategy for gaining his good favor: saying what he wants to hear. The company that started it all, AT&T, was the clearest example, since it wanted to buy Time Warner in the face of administration hostility—an acquisition approved by a federal judge in midJune. But it’s also true that Boeing wants to keep selling airplanes to the government, Wells Fargo would like to stop being held to such strict account for its misdeeds, and no CEO wants to feel Trump’s Twitter lash. Beyond this initial audience of one lay the harder-to-convince American people. And despite the vigor of the corporate public relations campaign meant to woo them, it wasn’t difficult to see it was all an act. One tip-off was the timing. The rush to distribute bonuses at the end of the year was timed so corporations could write them off at the old, higher tax rate: Employee expenses incurred in 2017 and even into early 2018 could still be deducted against a 35 percent tax rate, more valuable than the 21 percent deduction available under the new law. (Fiscal-year filers could

c h a r t d ata s o u r c e : b u r e a u o f l a b o r s tat i s t i c s

many announcements as possible” of company plans to increase investment or employee pay if the tax bill passed. “If we couldn’t do it before [the bill passed], as quickly as possible afterwards.” The White House did not respond to a request for comment. The only problem with the positive new perspective on the GOP tax law created by the flurry of bonus announcements is that it’s wrong. Pelosi was right. While anyone less wealthy than Trump and his cabinet would find an unexpected bonus of $1,000 a welcome surprise, the bonuses were—relatively speaking and in the proper context—crumbs. And they’re crumbs that few workers are actually receiving. The only way to have figured this out was to cut through the hype and look at the numbers. Americans for Tax Fairness (ATF) did just that, creating a master database documenting bonuses, wage hikes, tax savings, stock buybacks, layoffs, and a halfdozen other indicators of the impact of the Tax Act on business fortunes and behavior. Unlike the simple lists of cheery corporate news collected by Americans for Tax Reform and several other tax-cut boosters, ATF ’s presentation is an entire searchable website that makes it easy to compare who— among corporations, their shareholders, and their workers—is actually getting how much. ATF has determined that as of mid-June, only 4 percent of workers have received any kind of tax-cutrelated bonus or raise (and by dollar value, two-thirds are one-time bonuses and only one-third are ongoing wage increases). Belying the idea that workers were sharing deeply in the tax-cut bonanza, those payouts represented less than 10 percent of the companies’ savings from the new law. The biggest corrective of all to the feel-good bonus propaganda is that wealthy shareholders (including a healthy dollop of foreign investors) are projected to get 69 times as much from stock buybacks this year as American workers will get from bonuses or raises—$484 billion versus about $7 billion. Apple, the world’s most valuable

yo u t u b e

Part III Debunking the Myths

exploit this same tax arbitrage even later in the year, but the advantage wanes the deeper you get into 2018.) That diminishing tax advantage is one reason the seeming flood of announcements over the winter slowed to a trickle by the spring. Another signal that we had not in fact reached a new era of broadly shared prosperity was that the vast majority of payouts were one-time bonuses, not permanent wage hikes. More than twice as many workers are getting bonuses as are getting raises. It’s far easier for corporations to withhold future bonuses than to cut their workers’ wages. The bonus announcements were sometimes accompanied (as in AT&T ’s case) by promised new investments. But closer examination of these purported plans to plow tax-cut savings back into the American economy reveal little meat and plenty of stuffing. Commentators—including President Trump in his first State of the Union speech—celebrated Apple’s claim that it would invest $350 billion in the American economy over five years. But that headline figure was inflated by the company’s (discounted) tax payment on its offshore profits—which is a legal obligation, not an optional investment—along with such everyday expenses as supply purchases. Similarly, ExxonMobil’s ballyhooed announcement that it would be investing $50 billion in the United States over the next five years in the wake of the new tax law lost some of its luster when it was pointed out that an average of $10 billion a year had been its domestic-investment budget for years, long before the big corporate tax cut supposedly loosened its purse strings. As for actual raises, most of the relatively few companies that did increase pay applied the hike only to their entry-level minimum wage, which they frequently lifted to $15. But since many states and other jurisdictions are already moving toward a $15 minimum wage, the companies’ supposed acts of beneficence could just as easily be viewed as anticipating and standardizing a new legal requirement. Besides, unemployment is near record lows: Companies have to offer more money to attract scarce workers.

Some companies have boosted their pension-funds contributions. That sounds good, especially since there are so many underfunded plans out there. But the reality is that it’s companies that benefit most immediately from better funding for their pension plans: It’s another big deduction, at the old, higher tax rate. It’s also a wise investment to pay up because of the steep underfunding penalties the companies would otherwise face, not to mention that only fully funded pensions can be abandoned altogether, a move that pleases stockholders while leaving retirees in the lurch. And even if you believe that corporate tax cuts do help workers, these recent payouts cannot possibly demonstrate that—because they’ve come too soon. The process by which corporate

Trump TV: Fox News hyped the fake story of raises and bonuses.

tax cuts are supposed to boost wages involves multiple steps (increased profits leads to more investment which leads to better productivity which leads to higher wages) that play out over a long period of time. Instant bonuses are not part of the theory. Eventually, reality began to eclipse appearance. As the winter wore on, media coverage grew more skeptical. CNN Money reported on a survey from Morgan Stanley that found “Only 13% of companies’ tax cuts are going to workers.” MarketWatch published an opinion piece that announced, “Now we know where the tax cut is going: Share buybacks.” This

very magazine explored the surprising fact that passage of a law with “jobs” right in its name had been followed at many companies by layoffs. By mid-April, Gallup found disapproval of the Tax Act had risen to 52 percent. The approval level (39 percent) hadn’t changed much, but there were half as many undecided as in the December poll, meaning Americans were picking sides and most of them were lining up against the GOP law. Another indicator that the tax law was losing public support was its failure as an electoral issue. Congressional Republicans had planned to make the tax cuts the highlight of their fall campaigns. But when the GOP’s internal polling showed it wasn’t swaying voters in a special House election in Pennsylvania this spring, they changed the subject (and still lost). Even the Koch brothers have been reduced to sending tax-cut evangelists door to door in the hopes of opening the public’s hardening heart to the glories of the new tax law. In an exquisite political irony, some commentators have surmised that Republicans are having a hard time selling the public on their tax cut because the GOP has conditioned the electorate over decades to view with beady-eyed suspicion anything coming out of Washington—even ostensibly lower tax bills. Or maybe working families are just doing the math and beginning to see the links between wealthy tax cuts and the GOP plans to slash Medicare, Medicaid, and other vital public services. Whatever the reason, and after much early promise, the Great Corporate Tax Cut Worker Bonus PR Campaign of 2018 seems to have ultimately, thankfully failed. William Rice is a freelance writer and communications consultant for Americans for Tax Fairness.

Summer 2018 The American Prospect 41

For Main Street small businesses, the benefits of the Tax Act are peanuts. Nearly half of all the savings go to people making over $1 million a year. by C h u c k C o l l i ns

he small-business community is all too familiar with being used as a prop for tax cuts for the wealthy. From estate tax repeal to the corporate income tax cuts, “helping small business” is the go-to fig leaf for Republican tax-slashers. “It is a tried and true tradition of big business to say they are doing something to help small business when just helping themselves,” says Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce and co-chair of Businesses for Responsible Tax Reform. “Small businesses are one of the most appreciated institutions in the nation, in contrast to big business.” Small-business advocates like to point out that they are the real jobcreators in the U.S. economy, having created nearly two-thirds of privatesector jobs since the 2008 economic meltdown. Yet the 2017 Republican Tax Act funnels benefits mainly to big and multinational corporations. “For my business to do well, my neighborhood has to do well,” says Jim Houser, co-owner of Hawthorne Auto Clinic, a neighborhood garage in Portland, Oregon, with 13 employees, celebrating its 35th year in business. “My company prospers when I have more customers who are prosperous, with rising incomes, like pay raises, and declining expenses, like lower health-care costs. This tax giveaway neither raises my customers’ incomes nor cuts their expenses.” In fact, health insurance premiums are rising in Oregon directly because of GOP assaults on health care. “I’m not opposed to targeted tax cuts and subsidies if they create value,” says Houser. “We have solar panels on the roof of our shop and I got a five-year tax break that made

42 WWW.Prospect.org Summer 2018

it possible. But tax breaks need to be focused, vetted, reasonable, and scheduled to sunset.” “This law does not require the beneficiaries to hire even one more worker. It does not require giving anyone a raise in pay. There is no requirement to open a new plant, bring a factory back to this country, or prohibit one from leaving. None of these tycoons are my customer. Not one shops for tires at my store.” To understand the Tax Act’s impact on private employers, it helps to know the difference between a C corporation and most small business enterprises. Most large public corporations like General Electric or Boeing are C corporations, subject to the corporate income tax rate. The new tax bill provides a “permanent” rate cut from 35 percent to 21 percent, a whopping 40 percent reduction. This rate cut is

Where’s My Tax Cut? Despite the claims about small business, the Tax Act is heavily tilted toward large corporations.

dean mitchell / istock by get t y

A Lost Opportunity to Help Small Business

the biggest-ticket item in the Tax Act, and will cost $1 trillion over ten years, roughly two-thirds of the revenue lost. An estimated 90 percent of small businesses are chapter S corporations, LLCs, partnerships, or sole proprietorships, whose owners “pass through” their business income to be taxed on their personal income tax returns. So these small-business owners are affected by the tax changes impacting all individual taxpayers. The Tax Act does add a break for pass-through businesses, in the form of a 20 percent deduction. But the nonpartisan Joint Committee on Taxation estimates that in 2018, $17.8 billion, or 44.5 percent of the $40 billion in those tax breaks, will go to roughly 200,000 U.S. taxpayers making over $1 million who will claim the passthrough deduction. High-end taxpayers get the lion’s share of the “pass through” tax break because the ultimate benefit reflects the business owner’s marginal tax rate. Envision a power-lawyer with $1 million in annual income. In 2017, that income was taxed at a top rate of 39.6 percent. Under the new rules, the lower top marginal tax rate is 37 percent. The 20 percent pass-through deduction on $200,000 of the lawyer’s income is worth a tax cut of $74,000. Compare that to a business owner

Part III Debunking the Myths

who earns $100,000. They pay the lower 2018 marginal tax rate of 22 percent and collect a pass-through deduction on $20,000 of their income that is worth $4,400. The tax cut to the larger business that earns ten times more income is more than 16 times larger. For real small businesses, the temporary nature of the 20 percent passthrough is also problematic. If you’re making a decision about whether to expand, hire new people, purchase equipment, or open a new branch, you are watching for long-term signals. “Small business wants the same certainty going forward with taxes as large corporations,” says Knapp. “In fact, they sold the permanent 40 percent tax deduction for C corps with the line, ‘Big business needs to have certainty so they can plan for the future.’ There was no consideration for applying the same logic to small business.”

69 percent of small business owners said they

would not be hiring new employees as a result of the new tax law

59 percent

said they will not be giving their employees raises

60 percent

believe that the government focuses on large companies and doesn’t care about businesses like theirs. According to recent polls by Businesses for Responsible Tax Reform and the Kauffman Foundation

Businesses for Responsible Tax Reform conducted a poll of smallbusiness owners, heavily weighted to Republicans and red states. The poll found thin support for the new tax law. Most believe the tax cut is heavily tilted toward large corporations over small business. The fact that the tax cuts for corporations are permanent and the tax breaks for S corporations are temporary doesn’t encourage the sort of stability that small business

needs. Some 69 percent reported that they have no plans to hire new employees as a result of the Tax Act, and 59 percent said they have no plan to increase wages. These views were echoed in a similar poll of business entrepreneurs by the Kauffman Foundation, which found that more than 60 percent believed government didn’t care about businesses like theirs and was more focused on larger established companies. Only 7 percent of businesses polled by the National Small Business Association believe their tax preparations will be simpler under the new tax law—with the vast majority expressing concern about the cumbersome new rules and outrage about extra layers of complexity. “Remember how tax reform started? We were going to be able to file our taxes on a postcard,” says Knapp. “Every legitimate small business organization has said this is so convoluted, it’s so complex, its going to cost us more money to do our taxes. My guess is it will cost more money and any tax benefit will be gone. This is a ‘pass through’ to the tax-preparation industry.” The Tax Act passed with nearunanimous support from big corporations and the Republican lawmakers in Congress. It didn’t need, and didn’t get, widespread approval from smallbusiness owners, save for the ultraconservative National Federation of Independent Business. Even they professed opposition to the bill for a short while, lamenting that the bill “left too many small businesses behind.” But they reversed course after promises from House Ways and Means Chair Kevin Brady that a future bill would be better for them. No such bill has been forthcoming. Truly helping small businesses will require repealing this disaster of a bill and creating a tax reform that rewards honest, hardworking small-business owners. Chuck Collins is a senior scholar at the Institute for Policy Studies, where he co-edits Inequality.org, and is author of Born on Third Base: A One Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good.

Gutting the AMT Just to be sure that no wealthy taxpayer is left behind, the Tax Act destroys the Alternative Minimum Tax. By David Dayen

he Trump tax cuts have been categorized as a war on blue America. Limiting the state and local tax (SALT) deduction to $10,000 punishes residents of high-tax liberal states willing to pay for good services in places like New York, California, and Maryland. An additional cap on the mortgage interest deduction for loans above $750,000 raises taxes on homeowners in pricey areas, also typically along the coasts. But while blue states are certainly singled out in the tax law, officials have downplayed exactly who gets targeted—those wealthy enough to itemize deductions in the first place. Numbers from the Joint Committee on Taxation show that 70 percent of SALT deductions flow to households making more than $200,000 a year. And that very group—welloff people from high-tax states—also benefits from one of the most obscure but wide-ranging individual perks in the bill: the near-total shelving of the alternative minimum tax (AMT). A minimum tax on the rich was first enacted in 1969, to assure that no matter how many deductions and exemptions wealthy people and their accountants piled up,

they would at least pay some tax. But after several decades of weakening and its inclusion as the coup de grace in the 2018 tax legislation, the AMT now has such extreme exemptions and phase-outs that it will hit almost nobody. The impact is intense: a reduction in federal revenues of $637.1 billion over the next decade. That’s roughly equivalent to the $668.4 billion in increased revenue from the SALT changes—so what Trump takes from the wealthy in one hand, he gives back with the other. And with states trying to reinstate the SALT benefits, the affluent could get a double bonus. The maddening complexity and poor design of the AMT was part of the reason for its demise, but the effect will be to dramatically cut taxes on the richest 5 percent of income earners. Not only does this offset the supposed targeting of liberal elites, it stings from a tax fairness standpoint. If corporations, the super-rich, and now the merely rich are put off-limits to reasonable taxation, everyone else will bear the burden. And it gives fuel to the common refrain from deficit hawks that we cannot afford progressive priorities. The situation reveals that it isn’t just the 1 percent who

Summer 2018 The American Prospect 43

block progressive taxation, but those just below on the income scale, who have the greater numbers, the cleaner reputation, and the ear of policymakers to stop dead even the most sensible policies. A January 1969 report,

delivered by Treasury Secretary Joseph Barr at the tail end of the Johnson administration, informed Congress that 155 families making over $200,000 a year paid no income tax in 1966. This reportedly triggered more angry letters from constituents in 1969 than the Vietnam War. That led to the creation of a minimum tax, which was modified in 1982 into the AMT we know today, essentially a parallel tax system calculated by wealthy filers after their initial tax return, stripped of certain deductions and exemptions (including the SALT deduction). The larger of the two results serves as the tax owed. In the one tax return we have of Donald Trump’s, from 2005, he famously paid an additional $31 million to the government because of the AMT. Congress did one thing wrong, however: They never indexed the AMT for inflation. This meant that it could dip down from the top one percent into the upper middle class. The Bush tax cuts, which slashed income at the top, did not alter the AMT’s minimums, also making

it easier to travel further down the income scale. To many this was ridiculous: A tax fairness measure aimed at the very top had ballooned into something threatening millions, exponentially increasing the complexity of the tax code. But while the mechanism was crude, the AMT was always merely a

their self-dealing would be demonized. An AMT patch even appeared in the 2009 stimulus, though its stimulative effect was questionable since Congress passed something similar almost every year. After 19 patches in 44 years, the AMT finally got permanently indexed to inflation in 2013, in the fis-

million households would be subject to the AMT; under the new one, only 200,000 will need to pay. However, high-income earners will still likely have to check if they qualify, meaning that Paul Ryan’s alleged “tax simplification” reform will be just as complex as ever, forcing many to calculate taxes twice.

The AMT now has such extreme exemptions and phase-outs that it will hit almost nobody. The impact: a reduction in federal revenues of $637.1 billion over the next decade. deduction limitation that kept federal taxes more progressive. And even at its height, the AMT never affected more than a small percentage of families. But because it hit around 60 percent of households making between $200,000 and $500,000, and 45 percent of those between $500,000 and $1 million, it created a constituency of rich revolutionaries with clout. That included members of Congress, nearly all of whom fall into this category of wealth. So Congress started passing annual patches, protecting the not quite super-rich from paying the tax. Mind you, these were still families in the upper echelons of society, but they had the influence to lower their tax rate without the stigma of being so fabulously wealthy that

44 WWW.Prospect.org Summer 2018

cal cliff deal. You would think this would’ve been the end of the caterwauling, but Trump’s Congress, in its never-ending efforts to protect the wealthy from taxation, delivered the final blow. The House version of the tax bill would have done away with the AMT entirely; a compromise with the Senate merely made it mostly impotent. The compromise increases exemptions that taxpayers subtract from their AMT liability, up to $70,300 for a single filer and $109,400 for married couples. The phase-outs for reducing this exemption spike to $500,000 in income for singles and $1 million for couples. The Tax Foundation estimates this will “dramatically limit” the number of households that will pay. Under the old law, 5.25

In the end, however, the

rich and near-rich got what they wanted—relief from the AMT. Technically speaking, the provision expires at the end of 2025, at which point the AMT would go back to the old system. But with so much money on the line for a large group of important people, the odds that the new changes will get extended are pretty large. That’s a problem for progressive governance. To make the tax code fair, liberals need serious taxes on millionaires and billionaires; but those just below that level have to pay a reasonable level of taxes as well. There simply aren’t enough ultra-wealthy people. Progressives have big goals—single-payer health care, free public colleges,

a federal job guarantee— and while there are plenty of resources available for this, constantly handing out tax breaks for anyone with a big megaphone makes things far more difficult to manage. You could see the power of the near-rich in the saga of the Obama-era proposal to end tax-free college savings accounts known as 529 plans, which disproportionately benefited well-off families. Obama would have redirected 529 revenues to expanded tax credits for higher education for the middle class. But the concept triggered an uproar among affluent savers who used 529s for their children; within a week the administration withdrew the proposal. With that kind of a lock on perks for the top slice of the population, those in the lower half will always struggle to obtain a fair share of benefits. There are worse parts of the tax law than the individual AMT changes—after all, the AMT for corporations was eliminated entirely— but there may not be a worse outcome for the dreams of progressive, activist government. David Dayen is a contributing writer to The Nation and author of Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud.

Part IV the Consequences

Demonizing the IRS to Protect Tax Evaders

Weakening tax enforcement combined with new complexity invites evasion and massive illicit tax savings for the rich. by Dav i d C ay J o hns t o n

or decades, Republicans have pounded the Internal Revenue Service, initially on the advice of pollster Frank Luntz, whose focus group interviews revealed that exploiting popular resentment of taxes and widespread fear of getting tripped up by the worsening complexity of tax law is an easy way to win votes. Taking this advice, the party that claims the mantle of law and order set out to demonize the tax police. At the same time, Congress has enacted bill after bill that makes the Internal Revenue Code ever more maddeningly complex through devices that overwhelmingly benefit the political donor class—which is to say the wealthiest among us, and the corporations they own or control. Worse, the complicated new Trump tax law pretends to require such companies as Apple, Goldman Sachs, and Microsoft to pay huge tax bills. However, the fine print gives them discounts of up to 70 percent in taxes they avoided paying for years and then allows them to earn huge profits by further delaying their tax payments. Meanwhile, Congress keeps cutting the Internal Revenue Service budget. Combine demonization of the tax collector with mind-numbing complexity and you provide the perfect political prescription for massive tax evasion with little risk of detection while gathering votes from disaffected ordinary taxpayers.

If you looked just at federal tax

and budget data, you might reasonably conclude that tax cheating is a minuscule and dwindling problem based on how Congress funds tax law enforcement. The one exception to Congress’s steady erosion of the IRS enforcement budget—audits of the poor (see below)—reveals just how

Machiavellian this devilish strategy is. In the last fiscal year, fewer than about 1,200 prosecutions for tax crimes were initiated, according to government data analyzed by Syracuse University’s Transactional Records Access Clearinghouse. From 2010 to 2015, the number of IRS criminal investigators was cut 16 percent to 2,319, while overall the IRS lost a fifth of its workforce. Americans file about 150 million individual tax returns, corporations another six million. That means the Justice Department obtains about one indictment for every 100,000 tax returns. And many of those cases are where tax law is an easy way to prosecute drug dealers and politicians who took bribes. While Congress pretends that tax cheating is rare and becoming rarer, we know otherwise, thanks to a variety of sources, including journalists around the world working jointly through the International Consortium of Investigative Journalists. The 11.5 million leaked documents in the Panama Papers in 2016 revealed how a single law firm, Mossack Fonseca, helped cheat taxes in 39 countries. The leaked documents toppled the government of Iceland, whose prime minister was hiding money, and showed tax tricks used by Vladimir Putin and his gang of oligarchs, the king of Saudi Arabia, the president of Argentina, and British politicians. Mossack Fonseca is only one of many firms around the world that specialize in cross-border tax-dodging advice. Few of its clients are Americans. However, Mossack Fonseca created thousands of Nevada shell companies to help clients escape taxation. Its actions illustrate how despite all the political blather about high taxes, the United States is a reliable tax haven for wealthy citizens of other countries.

Despite all the political blather about high taxes, the United States is a reliable tax haven for wealthy citizens of other countries.

The Paradise Papers in 2017 expanded our knowledge of high-end tax cheating and brought the names of many Americans and major American companies into the open. The files came from Appleby, a Bermuda law firm, and others it works with. Many prominent Americans were in the Paradise Papers, including Trump cabinet members. Commerce Secretary Wilbur Ross and his Russian connections were among them. There were also files on businesses controlled by Rex Tillerson, Trump’s first secretary of state; Gary Cohn, the former Goldman Sachs head who was Trump’s first economic adviser; and ten others close to Trump. Appleby and other firms insist that everything they do is perfectly legal. Assuming that’s true, it points to the failure of Congress and the legislatures of other countries to enact disclosure, finance, and tax laws that will hobble and catch tax cheats rather than enable them. And that also requires adequate funding of the IRS. At the core of high-end tax cheating is the ability to use shell companies to hide assets, known as anonymous wealth. Anonymous wealth hidden from tax authorities totals about $36 trillion worldwide. That’s about an eighth of all the net worth on the planet, according to James Henry, an economist and lawyer who has spent four decades exposing corrupt banking and tax cheating. Henry, a colleague at the DCReport news organization, was a Panama Papers project consultant. You can observe the rapid growth of anonymous wealth in Manhattan real-estate records that Henry and I reviewed. When Trump Tower opened in 1983, it was one of only two highend residential towers that allowed apartment buyers to conceal their names. The other was Olympia Tower, owned by the Onassis family. Trump charged premium prices to buyers who hid behind shell companies. Had a buyer called “Snow Inc.” showed up, Trump did not need to inquire whether this was a ski lodge operator or a cocaine importer. The lucrative profits in allowing anonymous wealth purchases quickly caught on. Today, close to half

Summer 2018 The American Prospect 45

the value of residential real estate in Manhattan is owned by anonymous wealth, Henry and I concluded after examining city records. It’s a good bet that a lot of apartments and buildings owned through anonymous shell companies represent profits hidden from tax authorities domestic and foreign. There is one area, however, where congressional Republicans have spent billions of dollars to root out tax cheats, a crackdown demanded by Newt Gingrich when he was speaker and acquiesced to by President Bill Clinton. Congress put up money for intense scrutiny of the working poor who apply for the Earned Income Tax Credit. In the late 1990s, you were more likely to be audited if you made less than $25,000 than if you made more than $100,000. Hearings and press releases asserting massive tax cheating by the working poor are belied by what National Taxpayer Advocate Nina E. Olson found. About 80 percent of people denied the credit were later determined to have been due the credit. Many others had simply committed innocent errors. Olson also noted that Congress funded far more inquiry into pursuing the working poor than small-business owners who deal in unreported cash, tax evasion that she said was at least 11 times larger. Patricia Marie Knez, married but separated, filed in 2014 as “head of household.” The IRS not only denied her the Earned Income Tax Credit, it also asserted she could not refile as married filing separately or jointly after reuniting with her husband. Knez represented herself through the IRS appeals process and ultimately before a U.S. Tax Court judge, who took 11 pages to detail the case before ruling in her favor. Or consider the case of Rafael Barajas, who cared for his sick mother and two younger siblings, supporting them by working part-time as a machinist earning about $1,200 per month. The IRS denied Barajas the credit, asserting that he “did not care for any of his siblings as if that sibling were his own child.” Like Knez, Barajas represented himself all the way to the Tax Court, where a judge held that “under difficult circumstances” Barajas had “satisfied the requirements” to receive the Earned Income Tax Credit. Divorced mothers have told me how

46 WWW.Prospect.org Summer 2018

In the late 1990s, you were more likely to be audited if you made less than $25,000 than if you made more than $100,000.

their ex filed for the credit and IRS agents then demanded extensive proof that their children resided with them. One mother in Queens, who asked that her name not be used, told me, in tears, about an IRS agent losing her documents twice, then demanding she appear in person, only to tell her that her children’s report cards and a utility bill did not prove that her children resided with her. Her boss threatened to fire her if she took time off to go to the IRS again to hand-deliver a notarized statement from her building superintendent, which an IRS agent rejected as inadequate, but a supervisor accepted. Greater scrutiny of the poor continues today, though at lower levels because Congress has been cutting IRS funding, down more than a third per tax return since the turn of the 21st century. Congress also perpetuates draconian penalties for the working poor, including a ten-year ban on receiving the Earned Income Tax Credit if misconduct is found. No pile of massive funding was provided, however, to pursue the sham tax shelters promoted by the major accounting firms with help from big banks, especially Deutsche Bank and a host of Swiss and British banks. While a few high-profile court victories got a lot of attention in the news, little was done in terms of revising tax laws to make them clear and rigorous or providing enough tax police to discourage cheats. Poorly drafted tax laws combined with fewer tax police is a formula for encouraging tax evasion by those at the top. In more than four decades of attending tax trials, I have watched prosecutors make incredibly detailed arguments that jurors later told me left them utterly confused. Consider the prosecution of an Illinois car dealer who claimed to be a resident of the Virgin Islands to take advantage of a targeted tax ploy allowed by Congress. The core of the case was easy. To get the credit you had to be a bona fide resident, but the car dealer had rented out his condo to the federal government. But instead of presenting a lean case focused on that fact, Justice Department prosecutors presented more than 118 hours of tape recordings and 6,000 documents. That fits with a pattern I

have observed in federal tax trials going back more than 40 years. In the 2008 prosecution of actor Wesley Snipes, the prosecutor spent hours summing up his case instead of just holding up a 600-page manifesto that Snipes sent the government asserting that no law requires paying income taxes. Jurors in both the car dealer’s and Snipes’s case, as well as some others I covered, acquitted the defendants despite overwhelming evidence of willful misconduct. (Snipes was convicted on a minor charge.) Michael Minns, a Houston criminal defense lawyer who went to law school at night, uses the complexity of the tax code to help clients. In one typical case, his Michigan clients used complex trusts to make taxable income vanish, though they were at best sloppy in applying the techniques. The government’s star witness was a veteran IRS auditor. Prosecutors droned on and on with detailed questions about the many transactions. Minns conducted a brief cross-examination that roughly went like this: How many advanced degrees in tax law and accounting do you have? Two. How many years have you studied and worked with the tax code? More than 20. Have you, after all that study and practice, mastered the tax code? No. If I told you that because of the extreme complexity of the tax law your audit contains errors would you be surprised? No. Little surprise that the jury in that case found reasonable doubt and acquitted the defendants. That Minns smiled and said good morning to jurors every day while the prosecutor looked stern and stiff also helped. In the Swiss and other offshore bank cases, where Americans hid billions of dollars from the tax collector, official data analyzed by tax lawyer Jack Townsend shows the average fine was just $49,356. Of 58 people who confessed, only 27 went to prison with an average sentence of just five months. All 58 owed a combined $118 million, but only 14 made any

Part IV the Consequences

restitution. Add up all the restitution and it comes to just 4 cents on the dollar of tax evaded, assuming the IRS found all the evasion, which of course it didn’t. Going to trial was riskier, but 14 tax cheats were tried, 12 of them convicted. Their average sentence came to more than seven years. And average restitution among those convicted after trial was more than the tax evaded by almost $1 million. The government made an effort to go after corporate tax shelters, too, but with similarly weak results. In general, companies that exploited a disconnect between different parts of the tax code got away with it so long as they made sure to follow the exact path laid out by tax lawyers. Some of those lawyers charged $1 million for an opinion letter stating that the tax strategy would survive an audit, though the opinions were rife with caveats. Demonizing the IRS has also helped tax cheats by making juries distrust our tax police. That encourages dishonesty in self-reporting income and deductions. It also made believable a fabricated scandal ginned up five years ago by Representative Darrell Issa and his Republican colleagues on the House Oversight and Government Reform Committee. Issa and friends asked the Treasury inspector general for tax administration to investigate whether the IRS “targeted” groups seeking taxexempt status as 501(c)(4) organizations in 2010 and beyond so they could not participate in elections. The Republicans asked for a report only about conservative groups, not all groups. When House Democrats asked for more information, it turned out that liberal and progressive applicants got similar scrutiny. But by then President Obama had foolishly stepped into the issue, announcing on national television along with the Treasury secretary that the IRS commissioner had been fired. The real story was that a low-level IRS manager, who volunteered to Issa’s investigators that he is a conservative Republican, learned that many 501(c)(4) applications declared plans to engage in promoting politicians in partisan races. Congress says that’s not allowed. His actions were like those of a building inspector who

is shown plans for a building that he concludes will collapse if built and orders additional scrutiny. Today, virtually every American who has heard about the issue now believes that the IRS withheld approval of tax-exempt status for conservative groups who sought it. Indeed, The Wall Street Journal recently ran an op-ed stating as fact that the IRS had deliberately and maliciously targeted conservative applicants for tax-exempt status. The net result of adopting Frank Luntz’s advice to attack the IRS, the budget cuts, the adoption of ever more complex laws, and sucking the inspector general into a one-sided audit has been to lay the groundwork for a major transformation of the tax system. Most Americans have their income

(and Social Security and Medicare) taxes withheld from their paychecks before they collect the balance. That system is mostly automated so IRS budget cuts have little effect on them. But for Americans who control their finances, it’s another story. Business owners, especially those operating on an international scale, self-report. Unless they are thoroughly and frequently audited, they can understate their income and overstate their deductions. One of the most blatant examples of this is in small real-estate partnerships. When each deal ends with sale of a property, they are supposed to pay back the income taxes they saved while depreciating the nominal value of the building usually after 20 years (the actual value typically increases— this gimmick is another legal tax fiction that benefits the rich). Jerry Curnutt won awards a quartercentury ago as the IRS chief partnership specialist for identifying this type of cheating and how to easily and efficiently identify it. The IRS sent him all over the country to teach the technique to IRS and state income tax auditors. There was just one problem. His audit technique was never put to use, except when Pennsylvania hired him as a consultant. Even though Pennsylvania is just about the worst state to find such cheating because of peculiar aspects of its tax law, Curnutt quickly found some big-time cheats,

Sweet D ea l for A p p l e

pple announced it would pay $38 billion in taxes because of the 2017 Tax Act. Technically, that’s true. It’s also a gross distortion of what the Tax Act does. That $38 billion will be paid in installments from this year through 2025. And the installments are backloaded, just 8 percent annually for five years and a quarter of the money due on the last day of 2025. That means Congress loaned Apple $38 billion at zero interest. As the accompanying Amount loaned Apple profit chart shows, if Apple contin Year at zero interest, on loan valued in billions at 35.4% ues to earn its current rate of 2018 $38,000 $13,452 return on shareholder equity, 2019 $34,960 $12,376 the company will make $68.7 2020 $29,640 $10,493 billion in pre-tax profit because 2021 $27,360 $9,685 its tax payments are delayed. 2022 $24,320 $8,609 Apple actually hinted at the 2023 $19,000 $6,726 deferred tax payments in its 2024 $11,400 $4,036 press release, boasting that it 2025 $9,500 $3,363 expected to make the largest Pre-Tax profit on zero tax payment in history. Apple interest loan, in billions $68,740 said it “anticipates repatriation Sources: Apple.com, Statute tax payments of approximately $38 billion as required by recent changes to the tax law. A payment of that size would likely be the largest of its kind ever made.” No mention that Apple will pay $38 billion, but through discounts and investing, its deferred taxes earn what I calculate is about $113 billion in added profit. Trump and the Republicans gave Apple a 57 percent discount on its taxes, saving it about $42 billion. The Trump tax law gives a 70 percent discount to companies that invested their untaxed offshore profits in offshore factories. —D.C.J. contesting audit findings in court. We could catch lots of tax cheats with simple changes to tax law and computer software that identifies patterns. Congress vowed in 1998 to get the IRS new computers with just such a capability. But Congress has never funded the software needed to identify more cheats. With the groundwork laid for distrust of our tax police, the new tax law signaled another major shift in American tax policy, a shift that has received little attention in the news. You may have read that because of the Republican Tax Act, multinational companies are now repatriating about $2.6 trillion of profits held offshore. That was supposed to mean more capital investment at home, creating jobs

Summer 2018 The American Prospect 47

and resulting in higher wages. None of that has happened, but something much more sinister from the point of view of average taxpayers is in that law, something incredibly costly. Many of those untaxed “offshore” profits were actually earned in the United States. The companies used a fiveword section of the 1986 Tax Reform Act to convert those taxable profits into tax-deductible expenses paid to offshore subsidiaries. For example, every time Pfizer sells a Viagra tablet, it pays a royalty to a Swiss subsidiary, which passes the money on to a Liechtenstein entity known in tax argot as a “see nothing” because it is invisible to IRS auditors. These companies will also benefit from severe cuts in corporate audits. In 2017, the IRS audited just 331 of the 616 giant corporations, compared with near universal audits of the biggest companies up until 2013. More troubling, the IRS audited only 331 big companies in 2017, which is 100 fewer than in 2010, and spent 49 percent less time on these audits. That means that many of these audits were not thorough, known in an unflattering comparison to low-calorie beer as “audit lite.” These and other provisions of the old and new tax law, together with demonizing the tax police so the public is suspicious of the IRS, constitute a huge new program of welfare for the rich. By shifting the burden of taxes down the income ladder—did you get a 57 percent discount and an eight-year zerointerest loan from Washington?—the rich can get ever richer without taking risks investing their money in productive assets that create jobs in America. On the surface, our tax law is progressive, meaning that the more you make, the larger the share of your income you pay in federal income taxes. But for people who know how to exploit the weaknesses, are willing to take the minimal risks of buying into illegal tax shelters, and who can arrange to delay paying their taxes years into the future, the Republican changes in the tax law make life even easier. David Cay Johnston’s next book will propose a new federal tax system for the 21st century that is simple, fair, progressive, and promotes economic growth.

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Massive Spending Cuts: TheTax Act’s Hidden Costs Republicans rediscovered the peril of the enlarged deficit—as a pretext for gutting social spending. by J o sh ua H o l l a nd

he 2017 Republican Tax Act is plainly a raw deal for working America. Corporations keep their massive cuts permanently, but according to the Tax Policy Center, 53 percent of filers will actually pay more taxes in 2027 than they would have if the Tax Act had not become law. More than twice as many of those in the lowest income group will face tax hikes than will enjoy a cut. And by 2027, the law is projected to result in 13 million more Americans being uninsured. But that kind of narrow view only scratches the surface. One has to look at the law’s hidden costs, longer-term effects, and the ripple effect on state revenues and spending. In one provision that hasn’t received much attention, Republicans rejiggered the formula that the government uses to measure inflation. Known as Chained Consumer Price Index, this trick will reduce the official measure of inflation. In turn, that will result in “bracket creep,” in which tax filers move to a higher tax rate without seeing the same boost in their real incomes. In the first ten years, the government will collect an estimated $125 billion more as a result, but over the following ten years, it will result in a tax hike of $500 billion. This change, which hits people of modest incomes harder, was adopted to help pay the costs of tax cuts for the rich. Because this same measure is used to determine the Earned Income Tax Credit (EITC), this will hit lowincome working families especially hard. According to an analysis by the Center on Budget and Policy Priorities, in 2027, a family with three kids making $40,000 per year will pay $341 more in taxes as a result of the change. Again, this is permanent and

as a result, the value of the credit will continue to shrink after 2027. Because many states use federal cutoffs to determine their own income tax brackets and tax credits, this will also lead to stealthy, unlegislated tax increases at that level. In Minnesota, for example, the state estimates that residents will fork over $400 million in additional state taxes this year, according to The New York Times. The analysis finds that 870,000 families will pay an additional $489 per person this year. And because it killed or capped various tax credits, resulting in more taxable income, the Tax Act will hike taxes in the 41 states with broad-based income taxes. In the near term at least, that will boost state revenues, and in some red states—Georgia, Indiana, and Iowa—Republicans used that windfall to justify their own deep cuts, which are similarly skewed toward high earners. So skewed federal tax cuts cascade into similarly regressive changes in state taxes. A few states with progressive leaders have taken a different approach. Colorado used its additional revenues to hike funding for schools and infrastructure. And New Jersey Governor Phil Murphy is calling for a new “millionaire’s tax” on high earners that he would use to increase funding for education, transportation, and public pensions. Most states are waiting to see how changes to the federal tax system impact their budgets before taking action. But the big rip-off of working people hidden in the tax cuts comes in the form of massive and increasing deficits: At least $1.9 trillion over the next decade. Combined with other measures passed by Republicans, including a significant hike in military spending, that number balloons to $2.7 trillion over that same period. And that estimate assumes the economy will continue to

Part IV the Consequences

grow apace; if that doesn’t prove true, federal deficits will be yet larger. President Trump’s own 2019 budget suggests what’s in store: According to an analysis by the Committee for a Responsible Federal Budget, it would cut non-defense discretionary spending—which covers a gamut of programs that help working people stay afloat, from Pell Grants to job training programs to the Affordable Care Act’s subsidies—by 40 percent. In addition to decimating the budgets of the Environmental Protection Agency (with a 34 percent cut) and the Department of Labor (21 percent), it includes deep cuts to Medicaid, food stamps, and federal housing assistance. But there’s only so much meat on the bone with discretionary programs, and the real prizes for Republicans are Social Security, which keeps 22 million Americans out of poverty, and Medicare. Less than two months after the GOP’s deficitfunded tax cuts went into effect, House Budget Committee Chair Steve Womack cited skyrocketing deficits to push for a budget resolution that would lead to deep cuts to Medicare and Social Security spending. A month later, five conservative economists warned in The Washington Post of a looming “debt spiral” that “raises the specter of a crisis.” Rather than blame that on their party’s trillion-dollar giveaway to corporate America, they wrote that “our deficit and debt problems stem from sharply rising entitlement spending,” and that the only way to address it is to “reform and restrain the growth of entitlement programs and adopt further pro-growth tax and regulatory policies.” Three weeks later, Speaker Paul Ryan echoed that view, dismissing the Congressional Budget Office’s analysis and blaming the stormy budgetary outlook on Medicare, Medicaid, and Social Security. At around the same time, House Republicans tried to pass a constitutional amendment that would bar Congress from running deficits altogether. Politically, cutting Medicare and Social Security is tough. But Republicans have made it clear that, at a minimum, they’ll push for deeper cuts in discretionary spending, including housing, education, and numerous other safety-net programs.

In May, the House Agriculture Committee passed a Farm Bill that would cut spending on nutritional assistance to low-income households by $17 billion over the next ten years. The CBO estimates that this will kick 1.2 million recipients off the program, increasing the cost of food for some of the poorest Americans. Here again, there will be a downstream effect on state budgets. Federal transfers to the states account for around a third of their budgets, on average, and some poorer states get more than 40 percent of their revenues from the federal government. While most states are enjoying a short-term boost in their own revenues, over the longer term, the Tax Act’s cap on deductibility of state and local taxes will undermine state-funded public services. The National Conference of State Legislatures notes that “more states are experiencing tight budgets than at any point since the Great Recession,” and “a Because of our meager social reduction in federal spending, Americans shell out transfers … could present significant long-term challengof their total earnings for es for state budgets.” Some states may follow the path New Jersey’s governor is trying to take with That’s just an average. his “millionaire’s The relative load is higher for tax,” but for most less-affluent people. We pay state governments, almost five times the average the political path of among OECD countries. least resistance will be cutting services or closing budgetary gaps with regressive sales taxes, “sin taxes,” and fees. This represents another hidden tax hike because state and local taxes and fees are already significantly more regressive than federal income taxes. According to an analysis released last year by the Institute on Taxation and Economic Policy, those in the bottom fifth of the income distribution paid just under 7 percent of their income in federal taxes, and just over 12 percent in state and local taxes. That contrasts with the top 1 percent of tax filers, who pay a

more than 11 percent out-of-pocket social outlays.

The Tax Act and its related spending cuts will only shift more costs to consumers.

quarter of their incomes, on average, to the federal government but less than 9 percent of their earnings on state and local taxes. For roughly 70 years, state and local taxes have increased faster than have federal taxes, which has ultimately made our overall tax structure significantly less progressive. Shifting yet more of the total tax burden to state and local governments means taking even more out of the paychecks of working people to finance massive cuts for corporations and the investor class. As USC legal scholar Edward Kleinbard noted, regardless of the distribution of taxes, “government spending invariably is very progressive: Lowerincome Americans get disproportionately more value from government spending, relative to their incomes, than do the affluent, because they rely much more on public schools, social services and health care.” This underscores the most important hidden cost of the Tax Act: It gives conservatives the ability to apply relentless pressure to cut spending, and that forces typical households to spend more out of pocket on education, health care, retirement security, and a host of other social goods. In that sense, the Tax Act deepens a longstanding feature of American government: The United States has the fifth-lowest overall tax burden in the Organization for Economic Co-operation and Development (OECD), but we pay dramatically more in out-of-pocket social expenses than the citizens of every other highly developed country. In 2013, the most recent year for which complete data are available, Americans shelled out 11.4 percent of their earnings on private social expenditures, a figure that was about 50 percent higher than the country with the next highest share, the Netherlands, and almost five times the average among OECD countries. This will only worsen under the Tax Act. Conservatives have tried to sell the American people the idea that tax cuts come without costs. But the hidden costs associated with cutting taxes for the affluent are largely borne by people who can’t afford armies of lobbyists. Joshua Holland is a New York– based writer and host of Politics and Reality Radio.

Summer 2018 The American Prospect 49

How the Tax Act Undercuts Health-Care Reform

a functioning nongroup market. In contrast, just repealing the mandate risks destabilizing that market since insurers are still subject to the requirement to offer coverage regardless of preexisting conditions. To protect themselves, insurers obviously Ending the individual mandate will inflate premiums in the Obamacare will charge more—but the more they marketplaces—especially for the middle class. charge, the more healthy people may drop out. In similar situations in the by Pau l S ta r r past, rising rates have produced a “death spiral” as fewer healthy people ongressional Republicans got Obamacare by repealing the mandate. buy coverage and insurers ultimately themselves a two-fer when, The individual mandate actually stop offering it. late in the drafting of the originated as a conservative idea, first Even with the mandate’s repeal, 2017 Tax Act, they inserted incorporated into legislative proposhowever, the ACA still has provisions that reduce the likelihood of a provision repealing the “individual als by Senate Republicans in the early a full-blown death spiral. People mandate”—the tax penalty charged to 1990s as an alternative to Democratic with income up to four times the individuals who don’t qualify as finan- bills that mandated employers to profederal poverty line pay premiums cially stressed and nonetheless fail vide health insurance. The Repubthat are capped at a percentage of to obtain health insurance coverage. licans’ idea at that time was to offer their income. So, for example, if your The repeal of the mandate not only individuals an income-related subsidy income as a single individual in 2018 dealt a blow to Obamacare; it also cut for private coverage and to use the is $24,280 (twice the poverty level), projected federal spending by $338 mandate to prevent them from waiting your share of the billion over ten years since it will lead to insure until they got sick. No health premium for a silvermillions of people to drop subsidized insurance system can work if only the Who Wins, Who Loses: level plan is capped at coverage. Republicans were then able sick pay into it; an insurer can’t offer 6.34 percent of your to use the budgetary savings to offset you fire insurance if you can wait to More for Millionaires, income ($128 per some of the cost of tax cuts. buy it when your house is already on Less for Health Care month), regardless Who will be hurt most by eliminatfire. When Mitt Romney was goverCalendar year 2021, in billions of how high the preing the mandate? It won’t just be the nor of Massachusetts, he supported $40 mium goes. That cap increased numbers of low-income an individual mandate as part of the $30 should keep healthy families who face unaffordable program for universal coverage in that $20 people in the market health-care expenses without insurstate. As conservatives at the Heritage $10 as long as they have ance protection. One of the ironies of Foundation and elsewhere framed it, 0 incomes low enough the mandate’s repeal is that it will lead the mandate reflected an ethic of indi-10 to qualify for subsito especially high costs for middlevidual responsibility. -20 dies. But people with class people who buy coverage in the But as soon as Democrats -30 incomes over four “nongroup” market (that is, outside of embraced the idea, an individual -40 times the poverty an employer plan). responsibility requirement became Tax Cuts for Health-care level, who don’t get But before getting to the damage anathema to Republicans. Indeed, Millionaires cuts resulting any subsidy, will be report, let’s consider exactly what responsibility of any kind went out the from repeal exposed to the full the Tax Act did to health care and window in the Republican Tax Act. of individual Sources: mandate brunt of the rising why the Republicans did it. During Earlier in 2017, Republicans at least congressional budget office and joint rates in the nongroup 2017, no failure irked Republicans recognized they needed a functional committee on taxation / cpbb.org market. They’re the more than their inability to “repeal alternative to the individual mandate middle-class victims and replace” the Affordable Care Act. in their repeal-and-replace bills. After of the mandate’s repeal—collateral The more they threatened the ACA , all, if insurers were to cover people the more popular it became—and in damage in the Republican campaign with preexisting conditions, there had the end, they were unable to agree on to obliterate Obamacare. to be some incentive for healthy india replacement. But the ACA always This year, the individual mandate is viduals to buy insurance too. A bill had one point of maximum vulnerstill in effect. In practice, that means passed by House Republicans would ability, the individual mandate, which there’s still a penalty for failing to therefore have tried to deter people polls regularly found to be the law’s insure that amounts to $695 or 2.5 perfrom dropping out of the market by most unpopular provision. And while cent of income above the filing threshallowing insurers to impose a surcongressional Republicans could not old, whichever is greater, unless buying charge on those who purchased a polagree on an alternative to the ACA , insurance would cause financial hardicy after an interruption in coverage. they could at least say they had fulship (that is, cost more than 8.3 percent While far from ideal, that surcharge filled their pledge to do away with of income). What will happen when the provision would have helped maintain

$29.8

-$30.6

50 WWW.Prospect.org Summer 2018

Part IV the Consequences

mandate ends is unclear because there is no precedent for a market of the kind that now exists without a mandate. The Congressional Budget Office projects that the mandate’s repeal will reduce the insured population by four million in 2019, a total that will grow to 12 million in 2021 and 13 million in 2026. By that final year, according to the CBO forecast, the nongroup market will shrink by five million people, the Medicaid rolls by five million, and employer coverage by two million. A survey last March by the Kaiser Family Foundation, which found that 90 percent of enrollees in nongroup coverage still intend to buy it despite the mandate’s repeal, suggests the losses might be lower. But the Trump administration is also pursuing other policies that will intensify the problems created by the mandate’s repeal and raise nongroup rates even further. Using its regulatory powers, the administration is seeking to allow “association health plans,” which can skim off the best risks, leaving the ACA’s marketplaces with the highest-cost enrollees. Another administration initiative would expand the use of “short-term” health plans that typically exclude pre existing conditions and offer far more limited coverage than do plans under the ACA . For example, the short-term plans may not have to cover mental health care, a guaranteed way of avoiding people with higher costs. The effect again would be to draw healthier people out of the general market. The Republicans’ general strategy seems to be to turn the ACA’s marketplaces into high-risk pools, with premiums so inflated that the public deems Obamacare a hopeless failure. At the time Republicans passed the Tax Act, there was talk of a follow-up bill to stabilize the nongroup market. Predictably, nothing happened with it. Most congressional Republicans have no interest in doing anything to repair problems with health insurance that they hope to blame on the Democrats. And, once again, conservatives are going to court in the hope of getting the ACA declared unconstitutional—this time on the grounds that since the mandate was upheld as a tax and the tax has been repealed, the rest

Democratic responses to the erosion of health insurance coverage are now moving on two tracks: substantial long-term reforms and short-term adjustments to the ACA.

of the insurance market reforms must fall, too. The lawsuit threatens to end the protections for individuals with preexisting conditions, reigniting one of the greatest concerns to voters, just in time for the fall election. Democratic responses to the erosion of health insurance coverage are now moving on two tracks: proposals for substantial, long-term reform, including expansions of Medicare, and for short-term adjustments in the ACA . If Democrats win control of Congress in November, they may be able to pass some short-term adjustments to reduce rates under the ACA . The more immediate prospect for action, however, is in the states, which have the power on their own to stabilize their insurance markets. New Jersey has passed a stabilization bill with an individual mandate and a reinsurance fund (intended to limit the cost to insurers of high-cost cases in the nongroup market). All the candidates running for the Democratic gubernatorial nomination in Maryland have pledged to support a penalty on the uninsured that would be structured as a “down payment” for health insurance. The Maryland measure suggests how a measure aimed at creating an incentive to insure could be reframed. Under the ACA , those who pay the tax penalty get nothing in return, but the penalty could represent money earmarked for some basic level of coverage. For example, under the 1986 Emergency Medical Treatment and Active Labor Act (EMTALA), all Americans have a right under federal law to emergency hospital care. In retrospect, the individual mandate might have been better framed as an EMTALA payment due from those without health insurance and paid out to hospitals to cover unpaid bills. That might have changed the debate about the required payment and made it more difficult to repeal. It seems unlikely now that Democrats are going to make restoration of the mandate in its original form a political priority. They ought to be emphasizing other ways to bring down health-care costs and insurance rates and to get everyone enrolled in coverage. Creative thinking in the states may help show the way.

Accelerating the Death of Real Jobs The Tax Act adds insidious new incentives to turn more jobs into casual contract work. By Katherine V.W. Stone

or the past three decades, employers have used numerous techniques in their quest to reclassify their workers as independent contractors rather than as employees. Doing so enables them to avoid paying minimum wages, overtime premiums, expense reimbursements, workers’ compensation, health insurance, and numerous other statutory obligations. It also makes it illegal for their workers to form a union. To this end, employers have adjusted job titles, rearranged job duties, removed company logos from delivery vehicles, and even abandoned required company uniforms in order to portray their workers as independent contractors. These types of employer strategies have generated a massive amount of litigation. For example, in the “gig economy,” the issue of worker classification is a recurrent and festering controversy, generating hundreds of lawsuits against Uber and other on-demand employers. And the issue is far from settled. Just this past April, the California Supreme Court rendered a decision that adopted a broad definition of “employ-

Summer 2018 The American Prospect 51

ees,” one that would bring many types of ondemand workers within the employee category. The recently enacted Republican Tax Act could boost the trend toward converting employees into independent contractors. The Tax Act contains a provision that allows workers to lower their

Policy Center shows how the tax provision would work (see chart). The 20 percent deduction for independent contractors in the Tax Act is in addition to other tax advantages that independent contractors receive. As “sole proprietors,” workers who are classified as independent

tion does not apply to individuals whose work is in certain service industries. Specifically, the pass-through deduction excludes those independent contractors who earn more than the specified maximums and provide services in the fields of health, law, consulting, athletics, financial

Lower Taxes But Lost Job Security, Benefits Income and Taxes Old Law New Law

with Status Change

Spouse 1 Wages and Salaries

$100,000 $100,000 - $107,650

Qualified Business Income - Spouse 2 Wages and Salaries $100,000

$100,000 $100,000

Other Joint Items Taxable Interest

$10,000 $10,000 $10,000 Standard Deduction ($13,000) ($24,000) ($24,000) Qualified Business Deduction ($21,530) Personal Exemptions $8,300 -

Total Taxable Income

$188,700

Income Tax

$39,459 $33,219 $28,072 $30,600 $33,219 $30,510 $70,059 $63,819 $58,582

Payroll Tax Total Tax

taxes simply by converting from employee to independent-contractor status. The provision permits sole proprietors to subtract 20 percent from their income before their tax is calculated. To be eligible, the individual must have taxable income of less than $157,500 if filing singly, or less than $315,000 if married and filing jointly. On its face, the “passthrough deduction” could prove to be valuable to some workers. The Tax

$186,000

contractors are eligible for a number of deductions that are available to small-business operators, such as deductions for use of their car, home office, phone, and other items regularly used in their business. The new deduction only applies to workers who meet the criteria of independent contractors. To be an independent contractor, their work has to be done outside of an “employment relationship.” Moreover, the deduc-

52 WWW.Prospect.org Summer 2018

$164,510

services, brokerage services, or any service provider “where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” Nonetheless, the deduction would apply to many blue-collar jobs that lie at the intersection of employee and independent-contractor status, or in jobs in which the question of employee status is contested. Some tax analysts predict that the new pass-

through deduction for sole proprietorships will induce workers to try to get themselves reclassified as “independent contractors” rather than employees. Indeed, the Tax Policy Center advises employees to negotiate with their employers to get themselves converted to sole-proprietorship status in order to take advantage of the new law. And some analysts predict that it will make it easier for employers to reclassify workers because they can use it to convince their workers that reclassification is in their best interest. For example, Mike D’Avolio, a tax analyst who advises small businesses wrote an article in his newsletter entitled “New Tax Law Offers Many Perks for Self Employed.” Another libertarian financial blogger writes of the deduction, “Who knew that changing your employment status could be so lucrative?” Despite the Tax Act’s 20 percent deduction and the other tax advantages of independent contractor status, however, there are serious drawbacks and perils for workers in the tax law. If individuals convert from employee to independent-contractor status, they lose any employer-provided health insurance, pension contributions, or other benefits they get as employees.

Moreover, they lose the protections of federal and state labor and employment laws, including protection for overtime pay, minimum wage, health and safety on the job, workers’ compensation, rest breaks, expense reimbursements, antidiscrimination protection, and a host of other statutory rights. In addition, as independent contractors, they will be required to pay both their own share and the employers’ share of the Social Security tax, as well as Medicare taxes, amounting to more than 14 percent of their income. And most importantly, they lose the right to form a labor union and bargain for improved terms and conditions of work. Thus the new tax deduction for independent contractors could prove to be a big disappointment for workers who permit themselves to be reclassified on that account. Their financial gains are dubious, and the ultimate impact is worker disempowerment. In sum, the Republicancrafted Tax Act contains a Trojan horse, giving employers another weapon in their war against the labor laws and unions. But why should we be surprised? Katherine V.W. Stone is the Arjay and Frances Miller Distinguished Professor of Law at UCLA School of Law.

Part IV the Consequences

The Tax Act Actually Promotes Offshore Tricks

The Tax Act creates additional incentives to shift income offshore for purposes of tax avoidance, and what is worse, it creates incentives to shift actual jobs. by R eu v en S. Av i -Yo n a h

he 2017 Republican Tax Act, as passed by Congress and signed into law on December 22, 2017, represents the most far-reaching reform of the U.S. international tax rules since 1962. Most importantly, for the first time since the income tax was enacted in 1913, it changes the rule that U.S. resident taxpayers have to pay tax on all income “from whatever source derived.” Under the Tax Act, dividends paid to U.S. corporate shareholders from their foreign subsidiaries are exempt from U.S. tax. That remains true even if the dividend was paid out of earnings that were not subject to foreign tax in the country where the subsidiary is incorporated. Despite claims that tax reform would simplify the tax code or produce more domestic investment, this provision is an open invitation to U.S. multinationals to shift even more of their income to their foreign subsidiaries, because before the Tax Act, the main disincentive to such shifting was the difficulty of repatriating the income without incurring tax on the dividends. However, supporters of the law claim it will not create an incentive to shift because of certain anti-abuse provisions. In addition, supporters say that it will eliminate the incentive for U.S. multinationals to migrate offshore through “inversion” transactions, and that the repatriation of previously accumulated income will create U.S. jobs. Unfortunately, none of these claims is true. The Tax Act creates additional incentives to shift income offshore for purposes of

tax avoidance, and what is worse, it creates incentives to shift actual jobs. In addition, the incentive to engage in inversion transactions remains. Finally, the post–Tax Act evidence shows that repatriations under the law are used to reward shareholders, not create jobs. Will the Tax Act Stop Income Shifting?

The basic structure of U.S. international tax rules encourages income-shifting out of the United States. That is because since the origins of the income tax in 1913, U.S. residents were subject to tax on worldwide income, but foreign residents were only subject to tax on U.S.-source income. Moreover, a foreign corporation was defined as a non-U.S. resident for tax purposes even if it was a pure shell that was entirely managed and controlled from the United States. Thus, it was easy for a domestic corporation to create a foreign subsidiary and arrange to book profits offshore. This rule differs from the definition of residency adopted by the United Kingdom and most other industrialized countries, which define any corporation that is managed and controlled domestically as a resident for tax purposes. Until the 1990s, the resulting incentive to shift income out of the United States was mitigated by a set of anti-abuse rules known as Subpart F, which was enacted in 1962 (over intense opposition by U.S. multinationals). Under Subpart F, U.S. parents of foreign subsidiaries were taxed currently on investment income and other types of mobile income that was

likely subject to little or no tax offshore. As recently as 1997, Subpart F ensured that the benefit of shifting income offshore was sufficiently limited to the point that taxing all foreign subsidiaries of U.S. multinationals would only have raised less than $10 billion. However, in 1996, the Clinton administration either blundered or deliberately did a huge favor for corporations, and enacted a regulation called “check the box,” which enabled U.S. multinationals to shift mobile income among their foreign subsidiaries without triggering Subpart F. The result was an astonishing growth in offshore accumulation, which exceeded $3 trillion by the time the Tax Act was enacted and mostly reflects income from intangibles developed in the United States. In tax jargon, an intangible refers to software, patents, and other types of intellectual property that can be treated as being located offshore even if they were developed in the United States and are protected by U.S. patent and copyright laws. Apple is a prime example of how U.S. tax law before the Republican bill incentivized profit-shifting. The company’s profits are based on software developed in the United States. The software was shifted to Bermuda using a technique called cost-sharing, which is approved by the IRS. Basically, Apple created a paper subsidiary based in Bermuda, which participated in the cost of developing the software for a new Apple product. Apple could contribute this money to the subsidiary. Once a product had been developed, Apple could

share the profits with the Bermuda subsidiary at the same percentage rate as the cost. Apple then set up two Irish companies, one of which employed actual people in Ireland, while the other was treated as a Bermuda resident for Irish tax purposes. In between the two Irish companies, Apple set up a Dutch company. The profits from the sales of Apple products outside the United States were then attributed to the operating Irish company, but then shifted via the Dutch company to Bermuda, which does not tax those profits. The result of this “double Irish Dutch sandwich” structure was that Apple accumulated $128 billion in Bermuda with an effective overall tax rate below 5 percent. Most of these profits stemmed from software developed in the United States. The Tax Act on its face will do nothing to reverse this trend, because it eliminated the tax on dividend repatriations, the last barrier to profit-shifting. However, Tax Act supporters point out two provisions designed to counter the incentive to shift: the Global Intangible Low-Taxed Income (GILTI) and the Foreign Derived Intangible Income (FDII) provisions. Under GILTI, U.S. parents of foreign subsidiary corporations are taxed on GILTI, which is defined as their profits in excess of a 10 percent return on tangible investments offshore. This provision is designed to limit profitshifting incentives, especially for multinationals like Apple, Google, and Amazon that derive their profits from U.S.-developed intangibles and have low levels of tangible investments offshore. However, GILTI suffers from two major problems. The first is the tax rate, which at 10.5 percent is half of the new U.S. corporate tax rate of 21 percent. This lower rate creates a continued incentive to shift profits offshore, even if they are subject to GILTI tax. The lack of tax on future repatriation dividends strengthens this incentive.

Summer 2018 The American Prospect 53

The second problem is the definition of GILTI as income in excess of a fixed return on tangible investments. This provision creates an incentive to shift actual jobs offshore, because the higher the investment in factories overseas, the lower the GILTI tax. Thus, if Apple wants to avoid the new GILTI tax on its Irish profits, it should expand its actual operations in Ireland, where the top corporate tax rate is 12.5 percent—significantly lower than 21 percent. Or it could choose to migrate its operations to other locations that have an even lower effective corporate tax rate. There is a proliferation of special tax zones and patent boxes in the European Union and elsewhere that offer companies like Apple an effective tax rate well below 5 percent. Proponents of the Republican Tax Act realize this, and in response enacted FDII. FDII is the mirror image of GILTI, and provides for a lower rate on domestic income from exports that exceeds the same 10 percent return. The idea is to encourage exporting from the United States, rather than from overseas. But FDII has its own problems. First, the tax rate under FDII is 13.125 percent, which is higher than the GILTI rate, so the incentive to shift remains. Second, under GILTI, income below the 10 percent “hurdle rate” of return on tangible investment is simply not subject to U.S. tax currently or upon repatriation. Under FDII, on the other hand, income below the hurdle rate is subject to the full 21 percent U.S. corporate tax. Finally, FDII is a blatant violation of the World Trade Organization’s export subsidy rules, which prohibit lower tax rates for income from exports. It is highly likely that at least one of our major trading partners will challenge the FDII in the WTO, and the almost certain result would be a ruling against the United States that would enable hefty sanctions. We have been through this in the past, as the WTO has struck down U.S. export subsidies repeatedly, most recently in 2004. If this happens, the United States will have to either accept the sanctions, which can be imposed on any U.S. goods (oranges from Florida

54 WWW.Prospect.org Summer 2018

were the target in 2004, a presidential election year), or the United States can abolish the FDII, like it did with the export subsidies in 2004. In that case, GILTI will create an even more powerful incentive to shift income overseas. The Congressional Budget Office has confirmed that the incentive to shift profits out of the United States remains after the Tax Act:

The Tax Act creates new incentives to shift income offshore for purposes of tax avoidance, and what is worse, it creates incentives to shift actual jobs.

The GILTI and FDII provisions affect corporations’ decisions about where to locate tangible assets. By locating more tangible assets abroad, a corporation is able to reduce the amount of foreign income that is categorized as GILTI. Similarly, by locating fewer tangible assets in the United States, a corporation can increase the amount of U.S. income that can be deducted as FDII. Together, the provisions may increase corporations’ incentive to locate tangible assets abroad. Before your eyes glaze over at the sheer complexity, here is the bottom line: In essence, the Republican sponsors and corporate lobbyists were torn between two rival impulses. First, they wanted to cut corporate taxes as much as they could get away with. But second, they wanted to create the appearance of reform and limit the more flagrant forms of offshore tax avoidance, which was also necessary to keep the Tax Act from further ballooning the deficit. Basically, the first impulse won. But in their effort to limit the worst abuses, the bill’s drafters added several layers of complication that will benefit mainly accountants. At the end of the day, offshore corporate schemes to avoid U.S. taxation enjoy an even larger menu of maneuvers to choose from, and ordinary taxpayers who cannot resort to offshore dodges are fleeced more than ever. Will the Tax Act Stop Inversions?

Before the new law, there were two waves of “inversions,” which are transactions in which the U.S. parent of a multinational becomes a subsidiary

of a new foreign parent—essentially a sham transaction to avoid taxes. In the first wave, from 1994 to 2004, the foreign parent was typically a shell incorporated in Bermuda. This type of inversion was stopped in 2004, but the result was a second wave in which the new parent was incorporated in low-tax locations like Ireland and owned both the old U.S. parent and a foreign entity that was at least 40 percent as big as the U.S. group. The Obama administration waged a long fight against these types of inversions and was able to stop some of them, but others continued. The Tax Act was supposed to stop inversions, because one of the reasons to invert was to avoid the tax on dividend repatriations, which the act abolished. However, many inversions were motivated by other factors, such as the desire to load up the old U.S. parent with debt and reduce its effective tax rate through interest deductions. The Tax Act puts some limits on these types of deductions, but not enough to eliminate the appeal of inversions. More importantly, the first wave of inversions was motivated to a large extent by the desire to avoid Subpart F. This rationale was eliminated by the adoption of “check the box” in 1997, but under the Republican Tax Act, it comes back in the form of GILTI. Any multinational affected by the GILTI tax can avoid it by inverting. Thus, one would expect inversions to continue. For example, Ohio-based Dana Incorporated announced on March 9, 2018, that it was planning on inverting to the United Kingdom. In The Wall Street Journal, the company’s CFO said that “even with the new tax legislation, there is a benefit for us.” The company expects that this move will reduce its tax liability by around $600 million over several years. In addition, the Obama administration faced major problems with combating second-wave inversions because (with the GOP controlling both houses of Congress) it could not change the statute. Specifically, it wanted to define the acceptable threshold for the foreign partner in a true cross-border merger at more than 50 percent rather than 40

Part IV the Consequences

percent, and also define U.S. tax residency of the resulting group depending on from where the parent was managed and controlled. However, Congress refused to enact these provisions, which would have effectively killed inversions, since no inversion ever results in moving the actual corporate headquarters. The Tax Act provided a unique opportunity to enact these proposals in the context of a thorough rewrite of the tax law, but that opportunity was missed—the law contains almost no new antiinversion provisions, and those that it does contain do not apply to second wave–type inversions. Will the Tax Act Create Jobs in the United States?

As we have seen, the Tax Act incentivizes multinationals to move jobs out of the United States because of the structure of the GILTI rule. But proponents of the Tax Act argue that it will create U.S. jobs because it eliminates the tax on repatriations, so that most of the previously accumulated $3 trillion will flow back to the United States. While it is too early to tell, the evidence so far is that the Tax Act has not resulted in significant job creation: The current low unemployment rate environment preceded the bill. And as of a Senate Finance Committee hearing on May 8, 2018, the Tax Act has resulted in more than $480 billion in stock buybacks, but only $7 billion in bonuses to employees. We do have significant evidence from a previous attempt to create jobs through reduced repatriation taxes. In 2004, Congress enacted a one-year amnesty for repatriations with a rate of 5.25 percent (instead of 35 percent). About $300 billion was repatriated, but no jobs were created—the funds were used for share buybacks, just as they are being used now. Indeed, most of the companies that took advantage of the 2004 amnesty laid off workers at the same time. There is no reason to assume the experience under the Tax Act will be different. What Can the Democrats Do?

The international tax provisions of the Tax Act fail to achieve their most important goals. They do not

eliminate the incentive to shift profits out of the United States, and they create an additional incentive to shift jobs. They do not stop the incentive to invert, and they are unlikely to create any jobs. The Tax Act is unlikely to be amended as long as the GOP controls Congress. But let’s assume the Democrats take over in November. What changes should they make? One option is of course to try to repeal the entire law. But while I would support repeal of some of its provisions, like the terrible new regime for taxing pass-throughs, I think the approach to the international tax provisions should be different. While the Tax Act is deeply flawed, on the international tax front it does represent an improvement over prior law. In particular, GILTI ensures that U.S. multinationals will not be able to accumulate trillions offshore without paying any U.S. or foreign tax. Other provisions ensure that both U.S. and foreign Before the Tax Act changed the multinationals will find it harder rules, corporations owed an to strip taxable income out of the United States. Thus, I would stashed offshore. With the propose amending new law’s cuts in the tax rate GILTI by a) elimion these profits, corporations nating the exemption for income owe just $339 billion, below the hurdle according to the Joint rate, which incenCommittee on Taxation. tivizes job shifting, and b) setting the GILTI rate at is the perverse 21 percent, like the reward to multinational cornormal U.S. corporate tax rate. At porations for years of hiding the same time, FDII profits offshore to avoid taxes. can be repealed, because it will lose its anti-shifting rationale (and is likely to be repealed in any case if the United States loses a WTO challenge). These changes will create a regime in which U.S. multinationals will be subject to a 21 percent tax on their entire worldwide income. They eliminate any incentive to shift income or jobs overseas. At 21 percent, the tax

A Huge Reward for Hiding Profits:

estimated $750 billion in U.S. taxes on profits

So a tax break of over $400 billion

rate is low enough that it does not create competitiveness concerns, because that is the approximate average effective tax rate of our main competitors. These foreign effective rates are likely to go up when the EU Anti-Tax Avoidance Directive goes into full effect in January 2019. While there has been an overall decline in corporate tax rates in the European Union, that has been balanced by expansion of the corporate tax base, and the EU (minus the United Kingdom) is unlikely to engage in a “race to the bottom” following the Tax Act. Once the income is currently taxed at 21 percent, there is no reason to tax it again when it is repatriated, so the Tax Act’s repatriation provisions can be retained. There will be a stronger incentive to invert under these proposals to avoid the 21 percent tax on GILTI, but that can be addressed by enacting the Obama anti-inversion proposals. No U.S. inversion ever resulted in an actual shift of corporate headquarters, and there are no inversions in countries that define corporate residency based on the location of headquarters. In 1961, the Kennedy administration proposed eliminating the shifting incentives by currently taxing U.S. multinationals on their foreign income. This proposal was rejected out of competitiveness concerns, even though at the time U.S. multinationals had no serious competition. In 2018, there is more competition, but with a corporate tax rate of 21 percent and EU moves to raise the effective tax rate, the Kennedy proposal can be enacted with no adverse effects on U.S. multinationals. That is the only way to prevent continuing incentives to shift income and jobs overseas. And if the European Union is serious about cutting tax competition and raises rates, the United States can also increase the rate on corporate income, which is now at a postwar low. Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program at the University of Michigan.

Summer 2018 The American Prospect 55

Worsening Inequality

the Tax Act Boosts incomes most for high-income families Percent Change in After-Tax Income, 2018, 2025, 2027

The Tax Act worsens inequality both in the tax changes and in the program cuts used to address the resulting deficit. By Heather Boushey and Greg Leiserson

roponents of the 2017 Tax Act claimed that the legislation would deliver higher incomes—before taxes—for everyday Americans. There are two primary mechanisms by which this happens: Lower tax rates mean that Americans will now choose to work more hours and businesses will choose to invest more. Combined, these changes in people’s behavior would temporarily elevate the rate of economic growth. However, this is not nearly the whole story, because the direct effect of the structure of the tax cuts is to sharply increase inequality in after-tax incomes. Moreover, whether or not the tax cuts spur meaningful growth (a debatable question) once all of the direct and indirect effects are accounted for—including the need to address the resulting revenue gap in the years to come—most Americans will be worse off, and inequality will be even greater. The Congressional Budget Office estimates that the legislation will increase annual gross domestic product by about 0.7 percent on average over the next decade. However, overall GDP growth is ill-suited to assess the impact of legislation like the 2017 Tax Act on living standards because it focuses on production in the United States rather than income accruing to U.S. residents, and because it does not account for depreciation—the decline in the value of houses, office buildings, cars, and other types of assets due to wear and tear over time. The CBO

56 WWW.Prospect.org Summer 2018

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 -0.50

■ 2018 ■ 2025 ■ 2027

Lowest Second Middle Fourth Top All Quintile Quintile Quintile Quintile Quintile All

80-90 90-95 95-99 Top 1 Top 0.1 Quintile Quintile Quintile Percent Percent

Note: Excludes impact of repealing the individual mandate. Source: Tax Policy center

estimates that gross national product (GNP), which measures income accruing to U.S. residents rather than all domestic production, will increase by 0.4 percent rather than 0.7 percent and suggests that net national product (which reflects the increase in depreciation) will grow by slightly less than that. More fundamentally, however,

changes in pre-tax incomes can offer a misleading picture of the impact of the legislation on economic well-being. Looking at the change in pre-tax incomes alone is like looking at only one side of the cost-benefit calculation—ignoring many of the costs of generating income, such as putting in more hours of work. Moreover, it ignores the direct effect of the tax cuts themselves. Indeed, under standard economic assumptions, the direct effect of the tax cuts on different taxpayers (i.e., paying varying amounts less in taxes) provides a reasonable approximation to the effect of the tax cuts on economic well-being. The direct effects of the 2017 Tax Act paint a troubling picture. The tax cuts are severely regressive, with higher-income families receiving larger tax cuts both in absolute terms and as a share of incomes (see top chart). In 2018, families in the bottom quintile receive a tax cut of only 0.4 percent of income, families in the middle quintile receive a tax cut of 1.6 percent of income, and families in the top quintile receive 2.9 percent of income. After accounting for the repeal of the Affordable

Budget Cuts to Close the Deficit Caused by the Tax Act would Leave Most People Worse Off Percent Change in After-Tax Income, 2018, 2025, 2027 4.00 2.00 0 -2.00

■ 2018

■ 2025

■ 2027

-4.00 -6.00 -8.00

Lowest Second Middle Fourth Top All Quintile Quintile Quintile Quintile Quintile All

80-90 90-95 95-99 Top 1 Top 0.1 Quintile Quintile Quintile Percent Percent

Note: Excludes impact of repealing the individual mandate; financing set to 70% of state tax cut Source: Authors’ calculations using estimates from the Tax Policy center and cbo.

Even Using Progressive Taxation to Close the Deficit would Leave Most People Worse Off Percent Change in After-Tax Income, 2018, 2025, 2027 2.00 0 -2.00

■ 2018

■ 2025

■ 2027

-4.00

Lowest Second Middle Fourth Top All Quintile Quintile Quintile Quintile Quintile All

80-90 90-95 95-99 Top 1 Top 0.1 Quintile Quintile Quintile Percent Percent

Note: Excludes impact of repealing the individual mandate; financing equal to static tax cut Source: Authors’ calculations using estimates from the Tax Policy center and cbo.

Care Act’s mandate to purchase health insurance, which is excluded from these figures, many lowincome families were likely made worse off by the legislation. At the same time, the legislation added nearly $2 trillion to budget deficits over the next decade, more if expiring provisions of the legislation are extended. The full effects of the Tax Act can be known only once policymakers decide how to close this revenue gap. Republican legislators and President Trump

have already proposed that federal deficits be closed by imposing large, regressive cuts in public programs. Their recent budgets suggest some of the specifics, such as the president’s proposal to cut the Supplemental Nutrition Assistance Program (formerly food stamps) and many more, only in vague terms. Indeed, the health-care bill Republicans advanced in 2017 combined regressive tax cuts and regressive cuts to Medicaid. Even a seemingly more neutral

Part IV the Consequences

method for closing the gap would have a regressive impact. If policymakers close the gap with policies that have a distributional profile similar to what economists refer to as a lump-sum payment per tax return—the same amount for every family regardless of income— families in the bottom three quintiles of the income distribution will be made worse off (middle chart). Had these policies been implemented contemporaneously with the tax legislation, families in the lowest quintile would see income reductions of nearly 8 percent in 2018 and families in the middle quintile reductions of 0.3 percent. However, families in the top quintile would still be better off than before the bill became law, with tax cuts only slightly smaller than what is scheduled without further changes: 2.5 percent rather than 2.9 percent. Notably, these estimates reflect a back-of-the-envelope calculation of the gains of growth based on CBO’s analysis. What’s more, if the revenue gap were closed with progressive taxation—or progressive spending cuts— families in the bottom four-fifths of the income distribution would be worse off (bottom chart). Families at the bottom would face smaller losses, but families higher up in the income distribution would also face losses, and the gains from growth would likely be smaller. Policymakers do not need to choose between economic growth and increases in well-being for working and middle-class families. Tax reforms that restore adequate revenues and make the sources of those taxes fairer and more efficient would deliver on both those goals. In contrast, the 2017 Tax Act reduced revenues while increasing inequality, and these two features in combination will make most Americans worse off in the long run. Had the drafters stuck to a do-no-harm attitude on inequality and the deficit, a far better outcome would have been nearly guaranteed. Heather Boushey is executive director and chief economist at the Washington Center for Equitable Growth. Greg Leiserson is the director of tax policy and senior economist at WCEG.

The Harm to Affordable Housing

By cutting rates for the wealthy, the Tax Act slashes the value of the Low-Income Housing Tax Credit. by A lys s a K at z

construction fence surrounds the decaying Church of the Redeemer in Flatbush, one of Brooklyn’s many gentrifying neighborhoods. The congregation has provided the land to the nonprofit Mutual Housing Association of New York to create an oasis of 75 affordable apartments. Rents will start at $935 a month, and will be guaranteed affordable for 30 years. The church, meanwhile, will build itself a new home, tapping $5 million from selling construction rights to the housing group. The key subsidy making this deal possible is the Low-Income Housing Tax Credit, a better-than-nothing gimmick that helps the poor by rewarding the rich. Over the past three decades, LIHTC—pronounced lie-tek to people in the business—has helped finance more than two million affordable apartments, or about double the number of remaining traditional public housing units produced in its heyday from the 1930s to the 1970s. In this case, Bank of America will supply most of the $20 million to finance construction of the Flatbush apartments, because the law allows the bank to use this credit to reduce its corporate taxes by one dollar for every dollar it provides to a developer of low-income housing. But thanks to the 2017 Republican Tax Act, the housing credit is suddenly worth a lot less. Why? Because the Tax Act dropped the corporate rate from 35 percent to 21 percent. The credit dates to a Reagan-era tax provision, a variant of trickle-down economics that has grown into a $9 billion-a-year subsidy underwriting a vast industry of financial companies in symbiosis with for-profit middlemen and community-based nonprofits. The LIHTC makes for an inefficient and inequitable substitute for a robust

public housing program. But the credit is what there is, and the effect of the Tax Act will be to reduce its value, and the provision of affordable housing. In Flatbush, Mutual Housing’s investors dropped their commitment by more than half a million dollars from a bid that was already depressed in anticipation of the tax cut, blowing a hole in a budget already stretched to the limit. “You have underwritten these deals so tightly you are literally going line by line through the project to find the money,” says Ismene Speliotis, executive director of the Mutual Housing Association of New York. “It’s that painful, that micro.” Speliotis has been harvesting the housing tax credits since 1994, and her group’s history speaks to the unusual partnership between capitalists and grassroots organizers spawned by the credit. Formerly, it was called the ACORN Housing Company, an adjunct to the poor people’s community organizing group that was demolished when political saboteur James O’Keefe entered with a video camera and pimp costume. Both ACORN and the housing affiliate reorganized and rebranded. “The tax credit program is pretty much the only affordable housing production program that exists,” notes Hal Keller, president of the Ohio Capital Corporation for Housing, which helps nonprofit developers access funding through the program and pulled together $217 million from bank investors into a LIHTC pool last summer. “The tax credits are what we rely on to create housing for people with disabilities, senior housing, and supportive housing, and also to rehab existing housing.” In rural Ohio, the credits capitalize the replacement of dilapidated homes with decent ones. In Columbus, they financed Scholar House, a residence

Summer 2018 The American Prospect 57

for single-parent college students. Keller says the value of the credits has declined as much as 15 percent in Ohio. Other federal programs can help fill the gap, as can a modest state housing trust fund, but then those funds won’t be available for other developments, resulting in fewer apartments. And of course direct federal programs that help the poor are also under assault from the Trump administration. Industry analyst Novogradac & Company has projected that the 21 percent corporate rate would reduce the supply of affordable housing by 235,000 units nationally over the coming decade. “How do you make that up?” Speliotis asks. One way is by relying more on state and local governments. The administration of New York Mayor Bill de Blasio has made a multibillion-dollar commitment to affordable housing and agreed to increase subsidies for Flatbush, which already included federal Section 8 rent vouchers for seniors and subsidies to help the homeless transition out of shelter. City officials predict that as a result of the new corporate tax cut, they’ll have to spend $200 million more a year on subsidies than planned. That leaves the city with less overall buying power for building or preserving affordable housing. Another strategy is to stretch the value of the subsidy by marketing taxsubsidized apartments to more affluent tenants. In the New York area, the median income in four years has increased from $84,000 to $104,000 for a family of four, driven by gains for the already wealthy. A family at the tax credit program’s upper limit of 60 percent of the median income today makes $12,000 more a year than one that would have qualified four years ago—and thus pays $300 more a month in rent. Speliotis says she would prefer a different strategy. She is keeping incomes and rents right where she’d planned, “because we want to house people.” Community-based developers of

affordable housing find themselves in the ironic position of defending a dubious trickle-down tax subsidy, on which they depend—against an even worse trickle-down tax policy, the Trump tax cuts. The tax credit system

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Industry analysts project that the 21 percent corporate rate will reduce the national supply of affordable housing by 235,000 units over the coming decade.

at its foundation depends on the federal government subsidizing transactions for bankers and for-profit developers, enabling them to make a living vastly more comfortable than that of the tenants who will occupy their apartments. Projects pay out gains to investors. There are also syndication fees, and management fees. And that’s just up front. Over time, the private money that washed in washes out. Investors can take their capital out at the end of ten years, when the tax break expires, leaving developers on their own to figure out how to pay for upgrades as buildings age—often going back to the government for refinancing and other aid, if they don’t already have subsidies such as HUD’s Section 8. Apartments’ affordability is assured for just 30 years, and a loophole allows them to move to market rate as soon as 15 years. Half a million units are set to lose their affordability guarantees over the next decade. All this has occurred while Congress has drained aid from traditional public housing, resulting in predictable decay, and leaving stranded many poor tenants who earn too little to qualify for tax credit apartments without significant added subsidy. In the quest to bring market efficiencies to affordable housing, the convoluted tax credit system leaks rivers. The resulting industry has become so invested in the business model, and banks so accustomed to a piece of the action, that should Congress ever entertain the notion of returning to the New Deal model of directly subsidizing permanently affordable public housing and cutting out private middlemen, it would face well-financed industry opposition. “It’s complicated, which is why [HUD Secretary] Dr. Carson likes it—because a brain surgeon, he can understand it,” jokes David Dworkin, president and CEO of the National Housing Conference. “That’s how we could end up with a tax bill that cost us a quarter million units of affordable housing over ten years, and have that not be mentioned in the national debate.” The LIHTC actually consists of two different credits. One, covering 30 percent of construction costs, works in tandem with tax-exempt housing

bonds and is available on demand. It’s often used to insert affordable apartments into predominantly market-rate developments, generating the secondary social benefit of income integration in increasingly income-polarized cities. A more generous credit, for 70 percent of construction expenses, is also the subject of fierce competition between developers for a rationed slice of each state’s allocation from the IRS. Atypically, in a badly divided Congress, the competitive credits have fervent friends on both sides of the aisle. When their value first plunged after the election in anticipation of a tax cut— slowing affordable housing production immediately—Democratic Senator Maria Cantwell joined with Republican Senator Orrin Hatch to lead the bipartisan push that this year resulted in a four-year, 12.5 percent increase in the number of credits issued. Their measure also empowers developers to average tenants’ incomes, putting more apartments in reach of the poor. The tax credits’ bipartisan appeal dates to their origins, in response to the shock of an earlier tax cut. Buzz Roberts, now president and CEO of the National Association of Affordable Housing Lenders, was in 1985 a lobbyist for the nonprofit Local Initiatives Support Corporation, which helps community-based groups build housing and more. (This author is a volunteer advisory board member of New York City’s LISC affiliate.) Not only had Congress laid waste to housing-development subsidies; President Ronald Reagan’s cut in the top personal income tax rate from 70 percent to 28 percent had eviscerated the business of building affordable housing as a tax shelter for high-income individuals. When Roberts and other advocates pressed House Ways and Means Committee Chair Dan Rostenkowski to carve out a new path through a pending tax bill, skeptics on his staff told them to scram. But Republican Senator Bob Packwood seized on the idea of having private developers build quasipublic housing. Generous financial incentives, went the thinking, would spur investors to build and then keep projects well-run. The Low-Income Housing Tax Credit came into being in 1986 as a three-year experiment.

Part IV the Consequences

New York City became a high-profile proving ground for the LIHTC, sustained by Mayor Ed Koch’s effort to restore thousands of apartment buildings abandoned by their owners. Once demonstrated at the grassroots, the tax credit attracted a prosperous for-profit industry alongside the nonprofits. In the program’s favor: a pile of independent studies documents the tax credits’ positive economic and social impacts, which tend to outperform traditional public housing. Tax credit buildings tend to be located in neighborhoods with better schools, environments, and opportunities than traditional public housing; raise property values in low-income areas; and open up possibilities (though too often unrealized) for integration in suburbs and high-wealth areas. Today, government is undermining affordable housing policy on multiple fronts. Not only does the Tax Act reduce the benefit of the LIHTC; the

remaining forms of direct aid to housing, such as the Community Development Block Grant and Section 8 voucher aid, are also at risk because of the need to pay for the costs of the tax cut. As homeownership becomes less affordable, more people rent despite a severe shortage of affordable rental housing. As the number of renting households grows, the share of income devoted to rent has risen, in many cases crushingly so: The Pew Charitable Trusts finds 38 percent of tenant households are rent-burdened, spending more than 30 percent of pretax income on rent; 17 percent spend more than half. Also on the line is the survival of what remains of the nation’s public housing, as federal subsidies lag behind the cost of upkeep. Congress in its budget bill expanded to 455,000 the number of public housing units that can participate in Rental Assistance Demonstration, a U.S.

Department of Housing and Urban Development program that converts public housing funding to aid to private investors and managers, enabling them to borrow in the bond market to finance renovations—and tap the accompanying tax credits. A sobering takeaway from the broad support for LIHTC, at a time when federal anti-poverty and direct housing programs are coming under renewed political attack: Give banks and businesses a piece of the action, while delivering visible, even transformative results, and you build the most popular program on the block. The nation’s taxpayers and renters surely deserve better. Alyssa Katz is on the editorial board of the New York Daily News and is the author of The Influence Machine: The U.S. Chamber of Commerce and the Corporate Capture of American Life and Our Lot: How Real Estate Came to Own Us.

Penalizing Marriage for the Poor Incredibly, the Tax Act actually punishes low-income people for getting married. By Jordan Ecker

he tax code has long punished marriage. A married couple filing a joint return stood to pay a slightly higher rate than two individuals with the same incomes would pay if they were filing separately, especially if the incomes were close to equal. Early on in the tax reform process, House Speaker Paul Ryan bragged, “We’re going to get rid of the marriage penalty.” But the 2017 Republican Tax Act achieved that goal only for middle-income Americans, leaving low-income

households penalized for doing exactly what conservatives admonish them to do—get married and start a family. Prior to the Tax Act, many couples found themselves in a higher tax bracket after getting married. In addition, many means-tested benefits like the Earned Income Tax Credit and the Child Tax Credit are designed around a similar assumption—that the husband would earn more than the wife—and so the income phase-out for the EITC for a married couple is steeper than for an individual.

This means lower-income couples could incur a double jeopardy: marriage could both bump them into a higher tax bracket, and eliminate their means-tested benefits. The Tax Act fixed one of these two problems—and it was the one affecting middle-income households. Now, all the brackets for married couples are neatly double the individual filing brackets, except for the very highest-earning couples whose income combines to over $600,000. This means that the marriage tax penalty for middle-

income households earning between $40,000 and $150,000 has been mostly eliminated, according to analysis by the Tax Foundation. But for low-income couples, a hefty marriage tax penalty remains. Marriage can make them ineligible for the EITC and the Child Tax Credit. For households where both partners combined earn between $30,000 and $60,000 and have children, their tax bills can be increased by thousands of dollars by marriage. This penalty is larger the more children there are in the household.

Conservatives have long argued that the “success sequence”—the pattern young people should follow if they want to achieve the American dream of a middle-class income and a white picket fence—is going from high school to college to marriage to a family. If you want to be middle-class, get married and have a family, preached the highminded conservative. And yet, the marriage tax penalty is another example of an instance where actual Republican public policy betrays the conservative principles they preach.

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How the Tax Act Sacks Puerto Rico

For the Puerto Rican economy, already bleeding jobs and citizens after a decade-long recession compounded by Hurricane Maria, the Republican tax overhaul was one more blow. by M a nu e l M a dr i d

n keeping with the anti-Latino posture of the Trump administration, Puerto Rico has been subjected to a double policy assault on top of the natural disaster of Hurricane Maria. First, FEMA has failed dismally to respond to the human suffering and nearly $100 billion in damage from the hurricane, a display of both low priority and sheer incompetence that never would have been tolerated in a mainland state such as Florida where citizens can vote. Recent research suggests that the actual death toll caused by the hurricane could be more than 70 times the figure put out by the Puerto Rican government. And now, in the 2017 Republican Tax Act, the Republican Congress has added to Puerto Rico’s misery. It has undermined artificial tax benefits that have served as partial economic compensation for Puerto Rico’s odd political status as a quasi- colony. Puerto Ricans are U.S. citizens, with partial home rule, but can’t vote for president or for voting representation in Congress. While the commonwealth has its own constitution and locally elected government, Congress retains the ability to revise all aspects of law and policy on the island. Two new provisions in the Tax Act, of which more shortly, are likely to undercut future investment in major industries in Puerto Rico, including its manufacturing sector, the island’s economic backbone. Despite public and private lobbying efforts from Puerto Rico, Republicans in Congress failed to shield them from these harmful provisions.

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The island lacks the autonomy to deal with the weight of its crushing public debt; its sputtering economy remains indentured to foreign and U.S. corporations after a century of learned dependence stemming from the trickle-down piety of politicians in Washington and in San Juan. Lost in the winds of Donald Trump’s protectionist hurricane, Puerto Rico once again finds itself on the outside looking in on the country it pledges allegiance to. The United States acquired

Puerto Rico from Spain in 1898 in the aftermath of the SpanishAmerican War. For nearly five decades, the territory was largely without self-governance. The U.S. president appointed the island’s governors, attorneys general, and justices of its Supreme Court. Even after the 1952 federal ratification of a Puerto Rican constitution, which imparted a new “Commonwealth” label on the island and allowed it the autonomy to deal with local affairs, the island was still legally considered a territory and therefore ultimately under the control of Congress. Special tax breaks for the island began in its earliest days as a way to subsidize the sugar industry, and then in the mid-20th century as a way to bring low-wage manufacturing to Puerto Rico, often at the expense of local business and the Puerto Rican consumer. Those breaks, which served as an artificial prop, were gradually phased out by the U.S. Congress, leaving the island to rely on local sweetheart corporate tax rates to draw

investment. But the new Tax Act undermines this last economic lifeline by raising the price of doing business on the island through new taxes and making investment on the mainland more attractive. The Foraker Act of 1900 was the first major legislative overhaul of Puerto Rico’s institutions, structuring the island’s economy largely around the needs of sugar refineries and other large corporations extracting raw materials from the territory. In fact, the first U.S.-appointed civilian governor of Puerto Rico became president of the American Sugar Refining Company, the largest sugar refinery in the country, which by 1907 controlled 98 percent of national sugar production. Under the Foraker Act, companies received relief from various excise taxes (the federal income tax would not be constitutionally legalized until 1913) and, after two years, companies were able to import from and export to the island duty-free. Thanks to a Supreme Court ruling in 1901 allowing for the implementation of non-uniform tax laws in territories like Puerto Rico, Congress could treat the island as a foreign entity for purposes of taxation—a status that would have swiftly been judged unconstitutional in any U.S. state, but continues to this day. For nearly half a century, Puerto Rico effectively served as a sugar plantation for mainland corporations. The territory was brimming with industry, but little of it belonged to the local people. Sugar giants received more than a 110 percent rate of return in annual

dividends on investments over the years. But that wealth largely did not benefit islanders, the majority of whom were landless and lived well under the poverty level. By the end of the 1940s, faced with a declining agrarian economy, Puerto Rican politicians decided that economic development required further embracing its role as a tax haven for U.S. firms. In 1948, Puerto Rico’s first popularly elected governor, Luis Muñoz Marín, worked to pass a tax overhaul on the island, called Operación Manos a la Obra (“Operation Bootstrap”). Bootstrap aimed to use a series of tax exemptions and economic subsidies for U.S. corporations as a vehicle to industrialize the island. Between 1950 and 1980, disposable personal income spiked and educational attainment increased, with the average years of schooling of Puerto Ricans more than doubling. Yet at the same time, unemployment rose and labor participation rates fell, stimulating more migration to the mainland. While Puerto Rico celebrated near double-digit annual gains in output and a sprouting manufacturing industry, its public debt ballooned. In 1976, Congress added more tax incentives for U.S.-based manufacturers opening plants in Puerto Rico, allowing them to repatriate their profits at a special rate. Many of the pharmaceutical giants of the day, including Johnson & Johnson and Glaxo SmithKline, launched major manufacturing ventures on the island. This new model of economic expansion through corporate courtship provided a shackled sort of salvation for Puerto Rico, binding the commonwealth to fleeting corporate investment. But in 1996, Congress ordered a tenyear phase-out of major federal tax breaks for manufacturers. By 2014, the number of manufacturing jobs on the island had dropped by almost half. The island’s unemployment rate, which over the years grew as high as double the

Part IV the Consequences

s i m o n e b a r i b e a u / b lo o m b e r g v i a g e t t y i m a g e s

average rate on the mainland, drove more than half a million Puerto Rico residents to leave the island between 2006 and 2016, shrinking an already narrow tax base. Unable to restructure its debt because of its status as a territory, a bankrupt Puerto Rico is forced to answer to a federally appointed fiscal oversight board that is pushing for austerity cuts to the island’s social safety net. Which brings us to present day and the Republican Tax Act. In the Tax Act, which otherwise drastically cut corporate taxes, Congress included an offset that provided a tax on foreign firms owned by U.S. investors that might evade U.S. taxation altogether. This provision targets income from “intangible” assets such as patents, trademarks, and copyrights—the basis for much of the income in industries such as pharmaceuticals and medical devices, on which Puerto Rico has been heavily reliant. Were Puerto Rico not considered “foreign” for tax purposes, this provision would not bite. It has no impact on the 50 states. But it seriously harms Puerto Rico. The new tax on Global Intangible Low-Taxed Income (abbreviated in a bad pun, GILTI) was proposed as a way to target profitable firms created by U.S. investors but based abroad, known as controlled foreign corporations. Before the tax overhaul, any income generated by such U.S.-based corporations in Puerto Rico was subject to a mere 4 percent corporate tax. Company profits would only become subject to U.S. corporate rates once they were distributed back to an owner or shareholders stateside. Under the new framework, however, any profits that exceed 10 percent of a company’s hard assets (plant, equipment, furniture, computers, etc.) are subject to a much higher U.S. corporate tax rate, whether dividends are sent back to the mainland or not. This is bad news for companies doing business on the island. Patentdependent sectors like pharmaceuticals and medical equipment and supplies account for nearly 35 percent of the total employment in

manufacturing. Pharmaceutical companies alone employ approximately 90,000 Puerto Rico residents. Other industries like international insurance and financial services will also likely be forced to leave the island because of GILTI. But the tax bill doesn’t just raise the cost of operating in Puerto Rico;

it also makes huge cuts to the corporate tax rate on the mainland. That shrinkage in the gap between the two effective tax rates will stymie future investment on the island, according to José Villamil, CEO and chairman of Estudios Técnicos, an economic consulting firm in San Juan. “The gap is not sufficient to compensate for the new tax [on GILTI] that many of these companies will have to pay or for the extra cost of electricity and the risk factor that is entailed in establishing themselves in Puerto Rico after [Hurricane] Maria,” says Villamil. “I think we’re looking at a situation where Puerto Rico has now lost its competitive advantage from tax policy.” An early analysis of the tax bill conducted by Estudios Técnicos found that it would likely lead to a gradual erosion of the number of plants operated by U.S.-based corporations in the manufacturing sector and a drop in expansions and new investment. Such corporations make up the majority of Puerto Rico’s manufacturing sector

Hooked On Drugmakers: For decades, tax favoritism— now withdrawn—brought pharmaceutical companies to the island and provided manufacturing jobs at well below mainland wages.

and account for more than $2 billion in the island’s tax revenue. Included in the tax reform is a shift from a global system of taxation to a territorial system, including new antiabuse rules and a base erosion and antiabuse tax (BEAT). Whereas GILTI is exclusively concerned with income generated in foreign jurisdictions, BEAT is focused on payments by domestic corporations to foreign entities. BEAT is essentially an alternative minimum tax. It adds back to taxable income certain otherwise deductible payments made to nominally foreign subsidiaries. If, after considering deductions and depreciation for amounts paid to related foreign subsidiaries, the tax paid is less than a set amount (5 percent this year, then 10 percent through 2025, and 12.5 percent thereafter), the firm pays the difference. Most importantly for Puerto Rico, foreign tax credits (excluding credits for research and development) cannot be used to reduce a corporation’s BEAT liability. So while a medical device manufacturing company with multiple manufacturing plants in Puerto Rico may be able to avoid paying much tax on its GILTI due to its hard assets, it will still have to contend with BEAT. BEAT and GILTI were both drafted partly as offsets to the net impact on corporate taxation, which amounts to a huge corporate giveaway, and also as means to encourage more domestic investment. But because of its anomalous status as a foreign jurisdiction, Puerto Rico now finds itself competing against countries like Ireland and Singapore for investment, rather than states like Ohio and Wisconsin. Although the specifics of the legislation remained in constant flux until the very end, the risks in the tax bill were well understood by public and private leaders in Puerto Rico. Lobbyists from Puerto Rico descended upon the Capitol after the House and Senate released drafts of their versions of the tax bill in late October 2017. In the

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Senate bill, there was the aforementioned GILTI tax. The House counterpart had a 20 percent excise tax on intercompany sales. The House provision consumed much of the focus of lobbying efforts early on, according to Carlos Mercader, the executive director of the Puerto Rico Federal Affairs Administration in Washington. It was ultimately killed during House-Senate conference, but the Senate provision remained intact. The provision was one of many forged in line with the “America First” rhetoric of the president and Republican members of Congress. Efforts to dislodge it were met with polite rejections. GILTI received significant support from Republicans from states with large manufacturing sectors, according to sources involved in the lobbying of congressional offices. For Republicans seemingly sympathetic to Puerto Rico’s plight, such as Florida Senator Marco Rubio, subjecting the island to new taxes just months after it was ravaged by a hurricane was a travesty. But reopening this provision at the final stage of the drafting process risked sinking the entire bill, which already sat on a knife’s edge as various factions within the GOP worked to find a version that could get 51 votes. A Puerto Rico–only or territory-and-commonwealth-only exclusion clause would have created a new sticking point. Puerto Rico’s lack of representation in Congress made a key difference. The island’s congressional presence is limited to lobbying efforts by a single elected non-voting House delegate, Jenniffer González-Colón. Unlike Senators Lisa Murkowski, Jeff Flake, and Susan Collins, who were able to hold out on the legislation until their concerns were met, Puerto Rico had no voting member to champion their interests. If Puerto Rico had two voting senators, the outcome could have been entirely different. In a year-end interview with reporters, Rubio rejected the concern that the new provisions might harm Puerto Rico: “We’ve not heard from a single company, and in fact, every one of these entities involved in Puerto Rico has told us they’re in favor of the tax bill.” The Florida senator was right that

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In April, longtime Puerto Rico producer Amgen announced Rhode Island as the location for its new $165 million plant, citing changes in the new tax act.

many entities on the island supported the bill, but he was wrong to assume that support means the bill won’t harm Puerto Rico. Companies have already begun to consider refocusing their manufacturing activities on the mainland, where there are no damages to vital infrastructure from the hurricane, no savage cuts in basic services, and new lowered corporate taxes that wipe out Puerto Rico’s tax advantage. In April, pharma giant Amgen announced that it had chosen Rhode Island as the location for its new $165 million biopharmaceutical plant. The company, whose largest manufacturing plant is currently in Puerto Rico, credited the lower effective tax rate from the Republican overhaul for its decision to locate stateside. “Following U.S. federal tax reform, which provides company incentives to invest in innovation and advanced technologies, the decision was made to locate the new plant in the United States,” says an Amgen spokesperson, repeating the misstatement that Puerto Rico is not part of the United States. She adds, “As Amgen’s largest manufacturing site, we remain committed to Amgen Puerto Rico.” Puerto Rico’s Private Sector Coalition was united in opposition to these tax changes. Notably absent from the private-sector opposition, however, was the full weight of many large multinational biotech and pharmaceutical firms operating in Puerto Rico, such as Johnson & Johnson and Medtronic, according to a source with direct knowledge. These multinational corporations stood to gain more from the benefits included in the tax bill—in particular the lowered 15.5 percent repatriation rate on cash held outside of the country—than they would lose from the new taxes on their operations in the commonwealth of Puerto Rico and other U.S. territories. This is likely the real reason Rubio didn’t hear much outcry from large firms. A Credit Suisse report released in November found that U.S. biotech and pharmaceutical companies make up a third of the top 30 American companies with the most cash stashed overseas, totaling close to $150 billion. Neither Johnson & Johnson nor Medtronic

provided comment for this article. “That’s the sort of decision we’re going to see more of in the future,” says Villamil of Estudios Técnicos, who has already heard reports of other companies considering similar decisions. One passing comment an industry contact made to Villamil is particularly telling: “Twenty years ago, you had to go to your company’s board and explain why you were not in Puerto Rico. Now, you have to go to the board and explain why you would want to be in Puerto Rico.” The prevailing narrative for more than a century has been that the United States has already been too generous to the commonwealth. It was there in 1900 when Senator J.B. Foraker, nearly three weeks after the passing of his eponymous bill, declared that “no such favor has ever been shown to any other people for whom we have legislated.” It was there in 1909 when President William Howard Taft told Congress that Puerto Rican residents had “forgotten the generosity of the United States in its dealings with them” after the island’s House of Delegates obstructed an appropriations bill. And, most recently, it was there when Trump told Puerto Rico residents in October that they were “throwing [the U.S.] budget a little out of whack.” “We’ve spent a lot of money in Puerto Rico,” said Trump a few months before signing an estimated $1.5 trillion tax-cut handout to Wall Street and U.S. corporations. Trump has doubled down on the misleading narrative that Puerto Rico should be thankful for what it has, that it is undeserving, and that its crisis is entirely of its own making. The commonwealth’s situation remains dire and its needs in Washington are urgent. But it will have to wait for any tax relief. The slow slicing of the island’s economy, sped up by the Republican Tax Act, raises familiar and uncomfortable questions about the relationship between legislators in Washington and the nearly 3.4 million people living in Puerto Rico that last surfaced during the U.S. government’s mismanagement of relief efforts following Hurricane Maria: Where does Puerto Rico fit into America?

Part IV the Consequences

Denying the Child Tax Credit to Undocumented Children A little-noticed provision in the Republican tax reform will strip billions in tax benefits from an estimated one million mostly low-income undocumented children residing in the United States. By Manuel Madrid

b e b e t o m at t h e w s / a p i m a g e s

hether it’s being ripped from their parents at the border or being forcibly withheld from joining their relatives in the United States, undocumented children have become casualties in the Republican crusade against immigrants deemed undesirable. The Republican Tax Act is the newest assault. The new tax bill increases the Child Tax Credit from $1,000 to $2,000 per child under age 17 for U.S. citizens, but denies the credit to immigrant children without a valid Social Security number. The bill’s authors estimate that the provision will save more than $20 billion over the next ten years—an indirect transfer from poor immigrants to the wealthy, the primary beneficiaries of the cut. Currently, unauthorized immigrants are able to claim the credit by applying for a ninedigit Individual Taxpayer Identification Number, or ITIN, which allows them to file state and federal tax returns, even without a Social Security number. The new requirement, which will go into effect next year, will render ineligible roughly one million

undocumented children, according to a Center on Budget and Policy Priorities analysis of data from the Pew Hispanic Center. The change threatens to inflict greater poverty on a mostly low-income working population that depends heavily on such credits. In 2013 alone, some 4.4 million tax returns were filed using ITINs, claiming child tax credits worth $6 billion, according to a report on refundable tax credits by the Government Accountability Office (GAO). Almost a third of ITIN filers claiming child tax credits that year had incomes of less than $40,000. Most ITIN-filers are undocumented. The restriction could also harm children who are American citizens. At least nine million people live in mixed-status households in which one member is legally present and others are not. When an undocumented sibling loses access to tax benefits, the entire family suffers. Undocumented immigrant workers, like all other workers, are subject to sales taxes and property taxes. The majority of undocumented immigrants pay state

and federal income taxes as well as Social Security and Medicare taxes. In 2010, the Social Security Administration estimated that unauthorized workers contributed $13 billion in taxes that year. (The agency has not released

to $2,500 in “college- level educational expenses” from their federal taxes, is also still available to ITIN-filers.) Immigrant-advocacy groups like UnidosUS and the National Immigration Law Center have begun

more recent figures.) Undocumented immigrants, taxpaying or otherwise, are barred from receiving most benefits offered by the federal government (including health insurance, Social Security, food stamps, welfare, and disability benefits). They are eligible, however, for benefits like public schooling, emergency medical care, the Special Supplemental Nutrition Program for Women, Infants and Children—and until now, the Child Tax Credit. (The American Opportunity Tax Credit, which allows individuals to deduct up

releasing guidance for undocumented immigrants, suggesting possible tax alternatives. The Tax Act created a new non-refundable $500 “family credit” for dependents that don’t qualify for the CTC. That credit, though far less generous than the CTC, at least doesn’t require a SSN to be claimed. Still, it’s a small wonder that any of these remaining tax benefits made its way into the final legislation at all. In the far more draconian House version of the Tax Act, the CTC would not have been claimable if the taxpayer did not include

their own valid SSN, regardless of the status of their children—a change that would have excluded about 82 percent of current ITIN-filers, according to the GAO. It would have also stipulated that the college tax credit be made available only to individuals with valid Social Security numbers. Eliminating all access to tax benefits for undocumented immigrants has long sat atop the wish list of many conservatives, who have vilified undocumented immigrants and accused them of large-scale tax fraud. But the Republicans have displayed a studied disinterest in the large-scale tax frauds by the rich, which will only be intensified by the Tax Act. To compound the damage, the underfunding of the IRS persists, despite a tax code that is more complex than ever (see piece by David Cay Johnston, page 45). The illegal-immigrantas-menacing-abstraction has been Trump’s go-to rhetorical device both on the campaign trail and during his time in office. The Tax Act, with its punishment of children, is a startling showcase of such callousness.

Summer 2018 The American Prospect 63

What Else We Could Do with $1.9 Trillion

If we spent that money on infrastructure rather than tax cuts for the rich, we would get better economic performance and more good jobs. by J o n Ry nn

or almost 40 years, we have been living through Republican experiments with a theory of economic growth: Give tax cuts to the top and they will reward the middle and the bottom with new job-creating investments that also generate ever-greater tax revenues. In the latest tax cut, now expected to cost $1.9 trillion over a decade, it’s already clear that corporations are not spending their windfall on new investments but mainly on stock buybacks. Since about 2012, buybacks by corporations exceeded their investment in productive assets, and the trend is getting worse. If that $1.9 trillion tax cut were spent instead on infrastructure, the positive effects would ripple through the economy. Virtually all of the money would be productively spent on fixing the transportation, energy, communications, and water systems that underlie the functioning of the economy as a whole; millions of Americans would be hired for construction and factory jobs. Substantial infrastructure spending, in turn, would help reinvigorate the manufacturing sector, which is needed to produce parts and machinery for roads, bridges, and the rest of the infrastructure. It would generate new technology and tech jobs as well, just as the World War II investment boom did. Incomes of the working and middle classes would improve, leading to more balanced economic growth. Together, infrastructure and manufacturing create a virtuous circle of economic growth because the development of each reinforces the other. Long-term infrastructure outlay provides a stable market for domestic manufacturing firms, reduces investment risk, and gives these firms the opportunity to develop new

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technologies. This production base in turn enables the creation of the services that make up most of our national economic output. We are living in the age of the internet and smartphones because of this very process: By researching and developing the internet infrastructure, the government provided a foundation for the production of trillions of dollars of equipment, goods, and services. This self-reinforcing process of infrastructure building and manufacturing innovation has been taking place since the start of the Industrial Revolution and is still very much in evidence today. I see one example during my morning train commute into Manhattan— the “super crane” that is being used to build the new Tappan Zee Bridge connecting the two sides of the Hudson River about 30 miles north of New York City. This floating crane cost $50 million, but it saved $1 billion for the construction of this critical bridge. That is a 20-to-1 return that society gained as the result of the production of just one kind of machine. Innovations in construction and factory machinery can yield such a powerful impetus to economic growth, and infrastructure spending spurs this technological change. When I return home from work, I pass the remnants of NYC ’s first large-scale infrastructure project, the Old Croton Aqueduct, which in 1842 provided the first reliable supply of fresh water to the city and made its explosive growth possible. Now filled in for hiking, the aqueduct was replaced in 1890 by a system that in turn was greatly expanded starting in 1915. In 1970, the construction of a new water tunnel was begun in order to ensure the supply of water to our largest metropolis. Like the rest of the

Together, infrastructure and manufacturing create a virtuous circle of economic growth because the development of each reinforces the other.

nation’s infrastructure, water systems need to be constantly maintained, expanded, and reconstructed, providing much of the dynamism of a modern economy. Far too little has been invested in replacement of centuryold water tunnels, and at times they have been on the verge of collapse. Farther down the Hudson, the picture is even scarier. In 2010, thenGovernor Chris Christie of New Jersey vetoed a sorely needed rail tunnel under the Hudson that would improve and secure reliable train service into and out of Manhattan, a chokepoint for Northeast rail corridor traffic. Christie wanted to demonstrate to his potential supporters for a presidential run that he was so committed to destroying the government’s capability to achieve anything constructive that he was willing to hurt his own state. In our current political environment, conservatives deny funding of the infrastructure in order to prevent the government from gaining public support for taxation and regulation in general. Ironically in Christie’s case, his campaign was brought down by a crucial piece of public infrastructure completed in the 1930s, the George Washington Bridge. These three infrastructure policies in the NYC area—rebuilding the Tappan Zee Bridge, the modernization of the NYC water supply, and the veto of the Hudson tunnel—exemplify the ways in which building, or not building, infrastructure can influence economic rise or decline. When the business class is more concerned about building up the national economy than it is about taxes and regulation, infrastructure spending and the attendant economic growth are encouraged. When the business class turns obstructionist, it can prevent the renewal of infrastructure, leading to national decline. Sometimes—now, for example—the public needs to offset that influence by electing a government that will champion constructive federal intervention in the economy. Government’s role in the develop-

ment of public infrastructure and the role of infrastructure, in turn, in economic development, dates to the earliest years of the Republic. Alexander Hamilton sought to ensure the young

Part V the future

nation’s economic independence from the global superpower, Great Britain, by calling for government support of manufacturing. In the 1820s, Speaker Henry Clay enunciated what he called an “American System”: “American” in that, like Hamilton, he wanted to use tariffs to protect American industry from the British; and also a “system,” because Clay argued that an expanding manufacturing sector could provide a market for agriculture, farmers in turn would be able to buy manufactured goods, and new infrastructure would tie the whole system together. The elections of two of our greatest presidents, Abraham Lincoln and Franklin Roosevelt, represent two key turning points when the public demanded a constructive change in the government’s role in the economy. The first Republicans—like Lincoln, mainly from the Great Lakes area— wanted ports, rail, and roads for their budding industrial regions, but before the Civil War the Southern Democratic bloc in Congress would not fund “internal improvements.” Slaveholders feared that building national infrastructure would lead to an overconfident government that might indulge in the ultimate act of government intervention, freeing the slaves. As

President John Quincy Adams put it, “Slavery stands aghast at the prospective promotion of the general welfare.” In addition to abolishing slavery, in order to promote the general welfare the early Republicans used the federal government to support manufacturing, including establishing tariffs to protect infant industries against British domination. The first Republicans passed legislation during the Civil War that encouraged a rail network that created the first continentalsized market, giving the United States a leg up in the 20th-century global economic race. Along with telegraph and telephone networks, rail wove the national market together. The Lincoln Republicans established land grant colleges as well as agricultural extension services, and American states established public education systems, providing the skills for urban and manufacturing growth. By the early 20th century, great water projects developed the West and set the stage for the growth of big cities. Electricity revolutionized manufacturing and household life. The first national roads in the 1920s made the automobile boom possible. Even banking was turned into a (somewhat) regulated national network with the

Replacing the old Tappan Zee Bridge: Hundreds of other bridges, tunnels, and rail lines are outmoded. All it takes is public funds.

creation of the Federal Reserve System. Governments at the federal, state, and local level either directly or indirectly supported all of these systems. However, since unions were weak and finance was unregulated, the economy eventually became unbalanced and a dangerous level of income inequality combined with speculative finance to lead to the collapse of 1929. In 1932, FDR became president in another transformative election, and like the Republicans 70 years earlier, FDR and the Northern Democrats set off a burst of infrastructure-building whose effects would reverberate for decades. Much of the infrastructure that the conservatives are allowing to fall apart today was built in the 1930s by the New Deal’s Works Progress Administration. The WPA’s budget averaged about 2.2 percent of gross domestic product in the late 1930s, which if replicated in 2018 would equal about $430 billion. The Public Works Administration contracted private firms to build larger projects, many of which were designed to pay for themselves, for example by generating electricity. The Civilian Conservation Corps saved much of the rural economy in the Dust Bowl and restored dozens of ecosystems. The

Summer 2018 The American Prospect 65

Rural Electrification Administration extended electricity to most of rural America, and as a result for decades the Democrats picked up votes from rural residents. The Reconstruction Finance Corporation underwrote hundreds of projects, and during WWII funded the construction of military factories that would be used for civilian output after the war. These infrastructure-building agencies employed millions and convinced a skeptical public that democracy could work for most of the people, drying up support for both fascism and communism. FDR and top administrators wanted to expand the work of these agencies and make them permanent, which would have created what we might call an “infrastructure-centered” state. For a time just before, during, and after WWII, the federal government supported unions and regulated financial firms as if they were social infrastructure. These policies complemented the building of the Interstate Highway System, air travel systems, and suburbia in the 1940s and 1950s, creating the conditions for the “golden age of capitalism” from roughly 1945 to 1975. The middle and working classes gained unprecedented increases in income and standards of living. Manufacturing boomed. But by the late 1960s, the New Deal’s virtuous circle of infrastructurebuilding and manufacturing expansion had already begun to break down. The business class diverted the profits gained from their domination of global industry to create a runaway financial system, military spending went up, and infrastructure spending started to slow. Globalization accelerated these trends in the 1980s as new shipping and communication infrastructure made it possible to more easily send manufacturing overseas. The business class destroyed much of the industrial base of the United States, disempowering unions. Outsourcing corporations were cheered on by an ever-growing financial sector—which also helped to undermine global financial regulations. As a result, by the mid-1970s corporations stopped passing on productivity increases to workers in the form of wage increases,

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and the “golden age” was over. In the 1980s, President Ronald Reagan pushed through tax cuts that continued the slide of middle- and working-class incomes, and Reagan and British Prime Minister Margaret Thatcher declared that “there is no alternative” to an economy with minimal government involvement. Both Presidents Bush as well as Clinton went along with the neoliberal catechism of financial deregulation, free trade, and minimal government help for the 99 percent. Obama temporarily cleaned up their mess, but Republican obstruction and Democratic timidity bring us to our current predicament.

Infrastructure reconstruction and manufacturing create long-term, widely-shared prosperity— tax cuts don’t.

Today, as in 1860 and 1932, we are overdue for another transformative political realignment that will bring the government and market back into balance. As during those previous turning points, public investment and a restoration of regulation are necessary complements. In the long run, our greatest problem is that the Earth’s climate is being destabilized by the greenhousegas-generating electrical and transportation networks that were built in the previous eras of infrastructure expansion. Our agricultural and manufacturing systems have contributed to climate change and ecosystem destruction, as has our treatment of forests and seas. We clearly should expand and transform our network of infrastructure and production systems: We need renewable electricity for all energy; organic and carbon-sequestering agriculture; nonpolluting and recycling-based manufacturing; and ecologically sustainable cities, towns, and suburbs with walkable neighborhoods. There is enough work to be done to keep anyone who wants a job busy for a very long time. Now is the time to fulfill the New Deal promise of an infrastructure-centered state by permanently increasing the level of public investments. Public works spending would clearly be a better way to spend a significant portion of the nation’s financial capital than corporations buying back their stocks using tax cuts. Republicans have been happy to spend government money when they wanted to bankroll the Iraq War, to bail out the financial system, or to

pass the Trump tax cuts; progressives should be at least as willing to pay for a program of economic reconstruction. The first thing we can do is reverse the $1.9 trillion tax giveaway and spend the resulting nearly $200 billion a year to kick-start an infrastructure program, to be matched with another $200 billion a year from some combination of infrastructure bonds or new taxes on the wealthy. Another source of financing could be a Federal Infrastructure Bank, which would use seed money to leverage public works spending. With an allocation of $20 billion per year, the bank would be allowed to lend out ten times what they have on deposit, which in this example would mean another $200 billion for reconstruction. A total of $600 billion would more than double our annual infrastructure spending. If a much poorer and depressed United States could spend 2.2 percent of its GDP just on the Works Progress Administration, we could spend a similar percentage and more today. That $600 billion could be used for two main tasks. First, we need to fix our deteriorating basic infrastructure—everything from water and sewer systems to bridges, tunnels, and power grids, as well as systems to protect against storm surges. In their Infrastructure Report Card, the American Society of Civil Engineers gives the American infrastructure an overall grade of D+. The ASCE places the cost of merely upgrading existing infrastructure at $4.6 trillion. We also need new forms of national infrastructure. These could include an Interstate Wind System that replaces all coal and nuclear plants while transitioning current workers to new technologies, an Interstate High-Speed Rail System, and a rebuilt Interstate Electric Grid. We could add a HighSpeed Internet System that serves rural areas as well as cities, as well as new investment in affordable, comfortable housing and transit for walkable neighborhoods in city, town, and suburban centers. This program of economic reconstruction could result in more than ten million good jobs, which would indirectly lead to millions more jobs in manufacturing and service

Part V the future

occupations, thereby strengthening unions. As in the case of World War II investment, this program would also generate new technologies. Politically, this agenda could also enable the formation of the “economically coherent center-left political coalition” that columnist Thomas Edsall of The New York Times wishes could be created to “overcome the seemingly insuperable political divisions between the white working class and the African-American and Hispanic working classes.” A coalition of working-class voters of all colors, genders, orientations, and religious affiliations could join with urban professionals and rural voters to inaugurate a new progressive era. For the first time since the 1930s, we see most major progressive organizations talking about spending significant sums of money for our public systems. With Trump and the Republican Party clinging to their tax cuts, Democrats could go on the offensive, and use the theme of government-sponsored infrastructure building as an organizing principle for a progressive agenda. Medicare for All can be seen as an expansion of the health-care infrastructure, and paying for public college, universal Pre-K, and child care could be considered an extension of the educational infrastructure. This program would require changes to trade policy, particularly by mandating that all infrastructure building be supplied by domestic firms. Reining in finance and establishing public banks are ways of fortifying and democratizing the financial infrastructure. Rebuilding the United States could be the centerpiece of a federal jobs guarantee program. For the first time in almost a century, progressives can win the argument about what causes economic growth, both intellectually and at the ballot box. Infrastructure reconstruction and manufacturing create long-term, widely shared prosperity—tax cuts don’t. There is indeed an alternative, and it’s as American as apple pie. Jon Rynn is a fellow at the CUNY Institute for Urban Systems. He is the author of the book Manufacturing Green Prosperity: The Power to Rebuild the American Middle Class.

Want to Expand the Economy? Tax the Rich! If Democrats want to win big in November, they must do more than just renounce trickle-down economics. They need to replace it. by N i c k H a n au e r

f you think the Trump/Ryan tax cuts haven’t been a huge success, you don’t know trickle-down economics. In Kansas City, Missouri, 800 Harley-Davidson employees are losing their jobs as the iconic motorcycle manufacturer uses its tax savings to shift production to Thailand. Kimberly-Clark, the maker of household brands like Kleenex, Scott, and Huggies, told investors it would use its tax savings to help pay for a restructuring plan that would close ten manufacturing plants, eliminating as many as 5,500 jobs. And on the very same day that Walmart made headlines by doling out $1,000 onetime bonuses to a whopping 7 percent of its largely poverty-wage workforce, the retail giant announced it would use tax savings to offset the expense of closing 63 Sam’s Club stores, costing nearly 10,000 workers their jobs. Altogether, corporate America has announced more than 140,000 job cuts since the 2017 Republican Tax Act passed—nearly 87,000 shed by Fortune 500 companies alone—while sharing just 9 percent of its $76 billion tax windfall in the form of wage hikes and one-time bonuses. But to quibble over jobs and wages would be to entirely miss the point. Wealthy shareholders like me? We’re doing great, thanks to an astonishing $480 billion (and counting!) in stock buybacks announced since the Tax Act’s passage—more than 68 times the return to workers. By that metric, the tax cuts are working exactly as intended. Of course, nearly everyone knew the Republican tax plan was just another trickle-down scam—a massive and destructive financial giveaway masquerading as pro-growth tax reform. But as disreputable as the trickle-down

brand has become, its economic narrative remains so deeply rooted in our national politics that Republicans can still run and expect to win on tax cuts, despite the predictably dismal results. That’s why if Democrats want to take back Congress—and hold it— they must do more than just attack trickle-down economics; they need to replace it with an alternative theory of economic growth that places the American people back at the center of the American economy. Democrats can’t just run against the Trump/Ryan tax cuts; they need to run for substantially raising taxes on me and my wealthy friends—not on the grounds that it’s more fair (or because of “The Deficit!”), but on the sound, if radicalsounding, economic principle that taxing the rich is the only plan that would increase investment, boost productivity, grow the economy, and create more and better jobs. Taxing the Rich is Sound Economics and Effective Politics

Now, I know what you’re thinking: That’s crazy talk! For decades, rich guys like me have been selling you tax cuts on the merits of pure economic stimulus. The rich are “job creators,” we’ve told you. The more money and incentives we wealthy few have to invest in creating jobs, the better the economy is for everybody—especially you. And you bought it. Even many of you Democrats. Even when you fight for fairer taxes, some Democrats and their economic advisers still believe that there is always a trade off between fairness and growth. Bullshit. As a venture capitalist and serial entrepreneur who’s made a personal fortune founding or funding more than 30 companies, I can tell you firsthand

Summer 2018 The American Prospect 67

In 2012, Kansas Governor Sam Brownback famously embarked on what he called a “real live experiment,” pitting pure trickle-down theory against economic reality. Unfortunately for Kansans, reality won. Kansas has dramatically underperformed its neighboring states and the nation as a whole both in economic growth and in job creation since slashing taxes on individuals and corporations to as low as zero. Compare that with California, which in 2012 elicited the usual apocalyptic warnings from trickle-downers

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Wishful Thinking

What the Data Show

What trickle-down tax cutters would like to see

there is No correlation between top rates and growth

Note: The data in this chart are not real.

5% 4% 3% 2% 1% 0 -1% -2% -3%

20%

40%

60%

80%

100%

top marginal tax rate

6% 5%

economic growth rate

4% 3% 2% 1% 0 -1% -2% -3%

20%

40%

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top marginal tax rate

If trickle-down theory is correct—if cutting top tax rates reliably boosts economic growth—we’d expect to see a chart like the fictional one on the left: a downward sloping “best-fit” line reflecting an inverse relationship between top tax rates and GDP growth. What we actually see (the real chart on the right) are random dots. And the same holds true of every other economic indicator that the trickle-downers go on and on about: revenue growth from taxes, investment growth, employment growth, productivity growth, real median income growth—if they show any statistically significant correlation between top tax rates and growth, the slope is positive, suggesting that taxing the rich actually spurs growth. And if former Vice President Joe Biden’s economic adviser is too partisan for you, don’t just take Bernstein’s word on it. Both the nonpartisan Congressional Research Service (CRS) and the centrist Brookings Institution (perhaps the think tank cited most frequently from both sides of the aisle) report remarkably similar results. “[B]oth labor supply and savings and

investment are relatively insensitive to tax rates,” a statistical review by CRS researchers concludes, while a 2014 Brookings report looking at data from 1945 to 2010 found that “neither the top income tax rate nor the top capital gains tax rate has a statistically significant association with the real GDP growth rate.” In their conclusion, the Brookings authors bluntly expose trickle-down for the myth it is: “The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel,” the authors noted. “However, theory, evidence, and simulation studies tell a different and more complicated story.” A lot more complicated. In fact, the real economy is immensely more complex than the “Supply and Demand” fairy tale they teach you in Econ 101, for while tax rates don’t have zero effect, there is nothing magical about them. For decades, Republicans and some Democrats have taken it as an article of faith that, fairness issues aside, cutting taxes increases growth while raising taxes impedes it. But as we have just documented, there is absolutely no correlation. So, given the anecdotal and empirical evidence, how do Republicans justify their relentless trickle-down agenda? It is a well-worn (and unhelpful) cliché that economics is the science of the allocation of scarce resources, and the allegedly scarce resource that trickledown tax-cutters are obsessed with allocating is private investment capital. The market always allocates resources more efficiently than government, the theory goes. So, allow wealthy individuals and corporations to keep more of their earnings, and they will have both the incentive and the capital to efficiently invest in growing their businesses and creating more jobs. Two hundred years ago, at the dawn of the industrial age, this may have even been true. But in the 21st century, where the availability of capital and the cost of innovation have respectively risen and fallen exponentially, access to capital is no longer the primary constraint on market capitalism. A World Awash in Money

Some may find this assertion heretical, but investors like me are already struggling to cope with what Bain &

r i g h t c h a r t s o u r c e s : c b p p a n a ly s i s o f b u r e a u o f e c o n o m i c a n a ly s i s , b u r e a u o f l a b o r s tat i s t i c s , s o c i a l s e c u r i t y a d m i n i s t r at i o n , a n d ta x p o l i c y c e n t e r d ata

The Kansas Experiment and the Trickle-Down Myth

by daring to raise its top income tax rate to a highest-in-the-nation 13.3 percent. By 2015, California had one of the fastest-growing economies in the nation. Kansas? One of the slowest. Not enough data points for you? The economist Jared Bernstein and the Center on Budget and Policy Priorities gathered data on the intersection between top marginal tax rates and economic growth from 1947 to 2015, assembling them into easy-tovisualize scatterplot charts:

economic growth rate

that this classic trickle-down narrative represents more than just a fundamental misunderstanding of how market capitalism works; it is in fact a con job and a threat—an intimidation tactic posing as a theory of growth. The con works like this: If we can get you to believe these three things—that if you raise taxes on the rich, we’ll refuse to invest; that if you regulate corporations, they’ll be less competitive; and that if you raise the minimum wage, we’ll hire fewer workers—then you will accede, to some degree or another, to a 1 percent–enriching trickle-down agenda of tax cuts for the wealthy, deregulation of the powerful, and wage suppression for everyone else. Yet despite these claims, what you’ll never get from trickledown is faster growth and better jobs. Because economic growth doesn’t come from making the rich richer; it comes from making the middle class and working people generally stronger. To be clear: There is simply no empirical evidence or plausible economic mechanism to support the claim that cutting top tax rates spurs economic growth. Zero. Zilch. Nada. When President Bill Clinton hiked taxes, the economy boomed. When President George W. Bush slashed taxes, the economy ultimately collapsed. It wasn’t until after most of the Bush tax cuts expired during the Obama administration that the post– Great Recession recovery started to pick up steam—an ongoing recovery that, as uneven as it has been, has grown into one of the longest economic expansions in U.S. history. And then, of course, there’s Kansas.

Part V the future

Company terms “capital superabundance.” In a 2012 report titled “A World Awash in Money,” Bain explained that global financial capital more than tripled between 1990 and 2010 to some $600 trillion, and was on track to increase by half again by 2020. Meanwhile, financial innovations are dramatically expanding access to global debt and equity markets, leading to what can only be described as the commoditization of capital. But even as the global financial glut continues to grow, new technologies are dramatically reducing demand for capital throughout the most dynamic segments of our economy. It once cost billions to finance a new steel mill, the symbol of the old economy, but mighty Google’s first round of financing? Just $25 million. Amazon? Only $1 million. It is this “investment supply–demand imbalance,” writes Bain, that is decisively shifting power “from owners of capital to owners of good ideas.” You can actually see this glut of financial capital accumulating on corporate balance sheets and in private bank accounts in the form of unprecedented reserves of nonproductive cash. According to various estimates, U.S. companies are now hoarding as much as $2.6 trillion in cash and marketable securities through foreign subsidiaries, and another $1.9 trillion here at home. Add to that the $2.7 trillion of investor cash earning next to nothing in money market funds, and another $2.1 trillion of excess reserves banks are hoarding at the Fed, and that’s more than $9 trillion in available cash in those four categories alone. Just sitting there. Doing absolutely nothing. And yes, that includes the several trillion dollars of foreign earnings the Republican tax plan promised to “repatriate.” The truth is, these “overseas” reserves are largely an accounting trick. According to the Federal Reserve Bank of Atlanta, much of this money is already held in U.S. bank deposits, in U.S. Treasury notes, and in dollar-dominated corporate securities. That’s why, far from boosting the economy, the last time Congress enacted a foreign earnings “tax holiday,” the biggest corporate beneficiaries actually cut thousands of domestic jobs, choosing instead to

funnel their after-tax windfall into (surprise!) stock buybacks and dividends. Every “$1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders,” University of Chicago, Harvard, and MIT researchers concluded. Obviously, a tax holiday can’t possibly deliver a boost in jobs or wages by bringing home dollars that are already here. What it can do and is doing, however, is finance a record wave of stock buybacks—including $100 billion worth from Apple alone. But even if investment capital was scarce and the trickle-down theories were all perfectly sound (and they’re not), the Trump/Ryan tax cuts still wouldn’t spur much investment or growth, because marginal tax rates were already so low! This isn’t 1950. Or even 1980. At 39.6 percent, the top marginal income tax rate was already low by historical standards—far below the 91 percent top rate during the boom-boom Eisenhower years, the 70 percent top rate when President Reagan took office, or even the 50 percent top rate throughout most of the Reagan administration—while the average effective top tax rate (what rich people like me actually pay after loopholes and shelters and such) was a historically middling 23 percent. And while our statutory corporate tax rate was indeed among the highest in the industrialized world, let’s be clear: Almost nobody paid that. According to the Congressional Budget Office, even before the rate was slashed to 21 percent, the effective corporate tax rate averaged just 18.6 percent. And despite their constant whining, many large companies paid much less. During a joint appearance with Speaker Paul Ryan at the giant 787 assembly plant in Everett, Washington, Boeing CEO Dennis Muilenburg embraced the Republican tax agenda, calling corporate tax cuts “a big deal.” But over the past 15 years, Boeing’s effective tax rate has averaged only 3.2 percent. And mighty Amazon? Its 2016 federal tax bill was effectively zero. American Hoarders

The problem isn’t that corporations and investors don’t have enough aftertax cash; it’s that they’re not productively spending or investing the cash

Before 2008, a dollar changed hands 17 times a year. Since 2008, a dollar changes hands 5 times a year —because corporations and the rich are hoarding them.

they already have. And it’s a problem greatly amplified by the dramatic rise of income and wealth inequality in recent decades. Over the past 40 years, after-tax corporate profits have doubled, from about 5 percent of GDP to about 10 percent today, while wages’ share of GDP has fallen by about the same percentage. That’s a trillion-dollar-a-year transfer of wealth from paychecks to profits. But it doesn’t even tell half the story. Over the same period, the top 1 percent’s share of total U.S. personal income has more than doubled, from under 9 percent in the mid-1970s to 22 percent in 2015—another $2 trillion a year that used to go to people like you, but now goes to rich people like me. As a result, the top 0.1 percent’s share of total household wealth has more than tripled, from about 7 percent before Reagan took office to about 22 percent today. In fact, the top 0.1 percent (really rich people like me) now own more wealth than the bottom 90 percent of Americans combined. And this gets to the real cause of our nation’s chronically slow growth in wages, jobs, productivity, investment, and output: our accelerating crisis of economic inequality. We are concentrating cash in the hands of people and corporations who already have more money than they know what to do with, while starving consumers of the spending power that accounts for 70 percent of GDP. The anti-growth consequences of this concentration and hoarding of wealth can be seen in the precipitous decline in what economists call the “velocity of money”—the rate at which dollars recirculate through the economy— which the Federal Reserve Bank of St. Louis calculates as “the ratio of nominal gross domestic product (GDP) to the money supply.” During the years preceding the Great Recession, every dollar in circulation typically changed hands about 17 times over the course of a given year. For example, you spend a dollar on coffee, which the coffee shop pays to the barista in wages, who in turn spends it on buying a burger, and so on. But in recent years, each dollar in circulation has been spent an average of only five times during a year—one of the slowest

Summer 2018 The American Prospect 69

The Velocity of Money gross domestic product in Billions (St. Louis Adjusted monetary base) $22.5 $20.0

hoarding due to Gilded Age–level concentrations of wealth? How do we deliver the good jobs and good wages American workers desperately need? Raise taxes on the rich. Really.

$17.5

Tax and Spend

$15.0 $12.5 $10.0 $7.5 $5.0 $2.5

1985

1990

1995

2000

Source: fred.stlouisfed.org

rates on record. This means that each dollar in circulation today is generating 70 percent less economic activity than a dollar did just ten years ago. What explains this dramatic slowdown in the velocity of money? “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it,” explained the St. Louis Fed in a gloomy 2014 blog post. Trickle-down economics assumes that the velocity of money is relatively stable and predictable (indeed, the standard textbook formula MV=PT represents V as a constant); thus money in the hands of the wealthy should have as much velocity as money in the hands of the middle class. But this clearly isn’t true. And for obvious reasons: For example, I earn about a thousand times more per hour than the average American, but I couldn’t possibly buy a thousand times more stuff. I only own so many pairs of pants. My family and I can only eat three meals a day. We enjoy a luxurious lifestyle, but we already own several houses, a private jet, and one too many yachts (turns out, the optimal number is two). Cutting our taxes will make us richer, but it won’t incentivize me or my venture capital partners to spend or invest more than we already do. What’s holding us back isn’t a shortage of cash, but rather a shortage of demand. The truth is, no amount of luxury spending can make up for the buying power of the great American middle class—a middle class whose size and strength we have been eroding year after year. So then, how do we get money flowing back through the economy again in the face of such unprecedented

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2005

2010

2015

Raise taxes on the rich, and almost anything the federal government does with the revenue will pump more money through the economy than what the wealthy are doing with their hoarded cash today. Tax the rich to put money back in the hands of the American people through middleclass tax cuts, and corporations will expand production and payrolls to meet the resulting spike in consumer demand. Tax the rich to invest in roads, transit, bridges, health care, schools, and basic research, and we will create millions of good-paying jobs while building the physical and human infrastructure on which our collective prosperity relies. As for tax rates, we should create more tax brackets, not fewer, with substantially higher rates on our wealthiest households and our largest inherited estates. You want to simplify the tax code? Here’s an idea: Let’s treat all income equally. For example, eliminate the cap on payroll taxes, apply it to all income, and then slash the rate, increasing the spending power of most Americans. Rich people like me make most of our money from dividends and capital gains, and it’s just plain crazy that I pay a lower tax rate on investment income than a truck driver or schoolteacher pays on their hardearned wages or a small businessperson pays on her hard-won profits. As for the corporate income tax rate, keep the lower rate if you want—but only if the Trump/Ryan cut is more than offset by eliminating corporate tax loopholes. As a percent of federal tax revenue, corporate taxes already accounted for only a third of what they did in the 1950s, despite years of record profits. What corporate America needs and deserves is a fairer, simpler, more predictable tax code, not a cheaper one. An Alternative Economic Narrative

President Trump boasted that the “biggest winners” from his tax cuts would be “the everyday American

workers as jobs start pouring into our country, as companies start competing for American labor, and as wages start going up.” But you’re never going to get that $4,000 raise Trump promised, because Republicans have economic cause and effect reversed: Low wages and rising inequality are not symptoms of slow growth; low wages and rising inequality are the disease that causes slow growth—and inequality cannot be cured by creating even more inequality. If top tax rates were high, profits low, private investment capital scarce, unemployment rising, and inflation out of control, Republicans might have had a case for cutting taxes. But that’s not the economy we’re living in today. Our economy isn’t suffering from a lack of access to private investment capital; it is suffering from a homegrown crisis of extreme economic inequality that is eroding both consumer demand and the ability of working- and middle-class Americans to invest in themselves and in their children. And it is this deadly combination of slack demand and declining investment that is the real “job killer.” Indeed, a 2014 report from the Organization for Economic Cooperation and Development concluded that rising inequality knocked as much as 9 points off U.S. GDP growth over the previous two decades alone. That’s more than $1.6 trillion! Just imagine how many more good-paying jobs our economy would have created were it $1.6 trillion bigger than it is today. What our economy needs now is to get those trillions of dollars of hoarded cash off the sidelines, and back into the hands of working- and middleclass Americans—not because it is fair, but because it is pro-growth. Tell that story. Run on it. Believe it. Give voters a choice between an economic narrative that lionizes the rich as “job creators” or a middle-outward narrative that rightly celebrates the American people as the primary cause and source of growth, and most voters will choose the story that places them back at the center of the American economy. Nick Hanauer is a Seattle-based entrepreneur and venture capitalist, and the founder of Civic Ventures, a public-policy incubator.

Part V the future

The Long Game on Taxes

It’s not too soon to start thinking about the tax reforms we need and the strategy for getting there. by Pau l S ta rr

he immediate aim for progressives on taxes is clear: show all the ways in which the 2017 Republican Tax Act favors the interests of the wealthy and shortchanges average Americans, who will ultimately end up paying the cost. But the long game on taxes is a lot less obvious. We need policies that foster a more widely shared prosperity, correcting for the trend toward increased economic inequality instead of aggravating it. We need stable financing for programs that the public continues to demand. And we need to reduce the risks of climate change by promoting the shift away from carbon fuels. Working out an effective and persuasive strategy to achieve those aims poses an extraordinary challenge. How we got progressive taxation in the first place may hold some lessons for us now. In their book Taxing the Rich: A History of Fiscal Fairness in the United States and Europe, Kenneth Scheve and David Stasavage distinguish between two types of arguments for progressivity. The more familiar argument is that a person’s ability to pay increases with income and that a graduated tax is fair because it tends to equalize the sacrifice asked of rich and poor. The less familiar argument—but the one that Scheve and Stasavage point to as crucial to the rise of progressive taxation in the 20th century—is compensatory: Higher taxes on the rich compensate for other advantages the rich enjoy from government policy. Progressive taxation in the United States emerged in two steps, each of which had its own compensatory argument. In the late 1800s and early 1900s, support for a constitutional amendment to allow a federal income tax came predominantly from the South and the West, where Populists and Democrats saw an income tax as a way of compensating for the advantages

that protective tariffs created for industrial and financial interests concentrated in the Northeast. But rates only went as high as 7 percent in the income tax passed by Congress after the ratification of the 16th Amendment in 1913. It was during the two world wars that marginal rates on top incomes rose to much higher levels—up to 94 percent during World War II—justified by an even more powerful compensatory argument. With millions of men being conscripted to fight, it was only fair to demand greater sacrifice in taxes from those who stayed home and often prospered from the war economy. The “conscription of income,” some called it. During the Cold War, while the draft was still in effect, Congress maintained highly progressive rates. And because economic growth was strong in the postwar years, conservatives got little traction arguing that progressive taxes hindered economic growth, until the stagflation of the 1970s paved the way for the tax cuts of the Reagan era. The late 20th-century decline in progressive taxation wasn’t peculiar to the United States. Governments in the advanced economies cut the top marginal income tax rate from an average of 60 percent in the early 1970s to 38 percent by 2000, according to Scheve and Stasavage. Their explanation is that without wars involving mass mobilization, the compensatory argument for sharply progressive taxes became harder to make. Let’s leave aside the adequacy of that historical analysis (which leaves out differences in political influence and fails to explain the decline in corporate taxes that occurred in the same period). The political question now, in an era of runaway top incomes, is whether liberals can effectively make a different compensatory argument, justifying progressive taxes as a means of compensating for decades of government

The history of taxation in the United States and Europe offers lessons for how to approach the big long-term challenges we face today.

policy that has unduly favored powerful corporations and people at the top. That seems to me the right argument to make, but I also see another lesson for the long game on taxes from recent European and American history. And that lesson, while not contradicting the first one, goes in a different direction. If we want secure public financing, we need to put relatively less emphasis on income taxes altogether. The European countries with substantial public services and generous social insurance programs don’t rely heavily on progressive taxes on income. They typically achieve greater economic equality and security on the spending side, while collecting revenue through regressive taxes on consumption, primarily the value-added tax (VAT), as well as payroll taxes. Because it is built into everyday prices, the VAT provokes relatively little conflict. And because it is rebated for exports, it has advantages in international trade. That’s one of the ways the Europeans reconcile incentives for economic growth with protections for economic security. The United States desperately needs the kind of stable financing for public goods and services that a tax like the VAT provides. Since the end of the Reagan era, tax policy has seesawed back and forth. In 1993, Bill Clinton raised top marginal rates back up a bit, but George W. Bush cut them back down a decade later. Then they went up again under Barack Obama, and now back down under Donald Trump, with the biggest cuts coming in corporate taxes. The Republican tax cuts always come with false promises that they will pay for themselves. What they really do is create a fiscal straitjacket for future Democratic administrations, which are severely constrained even when they do manage to restore some of the progressivity lost under Republican control. If Democrats win control of Congress and the presidency in 2020, they should try to undo much of the 2017 Republican legislation. But we are not going back—at least, let’s hope we are not going back—to the conditions of the world wars that allowed for the exceptionally progressive tax rates of the mid-20th century. Just as the Europeans long ago recognized the limits of

Summer 2018 The American Prospect 71

72 WWW.Prospect.org Summer 2018

a professor at Columbia Law School. Graetz’s idea was to introduce a VAT at 10 percent to 14 percent while increasing the standard exemption on income taxes to $50,000 for an individual and $100,000 for a couple. A politically attractive feature of the proposal is that it would not only make the tax less regressive but eliminate the need for tens of millions of households to file income tax returns. Although Graetz’s idea has other problems, the basic strategy of using part of the proceeds

U.S. Taxes Were Low Before Trump Taxes as a share of Gross Domestic Product, oecd countries, 2015 Denmark France Belgium Finland Austria Italy Sweden Hungary Norway Netherlands Iceland Luxembourg Germany Greece Slovenia Portugal OECD Average Spain Estonia Czech Republic New Zealand United Kingdom Slovak Republic Poland Japan Canada Israel Turkey Latvia Switzerland Australia United States Korea Ireland Chile Mexico 0%

34%

26%

10%

20%

30%

40%

50%

of a VAT to reduce other tax obligations deserves reconsideration. A VAT makes many liberals uneasy. But depending on what taxes a VAT replaces, what services it finances, and what kinds of credits or rate differentials it has, its impact could be net progressive. Rebates to individuals have been a central feature of proposals for a carbon tax, which has the singular virtue of directly promoting sustainable patterns of energy use. Indeed, some proposals

for taxing carbon have advocated it solely for its incentive effects and called for rebating all the proceeds to individuals. But while rebating some of the money makes sense as a way of offsetting the regressive impact, a carbon tax could underwrite public spending to address environmental threats. Earmarking proceeds for a National Resilience Fund, for example, would be a way to finance public infrastructure investment, disaster aid and reconstruction, and other needs currently financed—indeed, underfinanced—out of general revenue. The third option, wealth taxation, faces inherent problems in a world economy with highly mobile capital: Try to tax wealth heavily, and its owners can move it elsewhere. That’s why at the end of his book Capital in the Twenty-First Century, Thomas Piketty calls for a global wealth tax. But while a new tax of that kind is hard to imagine, there are two more practical steps in that direction. One is to negotiate international agreements to reduce the tax evasion by the global 1 percent and capture revenue from the trillions of dollars in offshore accounts. The other is to strengthen the estate tax; for example, the current system allows wealth to be passed on untaxed from one generation to the next in perpetuity, while other people bear the burden of paying for public goods. Taxing capital gains at the point assets are passed on to heirs would not only be fair but help reduce the concentration of immense wealth in a self-perpetuating oligarchy. In the Trump era, everyone’s attention seems to be consumed by the scandals and crises of the moment. But we need to think about the challenges that Trumpery is keeping off the agenda, and taxes have to be part of that strategic effort. Most likely, enacting a new tax like a VAT or carbon tax, or combating the various means the superrich use to escape taxation, will require a precipitating national crisis that creates unambiguous fiscal demands. The latest Republican tax cuts may well contribute to such a fiscal crisis, in which case we ought to be prepared with bolder alternatives than are currently being discussed. The long game may be on us soon enough.

source: tax policy center, oecd stat extract. these are provisional estimates. 2014 data are used for australia, japan and poland. the oecd average is over the the most recently available data.

what they could get out of progressive income taxes, so Democrats here need to make that adjustment and play for a long game that enables us to break out of the seesaw pattern of recent decades and establish new sources of revenue. The rationale for new revenue is that the world we confront today requires more of a role for government, not less, in protecting both our personal economic and collective security. In the 20th century, America effectively delegated to employers many of the functions, such as the provision of health insurance, that governments elsewhere perform. But employers have been shedding those responsibilities, offloading risks onto their employees and relying more on independent contractors and part-time workers. Changes in family life have also created new needs, such as for child care, that the country has been unable to meet. We have likewise been hamstrung in making public investments not only for traditional infrastructure but also for the updated transportation and energy systems needed to adapt to rising sea levels and changing weather patterns. Climate change ought to be seen as a matter of collective defense—the defense of a sustainable environment for the nation and the entire world. Public money is essential to meet these challenges, and taxes are the only way to obtain it. It seems to me there are three major candidates for new revenue—a VAT, carbon taxes, and wealth taxation—and two primary ways to think about strategies for enactment. One way is to start small. Just as the federal income tax was originally established at a low level in 1913, so was the payroll tax for Social Security in 1935 (originally only 1 percent on the employer and 1 percent on the worker). Establishing the rationale for a new tax is more important than obtaining its full revenue potential. A second strategy of enactment is to propose a new tax at a higher rate and give much of the money back in the form of reductions in other taxes or rebates to individuals. This is the gist of a 2008 proposal for a VAT by Michael Graetz, who served as a Treasury official for tax policy in the first Bush administration and is currently

Part V the future

How to Restore Taxes on Inheritances

With the estate tax further weakened, is it time to pivot to an inheritance tax? by Ch u c k C o l l i ns

s part of the 2017 tax bill, Congress came within a whisker of abolishing the estate tax. In the end, Congress weakened the century-old levy on inherited wealth paid exclusively by multi-millionaires and billionaires. The estate tax was one of the substantive negotiating points of the joint tax conference committee that reconciled the differences between House and Senate versions in December 2017. House Republicans, fulfilling a decades-old aspiration, voted along party lines to abolish the tax. Senate Republicans were divided and several wondered aloud about the necessity of complete repeal. Arizona Senator Jeff Flake, in a moment of candor, pointed out that Congress had already “done pretty well” in modifying the estate tax. He questioned the GOP contention that estate tax repeal would have a positive economic benefit, doubting “whether [repeal] stimulates that much more.” At a pivotal moment, Senator Susan Collins of Maine and Senator Mike Rounds of South Dakota signaled their opposition to estate tax repeal. The Senate voted to double the wealth exemption but retain the tax. The law that was finally enacted mirrored the Senate version. The amount of wealth exempted by the tax, minus deductions—such as for charitable giving—was doubled from $5.49 million for an individual to $11.18 million—and from $10.98 million for a couple to $22.36 million. The 40 percent rate remained unchanged. Prior to congressional action, the estate tax was on track to raise $280 billion over the coming decade. After this reform, the tax is estimated to raise $32 billion less over the next decade, according to the Congressional Budget Office.

Like other provisions affecting individual taxpayers in the 2017 tax bill, changes in the estate tax will expire in 2025. Unless Congress acts, the wealth exemptions will revert to the 2017 law, with its $5.49 million individual wealth exemption adjusted for inflation. Estate planners face interesting new scenarios—such as one spouse dying before 2025 under the new law and a surviving spouse living to see the law revert to 2017 rules. “The legislation is just idiotic,” said James Spica, an estate tax specialist in Detroit. “You’ll get half the benefit if the second spouse dies outside this new regime.” While the estate tax appears to be on life support, it is surprisingly resilient. While the tax has been under attack for decades, it already survived a near-death experience in 2010. Looking Back

The estate tax has been in GOP crosshairs since the late 1990s, when a number of conservative anti-tax organizations, such as the Family Business Coalition and a cabal of wealthy newspaper owners, mounted a full-frontal assault. At that point, the amount of wealth exempted by the tax hovered around $675,000, it was paid by about 2 percent of estates, and it raised about $38 billion a year in current dollars. Estate tax opponents spent millions to save billions. The levy triggers intense opposition from those fortunate enough to be subject to it—the wealthiest 1 percent—who obviously have plentiful resources to fight it. In the early years of opposition, 1997 to 2005, dynastically wealthy families such as the Mars, Gallo, and Walton families contributed to abolition advocacy campaigns. Yet the estate tax has had fickle public support, with ordinary people resenting being taxed as they imagine

An inheritance is a form of windfall income. The tax should be paid by the heirs, not the estate.

becoming millionaires. The abolition cause was boosted by right-wing message maestro Frank Luntz, who framed the tax as a “death tax.” Antitax advocates focused on convincing ordinary people that the taxman would show up at funerals, especially at family farms and small businesses. Their mini-campaign received a huge boost when President George W. Bush included repeal in his 2001 tax cut proposal. But in order to fit within a ten-year budget framework, the tax was slowly phased out and then repealed in 2010 for one year only before having to be renegotiated. This famous “throw momma from the train” provision did benefit a few wealthy families. When shipbuilder and Yankees owner George Steinbrenner died in 2010, his estimated $1.1 billion fortune passed untaxed to his heirs. In 2011, the estate tax returned and Congress increased the wealth exemption from $3.5 million to $5 million for an individual and from $7 million to $10 million for a couple, adjusted to inflation. The rate was dropped from 45 percent to 35 percent. It would be fair to say the estate tax is a shadow of its former self since its more robust days prior to the 2001 Bush tax reform. Since 2001, the number of estates paying an estate tax has shrunk by more than 90 percent, falling from over 50,000 in 2001 to 5,219 in 2016. In 2001, two out of 100 estates were subject to the tax. By 2017, the tax was paid by only the wealthiest—two out of 1,000 estates paid. The rate has also steadily been cut. Since 2001, the estate tax rate has fallen from 55 percent to 40 percent. In 2016, estate taxes of $18.3 billion were paid on total estate assets of $108 billion, an effective rate of 17 percent. At a time when the combined wealth of the Forbes 400 is more than $2.7 trillion, we can presume a high level of estate tax avoidance. Donald Trump resurrected the call to abolish the estate tax, repeating tired talking points. “To protect millions of small businesses and the American farmer,” said Trump at an Indianapolis speech, “we are finally ending the crushing, the horrible, the unfair estate tax, or as it is often referred to, the death tax.” In fact, advocates of repeal

Summer 2018 The American Prospect 73

taxes. For example, a trust mechanism called a Grantor Retained Annuity Trust (GRAT) has been deployed by hundreds of executives, according to Securities and Exchange Commission filings, including by Facebook founder Mark Zuckerberg, fashion designer Ralph Lauren, DISH Network Chairman Charles Ergen, and 84 current and former partners from Goldman Sachs, including CEO Lloyd Blankfein. JPMorgan Chase & Co. has so many clients that use GRAT trusts that they have a special unit of the bank devoted to processing GRAT paperwork. GRATs are complex trusts that include a “retained interest” for the wealthy grantor (like an annuity payout) and often enable them

Estat e Ta x Fabri c ati o n s

outh Dakota Representative Kristi Noem served as House Speaker Paul Ryan’s point person on the conference committee to reconcile the Tax Cuts and Jobs Act of 2017. For over a decade, Noem deployed a personal story of her father’s sudden death in 1994 and her family’s payment of the “death tax” as a heart-wrenching personal anecdote. “It wasn’t very long after he was killed that we got a bill in the mail from the IRS that said we owed them money because we had a tragedy,” Noem said in a 2015 speech on the House floor. “I didn’t understand how bureaucrats and politicians in Washington, D.C., could make a law that says when a tragedy hits a family they are somehow owed

survived by his spouse something from that was subject to tax,” family business.” said Robert Lord, a Noem became the Phoenix tax attorney case study of a tyranand expert in estate nical tax gone bad, tax law. “It easily could soaking hard-working have been deferred. Midwestern farmers at That would have been a a time of loss in a famno-brainer.” ily’s life. She helped A team from the keep the focus on famInstitute for Policy ily farms as victims of estate taxes rather than Studies reviewed the public probate findings on the super-wealthy and exposed Noem’s who will owe the tax. But tax experts asked misrepresentation. What triggered her why Noem’s family paid family’s tax was a South any federal estate tax at all. Since 1982, estate Dakota estate tax provision, abolished in 1995, tax law has allowed that had nothing to do an estate to pass to a with the fedspouse without tax. eral estate Noem’s mother, who is tax. It still alive to this day, was also should have used this revealed spousal exemption. that “It’s hard to believe between the estate of 1995 and a farmer who died 2016, in 1994 her Rep. Kristi Noem and was

74 WWW.Prospect.org Summer 2018

family-owned Racota Valley Ranch in Hazel, South Dakota, cashed in $3.7 million in government farm subsidies. In 2012 alone, they accepted $232,707 in subsidies. As Noem complained about government overreach and taxes, her family happily deposited hundreds of thousands in farm subsidies. South Dakota media pursued Noem and questioned her veracity, weakening her position going into the conference committee. When it came time for Noem to forcefully make the case for estate tax repeal, she was cowed and quiet. A few weeks later, Noem announced her retirement from Congress to run for South Dakota governor. —C.C.

to transfer a substantial amount of wealth to heirs without taxes. Casino magnate Sheldon Adelson created more than 30 GRATs to churn assets and annuities and avoid $2.8 billion in estate and gift taxes by shifting almost $8 billion to heirs. The creator of the trust, attorney Richard Covey, estimates it has cost the U.S. Treasury at least $100 billion in lost revenue. Looking Forward

It’s time for a new approach. The premise of the estate tax, back when it raised serious money, was that the estate paid the tax. But when a progressive Congress revisits this issue, it makes more sense to apply the tax to their heirs, as just another form of income. At the conclusion of Capital in the Twenty-First Century, the French economist Thomas Piketty calls for the establishment of a global wealth tax as a key intervention to move increasingly unequal societies away from our drift toward patrimonial capitalism. Today, however, policy in most countries is moving in the opposite direction. Very few countries have robust estate or inheritance taxes and even fewer have annual wealth taxes. Even France, Piketty’s homeland, recently abolished its “solidarity tax” on wealth in 2017 as President Emmanuel Macron came into office. Prior to this action, France taxed wealth of over $1.3 million euros on an annual basis at progressive rates, ranging from 0.5 percent to 1.5 percent. France did retain a progressive inheritance tax, with steeply progressive rates depending on total wealth and the relationship to the decedent. France also has a luxury tax on gold bars, luxury boats, and cars. Other countries with direct taxes on wealth include Switzerland, which taxes wealth at the canton level, as well as the Netherlands and Norway. Sweden abolished its wealth tax in 2007, concerned about capital flight. Should the United States consider a wealth tax? As an interesting aside, in 1999 Donald Trump proposed a one-time 14.25 percent tax on wealth of over $10 million. Trump claimed the tax would raise $5.7 trillion that should be applied toward reducing the national debt.

j. scot t applewhite / ap images

have repeatedly tried in vain to find an actual family farm or business that had to be sold to pay estate taxes. (See “Estate Tax Fabrications.”) In 2017, however, the opposition’s intensity was diminished. The lobbying efforts to abolish the tax did not approach the level of resources expended in 2001, raising the suspicion that many of the big money interests behind the repeal campaign had figured out ways to avoid the tax using trusts and hidden wealth mechanisms. The big advocacy dollars were focused on winning the corporate tax cut. Since 2000, a growing number of wealthy U.S. nationals have deployed the offshore system and complex trusts to dodge estate levies and other

Part V the future

The United States could explore a progressive wealth tax similar to the French “solidarity tax.” A graduated annual net worth tax on wealth of over $10 million could start at 1 percent and rise to 2 percent on wealth over $500 million. Such a tax, which could be promoted as an excise tax on hoarded wealth, could raise substantial revenue from those with the greatest capacity to pay. On the other hand, it may be easier politically and constitutionally to make the case that inheritances should be simply taxed as income. A number of legal experts have suggested that the U.S. Constitution precludes a direct tax on wealth at the federal level. But there is no obstacle to taxing wealth when a transfer event occurs, such as an estate flowing to the next generation. Taxing Wealth Transfers Going Forward

A progressive tax agenda must include strengthening wealth transfer taxes, whether as a more robust estate tax or a redesigned inheritance tax. Inherited advantage is disrupting social mobility and opportunity, creating dynamics of “dream hoarding”— blocking opportunity for non-wealthy people—among the super-rich, and distorting democratic institutions. Inheritances represent roughly 40 percent of all wealth, with bequests totaling about $500 billion per year. A progressive wealth tax program could include strengthening the existing estate tax by broadening the base, instituting a more progressive rate, and reducing the wealth exemption. For the last several congressional sessions, Senator Bernie Sanders has introduced his “Responsible Estate Tax Act” that would return the wealth exemption to $3.5 million and close some of the most egregious loopholes, such the GRAT trust. The Sanders proposal would also institute a graduated rate structure, with a 50 percent rate on estates between $10 million and $50 million ($20 million to $100 million per couple), rising to 55 percent for estates between $50 million

Number of Estates Facing Tax Has Plummeted Taxable Estates in Thousands 60

In 2001, 2.2% of estates owed the estate tax. In 2015, only 0.2% did.

50 40 30 20 10 0

2001

2003

2005

2007

2009

2011

2013

2015

Source: Joint Committee on Taxation; cbpp.org

and $500 million ($100 million and $1 billion per couple). A top rate of 65 percent would be levied for estates to the extent they exceed $500 million ($1 billion per couple). This progressive rate structure would raise an additional $243 billion to $288 billion over ten years. As the estate tax approaches the 2025 transition point, there might be the leverage and political will to transition to an inheritance tax. New York University law professor Lily Batchelder has consistently made the case for converting the existing estate and gift tax into a direct tax on recipients of large inheritances. This would include modifying the federal income tax to include income from inheritances and gifts above a certain threshold. Currently, if you find $5 million worth of cash in a bag on the street, you are required to declare it as taxable income on your tax return. But if your mother leaves you a $10 million inheritance, it is exempt from taxation. Batchelder proposes that heirs of large inheritances pay income tax plus a surcharge on inheritances above a lifetime exemption. She proposes an annual exemption of $5,000 for gifts and $25,000 for inheritances, with a lifetime exemption of $2.1 million. Batchelder estimates that if a lifetime exemption is established at $2.1 million and the surcharge is 15 percent, such a tax would raise roughly $200 billion more over ten years than the 2017 estate tax. Increasing the rates or

If you find $5 million on the street, it’s taxable, but if your mother leaves you $10 million, it’s tax-exempt.

reducing the wealth exemption threshold would further boost revenue. Emphasizing a tax on the heir—and calling it a “silver spoon tax” or “privilege tax”—sidesteps the communications challenges of the “death tax” attack. For example, instead of taxing Conrad Hilton, the virtuous industrialist, it would tax Paris Hilton, the idle heiress. Inheritance taxes make good policy. Those receiving large inheritances have likely been beneficiaries of other intergenerational wealth transfers and social capital to give them more than an advantaged head start. As Batchelder writes, “Heirs of large inheritances also typically have a huge leg up in earning income if they choose to work—with access to the best education, influential family friends, interest-free or low-interest loans, and a safety net if they take risks that don’t pan out. This further strengthens the case for taxing inheritances at a higher rate.” An inheritance tax may have the advantage of capturing wealth that has been hidden in trusts and in offshore systems. Economist Gabriel Zucman believes that the use of tax havens grew 25 percent between 2009 and 2015. He estimates that about 8 percent of the world’s individual financial wealth—almost $8 trillion—is hidden in these offshore centers. Wealthy U.S. citizens have an estimated $1.2 trillion stashed offshore, avoiding $200 billion a year in taxes. Some of this hidden wealth will be passed on to heirs through these hidden mechanisms, but to the extent it is passed on through inheritance, it could be taxed as income. With wealth concentrated at its greatest level since the Gilded Age a century ago, there is no better time to strengthen U.S. wealth transfer taxes. Chuck Collins is a senior scholar at the Institute for Policy Studies, where he co-edits Inequality.org, and is author of Born on Third Base: A One Percenter Makes the Case for Tackling Inequality, Bringing Wealth Home, and Committing to the Common Good.

volume 29, number 3. The American Prospect (ISSN 1049-7285) is published quarterly by The American Prospect, Inc., 1225 Eye Street NW, Suite 600, Washington, DC 20005. Periodicals-class postage paid at Washington, DC, and additional mailing ofﬁces. Copyright © 2018 by The American Prospect, Inc. All rights reserved. No part of this periodical may be reproduced without the consent of The American Prospect, Inc. The American Prospect ® is a registered trademark of The American Prospect, Inc. Postmaster: Please send address changes to The American Prospect, P.O. Box 421087, Palm Coast, FL 32142. printed in the u.s.a.

Summer 2018 The American Prospect 75

Principles for Real Tax Reform The 2017 Tax Act not only harmed most Americans, but upstaged true, overdue reforms. Here are some key elements, as themes for both politics and policy. By Robert Kuttner

Tax Fairness: Corporations and the Wealthy Should Pay Their Fair Share Repeal all corporate provisions of the tax act. The idea that corporate rates were too high was always phony.

Even at the old rates, the United States had one of the lower net rates of corporate taxation among OECD nations. Restore the top marginal rates on individuals, and add a new surtax rate of 50% for incomes over $1 million.

During the boom years after World War II, the top rate was never below 70% and the economy flourished. Repeal provisions of the law intended to punish citizens in states with decent public services, such as the cap on deductibility of state and local taxes. At the same time, cap the mortgage interest deduction and use the savings to finance more affordable housing. Tax income from wealth the same way we tax income from work. Eliminate all preferential tax treatment for income from dividends and capital gains. That reform also reduces inefficient economic activity intended purely to game the tax system. Restore a robust tax on large inheritances both to increase tax fairness and to curb dynastic wealth.

Fighting Abuses: Crack Down on Cheating and Gimmicks that Benefit the Rich End profit-shifting and offshore tax evasion by taxing all corporate profits based on the location of final sale.

That way, corporations save no tax money by playing accounting games about where profits are nominally booked. Tax foreign corporate profits the same as domestic profits. Require all owners of assets to disclose the true owner, irrespective of dummy corporate shells and trusts. resume international leadership of a common effort to shut down tax havens. Transactions should be

prohibited with any country that refuses to disclose true owners of assets to tax authorities. Banks that collaborate in asset-hiding schemes should be subject to criminal prosecution as money-launderers. Restore adequate funding to the IRS, with an explicit mandate to investigate complex tax evasion and asset-hiding

schemes. End artificial depreciation benefits for owners of commercial real estate. End all tax subsidies of oil, gas, and other extractive industries. End the “carried interest” special treatment of hedge fund profits and tax them as ordinary income.

Revenue Adequacy: Restore Tax Equity to Finance Public Needs Identify new sources of revenue that also target abuses. Two good ones are a Wall Street sales tax (“Tobin Tax”) on short-term financial transactions and a carbon tax. Use credits to offset the regressive aspects of a carbon tax. Restore all program cuts based on the $1.9 trillion increase in the deficit caused by the Tax Act. Secure adequate revenues to assure funding of core programs such as Social Security, Medicare, and Medicaid, and to make new investments in affordable higher education, infrastructure, early childhood education and child care, and transition to a green economy.

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A Moral Imperative: Ending Poverty By Randi Weingarten, President AMERICAN FEDERATION OF TEACHERS

ifty years since the launch of the Poor People’s Campaign by the Rev. Martin Luther King Jr., 43 million Americans remain in the grips of poverty and 140 million Americans are considered lowincome. The number of families living on $2 per person, per day—yes, $2 per day—has grown to 1.5 million American households, including 3 million children. Think about that: Going years without seeing a dentist. Going to school in dirty clothes. Cleaning soiled diapers in order to reuse them. Selling plasma to buy food. Never having enough food. I don’t know if President Trump thinks about that, in between his seemingly endless self-congratulatory tweets about his stewardship of the economy. It is true that the U.S. economy has generated immense wealth over the last half-century for those at the top of the economic ladder. Against the backdrop of soaring economic inequality, a new campaign to protest policies that keep people in poverty has been revived. The new “Poor People’s Campaign: A National Call for Moral Revival” was launched last month in state capitals and Washington, D.C., to demand federal and state living wage laws, investment and equity in education, protection of the right to vote, affordable high-quality healthcare and an end to mass incarceration.

States, “the persistence of extreme poverty is a political choice made by those in power,” and that “with political will, it could be readily eliminated.”

a majority say they are still struggling. Yet a majority (57 percent) of people understand that the wealthiest families have benefited from Trump’s policies.

Compare the political choices made by President Lyndon Johnson, whose War on Poverty enacted anti-poverty, health, education and employment policies and civil rights legislation, with the policies promoted by President Trump. Take the recent GOP tax bill, which is the biggest transfer of wealth to the rich in decades. The wealthiest 1 percent receives 83 percent of the benefits. The tax plan will increase the deficit to nearly $1 trillion in fiscal 2019, and the GOP is already using the skyrocketing deficit as an excuse to make deep cuts to Social Security, Medicare, Medicaid, student aid, food and housing assistance, and other programs the neediest Americans depend on.

At the launch of the new Poor People’s Campaign, a low-wage domestic worker spoke of suffering depression and suicidal thoughts over her fears that, despite her hard work, she and her children would end up homeless. “Systemic poverty has been created,” she said through tears, “not because we’re lazy or don’t want to work, but because of politicians who block a living wage.”

A recent AFT-Democracy Corps poll found that most respondents have not benefited from the GOP tax plan. They are unhappy their wages are not keeping up with rising costs. They are angry that the GOP plans to pay for tax cuts by shredding the social safety net. And they feel strongly that the funds being redistributed to the rich should have been invested in public schools, healthcare or infrastructure. Similarly, the Monmouth University Polling Institute found that only 12 percent of Americans feel they have benefited a lot from the recent economic upturn, while

Lack of investment in public education, including low wages, are at the core of the teacher walkouts that have rippled across America. The inequity between the haves and have-nots hurts kids every day. The Journey for Justice Alliance recently released “Failing Brown v. Board,” an analysis of course offerings at high schools in 12 cities. It shows that students attending majorityblack and/or -brown schools are still segregated by inequitable education because their schools offer fewer academic subjects and less of the arts than majoritywhite schools. AFT members address the plight of poverty every day in their work in hospitals and schools, and we are proud to be a coalition partner in the new Poor People’s Campaign. In this age of unprecedented bounty, it is time to end the oppression of the poor and embrace a moral revival. That would make America great.

The new Poor People’s Campaign seeks to end policies that keep people in poverty.

The Rev. William Barber II, the founder of the Moral Mondays movement, has mapped a path to bring about this “moral revival” that includes policy demands, voter registration and civil disobedience. While poverty disproportionately affects people of color, numerically, there are more white Americans in poverty than any other race or ethnic group. The new Poor People’s Campaign builds on the Moral Mondays movement that mobilized across racial lines, finding the common ground of the disenfranchised. This is more important than ever, given the rising polarization in the age of Trump. The United Nations recently conducted a report that revealed a bleak picture of the extreme poverty in the United States, documenting the terrible circumstances endured by the poor—from unsafe sewage and sanitary conditions, to chronic homelessness, to criminalization and harassment just for being poor. The report concluded that, particularly in a rich country like the United

Photo courtesy of Brett Sherman

Weingarten at the release of “Failing Brown v. Board” at the U.S. Supreme Court on May 14. Follow AFT President Randi Weingarten: www.twitter.com/RWeingarten

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