So we’re about to have a new tax code — one that will let corporations and top earners pay less and, eventually, make most individuals pay more. After exactly zero hearings and not even a score on the final bill from the congressional Joint Committee on Taxation, it now goes to President Donald Trump for his signature.
How will we rue the tax bill? Let’s count some ways.
The natural growth rate of the U.S. economy is about 2% right now, and we’ve averaged 2.3% over the last three years. In other words, we’re doing as well as our population and productivity growth say we should. Growth is only even that low because exports slipped after China’s mini-panic drove up the dollar and suppressed demand for U.S. services for about a year.
Real median household incomes, the talisman of how the middle class is doing, began rising in 2014 and are up more than 10% since, finally topping internet-boom era peaks after a sharp post-2007 decline.
The economy has only gotten stronger this year, as oil-patch investment strengthened and exports recovered. Most of the difference between 2016’s growth rate and 2017’s can be explained by that — before any tax cut ever happened.
The funniest moment of the tax debate came when National Economic Council Director Gary Cohn asked a roomful of CEOs who would use the corporate tax cut to invest more in their businesses — and almost no one raised a hand.
But it won’t be funny when we blow a $1.5 trillion hole in the federal budget and get no macro return.
We’ve always known where most money from the lower corporate tax rate will go, at least at public companies — to stock buybacks. That’s where about three-fourths of the Bush-era tax holiday on offshore earnings went, according to Goldman Sachs. The current version, blending a cut in taxes on repatriated past earnings with a long-term corporate rate cut, will be nice for holders of a few cash-flush companies — notably Apple AAPL, +0.26% and Microsoft MFST, +0.00% .
But it won’t get invested in plant or equipment, to raise productivity and build wealth. With 37% of U.S. equities held in retirement accounts (and rising, according to the Tax Policy Center, with only a quarter held in accounts that even pay taxes), the corporate-tax cut part of the money won’t even be spent on consumption.
I remember when Republicans objected to the government redistributing wealth — but it turned out they just wanted to redistribute it to their own (perceived) voters.
After 2025, the corporate tax will still be lower, but the bill will repeal the tiny tax cuts that most individuals get in its early years. By 2027, the TPC says most Americans earning $100,000 a year or less will pay higher taxes than if this bill never passed. These will be concentrated in the working and middle classes — 13 million of whom will also lose health insurance because the bill repeals the tax penalty that makes the Affordable Care Act work.
Yet GOP senators personally stand to save $14 million a year in taxes because the bill carves out a low rate for mostly passive income from real estate partnerships. The biggest saver, Tennessee’s Bob Corker, voted against a bill that didn’t include this provision, but now is a “yes,” spawning the hashtag #corkerkickback.
Know who else owns a lot of real-estate partnership interests? The Trump family, whose patriarch Forbes projects will save $11 million a year. And you know what happened after the 1981 tax bill threw money at commercial real estate? A wave of overbuilding that prompted a banking crisis and a recession.
It’s the Animal Farm of Tax Reform: All income is equal (a tested tax-reform principle) but some income is more equal than others. Income that doesn’t involve working is treated as special. It’s a bizarre way to encourage work.
And, finally, the fourth and most-important reason this “reform” bill isn’t worthy of the name:
Give the GOP this: They never made any bones about the fact that they’re moving the bill because they need to appease party donors. They’ve made little case that it will help the economy.
Instead, they’ve openly stuffed money in the pockets of their constituents — because they are Republican constituencies. Limits on deducting state and local taxes are about punishing New Jersey, New York, and California for electing Democrats (now, watch these states send about 10 fewer Republicans to the House in 2019). They kept notorious tax breaks for private equity and hedge-fund operators, who give mostly to Republicans, that even Trump campaigned against.
And, of course, the #corkerkickback, taking its place alongside Trump’s Washington hotel on government-owned land and his son-in-law courting Chinese investors for his financially imperiled New York office building.
It’s surreal, but it’s right there to see.
As the bill limps through Congress on party-line votes, it’s worth recalling that the 1986 tax reform won 88 votes in the Senate. That’s what happened when Congress wrote a bill with bipartisan consultation and respect, which actually raised taxes on corporations and investors to cut them on individuals.
This year’s bill wasn’t sown with respect for working families, and won’t reap much respect from them. Polls show only a third of Americans support Trump’s pseudo-reform. Democrats now daydream about capturing 40 House seats next year. If they do, this exercise in contempt for average voters, shown in the bill’s contents and the reasons behind them, will be a big reason why.