Trump is enacting a payroll-tax cut through executive action. But that doesn't mean workers will see extra money in their paychecks.
Joseph Zeballos-Roig

MANDEL NGAN/AFP/Getty

President Donald Trump moved on Saturday to enact a payroll-tax cut on his own, circumventing Congress.
The idea gained traction in the White House after two conservative economists called on the president to use executive authority to suspend that tax collection and add money to workers' paychecks.
But experts say employers are likely to hoard the cash, since the president only has the authority to defer tax collection — not to forgive it.
"Knowing that, employers would be taking an enormous risk if they don't withhold the tax they're legally liable for," tax expert Seth Hanlon told Business Insider.

President Donald Trump signed an executive action on Saturday to enact a payroll tax cut, a step he's sought to take throughout the pandemic in an effort to juice people's paychecks.

The text of the memorandum says that people earning under $4,000 every two weeks — or $100,000 annually — won't have to pay the tax out of their paychecks from September 1 to December 31.

It could set the stage for a clash with lawmakers from both parties, given Congress dismissed the measure in past stimulus proposals. And many economists say it would not be effective in helping millions of unemployed people.

But the move is unlikely to deliver more cash into worker's pockets. The memo simply defers payment of the taxes to next year, and only congressional legislation can toss out any legal liabilities.

With stimulus negotiations at a standstill, the idea gained traction in the White House after a pair of conservative economists, Stephen Moore and Phil Kerpen, called on Trump in a Wall Street Journal op-ed last weekend to "declare a national economic emergency." They said he should order the IRS to stop collecting payroll taxes from employees' paychecks.

"Voters would instantly see the 7.5% boost to their paychecks," they wrote.

Read more: MORGAN STANLEY: The government's recession response has the stock market heading for a massive upheaval. Here's your best strategy to capitalize on the shift.
How the payroll tax usually works

The federal government imposes a 15.3% levy on wages known as the payroll tax. It's evenly divided between employers and workers, and most of it goes to fund Social Security. It also helps to finance Medicare.

Experts say it's not as straightforward as the conservative economists laid out. The tax code allows the Treasury Department to postpone tax deadlines for up to a year only during a national disaster, Daniel Hemel, a tax-law professor at the University of Chicago, wrote on Twitter.

"There's no deadline that can be delayed in order to achieve" the paycheck boost that Moore and Kerpen outlined, Hemel said.

That's because of the executive branch's jurisdiction over taxes. While Trump has the authority to order the IRS to stop collecting those taxes from people's paychecks, the president can't wipe away tax bills on his own; it requires Congress to step in.

So even with an executive order suspending payroll taxes, companies are still required to make those payments in the future — unless Congress passes legislation letting employers off the hook.

Experts think companies will just hoard the cash instead of turning it over to workers

Seth Hanlon, a tax expert at the left-leaning Center for American Progress, told Business Insider it's unlikely that employers would turn that cash over to workers, because of a fear of footing the bill when it's due.

"Ultimately, if they don't withhold, they're liable for the employees' share of the tax," Hanlon said. "Knowing that, employers would be taking an enormous risk if they don't withhold the tax they're legally liable for."

An executive action, economists say, could amplify the shortfalls of a payroll-tax cut in combating the pandemic-induced recession.

"The EO would take the negative aspects of a payroll tax cut & exacerbate them: businesses would be unlikely to increase hiring or investment, workers wouldn't see greater take-home pay & the unemployed would still not see a cent," Samantha Jacoby, a senior tax legal analyst at the Center on Budget and Policy Priorities, wrote on Twitter.

Republican lawmakers don't appear to be as enthusiastic as Trump about a payroll-tax cut through executive action. They left it out of their $1 trillion stimulus plan and included another round of stimulus checks instead.

"The point is, what does the law allow?" Sen. Chuck Grassley, the chair of the Senate Finance Committee, said on Monday. "The only tax policy that is really any good is long-term tax policy."

TRUMP'S MAR A LAGO TAX CUTS

ONE FOR DRINKS, FOOD AND ENTERTAINMENT

Trump calls on Congress to restore tax deductions for ...

https://thehill.com › homenews › administration › 490619-trump-calls-on-...

Apr 1, 2020 - President Trump on Wednesday called on Congress to approve a tax deductibility for ... Trump calls on Congress to restore tax deductions for business meals, entertainment ... Donald J. Trump (@realDonaldTrump) April 1, 2020 ... Trump disclosure shows 2019 revenue at Mar-a-Lago, other major clubs.

GOP plan would boost deduction for business meals | TheHill

https://thehill.com › policy › finance › 509210-kudlow-gop-plan-will-incl...

Jul 27, 2020 - ... year, up from 50 percent under current law, if the food and beverages are from restaurants. ... Trump pushed to increase deductions for business meals earlier this year ... for meals and entertainment would be "the latest example of a tax ... The business-meals provision is one of several tax-related parts of ...

Trump's Fix for Restaurants Is Out of Touch With the Crisis ...

https://www.theatlantic.com › ideas › archive › 2020/07 › trumps-fix-for-r...

Jul 17, 2020 - But one Donald Trump idea apparently came from a celebrity chef whose ... meals (including drinks!) and entertainment, and then, under the tax bill that ... the overall cost of the much larger business tax cuts in the 2017 bill.

ONE FOR PAYROLL TAX

Trump pledged to permanently scrap the payroll taxes used to fund Social Security and Medicare if he wins re-election

Joseph Zeballos-Roig

US President Donald Trump speaks during a news conference in Bedminster, New Jersey, on August 7, 2020. JIM WATSON / AFP

President Donald Trump vowed on Saturday to scrap the payroll tax, a funding mechanism for Social Security and Medicare, if he wins re-election.

"If I'm victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax," Trump said at a press conference announcing executive actions on coronavirus relief.

Experts say the move to cut payroll taxes would further erode the shaky finances of both programs.

President Donald Trump pledged on Saturday to scrap the payroll tax, a key mechanism that's used to fund Social Security and Medicare.

"If I'm victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax," Trump said at a press conference. "I'm going to make them all permanent."

He later said: "In other words, I'll extend it beyond the end of the year and terminate the tax. So we'll see what happens."
The payroll tax funds Medicare and Social Security

The federal government imposes a 15.3% levy on wages known as the payroll tax. It's evenly divided between employers and workers, and most of it goes to fund Social Security. It also helps to finance Medicare, the federal health insurance program for people over the age of 65 and for younger Americans with disabilities.


In an April 2020 Gallup poll, 58% of retirees said they relied on Social Security for a "major source" of their income.

Trump's unexpected comments on Saturday came as he signed an array of executive actions aimed at providing relief to Americans during the pandemic. Among them was a payroll tax cut, which he is waiving from September through the end of the year for workers earning below $100,000 a year.

But it doesn't forgive workers' payments outright since the power to eliminate taxes or change the tax code rests with Congress. As workers and employers are still legally on the hook to make those payments next year, experts say it's unlikely that people will see a bump in their wages anytime soon.

Plus, lawmakers from both parties roundly rejected including a payroll tax cut in their stimulus proposals. Many economists say it would not benefit the 31 million unemployed Americans, either.

Congressional action to eliminate the tax entirely is also improbable, and instead set off a fraught debate over the federal programs' fiscal futures.

Medicare and Social Security's finances are already shakyEconomists from the left-leaning Center for American Progress warned on Thursday that Trump's push to enact a payroll tax cut could further erode their shaky finances.

"Trump's scheme would weaken the Social Security and Medicare trust funds by diverting the revenue from the employee portion of Social Security and Medicare taxes, and potentially the employer's share of Medicare taxes, from the programs' trust funds," a memo from the organization said.

The trust funds for both programs are scheduled to be depleted in this decade. The Bipartisan Policy Center projects that if economic damage was similar to the Great Recession a decade ago, the Social Security trust funds could be depleted in 2029. That could prompt a 31% cut in retirement benefits, the organization said.

The Medicare trust fund is in worse shape. Its trustees said the program would run out of money in 2026 — also without accounting for the pandemic.

Trump implementing a payroll tax cut through executive order would blow a hole in Social Security and Medicare's finances, economists warn

Joseph Zeballos-Roig 

Economists are warning that if Trump enacts a payroll tax cut, it would weaken the shaky finances of the Social Security and Medicare trust funds.

It's unclear whether the president would attempt to replace the funding as Congress did when it deferred employers' Social Security tax payments earlier this year.

"It's like borrowing money from the Social Security and Medicare trust funds to give to employers just to hold," said Seth Hanlon, a tax expert.
A group of economists at a think tank are warning that if President Donald Trump moves forward with a payroll tax cut through an executive order, the step would weaken the funding mechanisms for Social Security and Medicare.

Over the past week, the president has threatened to circumvent Congress and sign an executive order to enact a payroll tax cut. The tax refers to the 15.3% levy on wages imposed by the federal government, and evenly divided between employers and workers. Most of it funds Social Security, but it also helps finance Medicare.

But experts say the step would further erode the shaky finances of both safety-net programs by yanking a critical source of funding.

"Trump's scheme would weaken the Social Security and Medicare trust funds by diverting the revenue from the employee portion of Social Security and Medicare taxes, and potentially the employer's share of Medicare taxes, from the programs' trust funds," the memo from the Center for American Progress said.
Earlier this year, Congress deferred the employer-portion of the Social Security tax (6.2%) through 2022 under the CARES Act. But they replaced the lost money with an infusion of general Treasury funds.

Trump, the memo said, lacks the authority to appropriate funds, which is Congress's purview.

Many economists say that implementing a payroll tax cut through an executive order wouldn't lead to a bump in wages for most workers, since the executive branch can only defer tax payments up to a year and not forgive them. Wiping out the payment requires Congress to act.

Legally, employers remain on the hook for any delayed payment. Firms would likely keep the money since they fear being saddled with a hefty tax bill if Congress didn't move to forgive it.

"It's like borrowing money from the Social Security and Medicare trust funds to give to employers just to hold," Seth Hanlon, a tax expert and senior fellow at the left-leaning Center for American Progress, told Business Insider. "They're just gonna hold the withheld taxes because they'd have to pay it eventually."

The massive wave of layoffs due to the pandemic has weakened the programs' finances by slashing the amount of payroll tax revenue streaming into their trust funds. Around 13 million fewer people are employed in July compared to February.

The Bipartisan Policy Center projects that if the economic damage is similar to that of the Great Recession a decade ago, the Social Security trust funds could be depleted in 2029. That could prompt a 31% cut in retirement benefits, the organization said.

Before the pandemic, that program's trustees estimated the program's funding would lapse in 2035 without taking the coronavirus outbreak into account.

The Medicare trust fund is in worse shape. Its trustees said the program would run out of money in 2026 — also without accounting for the pandemic.

How Trump’s tax cuts and tariffs will make coronavirus recession worse

President Trump holds up a document during an event to sign the tax cut legislation in December 2017.
(Brendan Smialowski / AFP/Getty Images)

By DON LEE  LATIMES STAFF WRITER
MAY 19, 2020

WASHINGTON — 

President Trump’s pre-pandemic economic blueprint of massive tax cuts and global trade wars not only failed to deliver the promised spike in growth and domestic investment, it now appears to have left the U.S. more vulnerable to the devastating financial impact of the coronavirus outbreak.

Even before the pandemic pushed the U.S. into what is almost certainly a recession, benefits from Trump’s policies on taxes and trade were largely offset by the costs of soaring national debt and damage to U.S. foreign relations — challenges now magnified by the health crisis.

“The lasting legacy is a bigger deficit and higher debt [as a share of the economy], which means what we’re doing in response to the pandemic is piling on something that was already a pretty big mess,” said Joel Prakken, chief U.S. economist at IHS Markit.

The Tax Cuts and Jobs Act — Trump and the GOP’s 2017 tax overhaul — is estimated to cost the federal government at least $1 trillion in lost revenue over 10 years, according to various government and private estimates.

Individual tax rates were lowered through 2025, but by far the costliest feature of the law was a permanent cut in the U.S. corporate income tax rate to 21% from 35%.

The lower corporate tax rate, plus the elimination of taxes on most foreign business income, would make the U.S. more competitive globally, it was argued. With the tax savings, companies would ramp up domestic investments. U.S. multinational firms would repatriate cash stashed overseas and invest domestically, and it would discourage a flight of capital to offshore destinations, ultimately benefiting workers in America.

But economists widely agree that the tax cuts, while providing a small stimulus to growth particularly in 2018, failed on its core objectives.

Instead of ramping up capital spending and investments or turning away from offshoring, many U.S. companies focused on hiking dividends and buying back their own stock, which chiefly benefited high-income investors. Buybacks hit record levels in 2018 and remained strong in 2019.

Far from leaping ahead, the U.S. economy continued its long-running but modest recovery from the Great Recession of 2008-09.

Economic growth picked up in 2018 to 2.9%, but fell back to 2.3% in 2019, about the average growth over the last decade and far below the 4% promised by Trump and some of his officials.

As for incomes, some workers saw gains but for most, it was a continuation of long-term stagnation of personal incomes and financial security.

“What was really holding back investment wasn’t cash constraints of companies that were paying too much taxes, but was rather this overall weakness in demand,” said Kimberly Clausing, an economics and tax policy expert at Reed College.

As for dampening offshore investments, research has shown evidence the opposite happened. The tax overhaul included several new provisions that actually made it more desirable for U.S. multinational firms to invest in tangible assets overseas because that would give them a bigger tax break.

From the outset, many economists questioned the wisdom of enacting deficit-financed cuts at a time when the economy was growing at a steady pace.

Almost always in the past, the federal government used massive tax cuts only during downturns, when they could give the economy a much-needed lift in consumer and business spending.

“At the time, it seemed just a little bit heinous that we should be running a near-trillion-dollar deficit while we were more or less at the top of the business cycle,” said Nicholas Eberstadt, a political economist at the American Enterprise Institute.

Not only did the tax cuts not deliver the benefits Trump and congressional Republicans promised, they left the country with a big budget hole that just got much bigger from the once-in-a-century economic shock of the pandemic.

“It was a huge mistake that we’re now seeing because we now have less fiscal room than we would have to fight this current crisis,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.

He noted, for example, that it’s no longer an option to offer certain tax incentives for businesses to invest and stimulate the economy, such as full expensing for new plant and equipment purchases, because it was already included in the 2017 law.

Goldwein estimated that without the 2017 tax cuts, the country would have an extra $500 billion to fight the current health and economic crisis. While that may not seem like a lot compared with the $3 trillion already approved in pandemic relief by Congress, it will make a difference in the future, he said.

“As time goes on, the structural deficit may kind of create extra fatigue that makes it harder for us to support the economy,” Goldwein said. “And allowing us to spend an extra $500 billion for more support for the economy, that would be a big deal.”

On the trade front, some economists say the gains in business investment promised from the tax cuts did not materialize in part because of uncertainty created by Trump’s nearly two-year-long trade war with China.

After months of on-again, off-again negotiations and several rounds of tit-for-tat tariffs, the U.S. and China announced a trade deal in January in which Trump got some of what he sought, at least on paper. Beijing pledged to step up its purchases of U.S. goods and services by more than $200 billion over two years.

But the so-called Phase 1 deal put off for a later day such critical issues as China’s policies of subsidizing and supporting its state-owned enterprises.

Many analysts said at the time that China was unlikely to follow through on the promised increases in purchases, including of U.S. soybeans and other farm crops that have been hit hard by the trade wars.

Now the COVID-19 pandemic has made such massive purchases even less likely.

The pandemic has severely disrupted global trade and supply systems. And the ill-will created during the last two years of trade friction with China — as well as with many allies, including Germany and Canada — left the U.S. in a worse-off position when the pandemic hit.

Most immediately, the trade tensions complicated Washington’s ability to secure critical surgical masks, goggles, gloves and other protective gear, much of which originate in China.

N95 masks were among products from China hit with 15% tariffs in September. Those tariffs were halved when the U.S.-China trade deal took effect Feb. 14, but it wasn’t until March 17 that the remaining duties were removed, said Chad Bown, a trade expert at the Peterson Institute for International Economics.

“They got caught up in the trade war,” Bown said. “That obviously hurts your preparedness when something like this happens.”

Trump can claim credit for having renegotiated the North American Free Trade Agreement, and while his tariffs on many products from trading partners helped lift some domestic manufacturers like steel firms, the benefits sometimes didn’t last and there was considerable collateral damage to other industries.

“It’s not like he accomplished nothing, but they were significantly offset by the cost,” said William Reinsch, a veteran trade analyst and senior advisor at the Center for Strategic and International Studies.

What’s more, economists worry that Trump’s America First strategy will prove to be costly in terms of responding effectively to the intertwined challenges of health and the economy.

“The entire world is fighting the same thing right now,” Bown said of COVID-19, “and in a sense we’re never going to be safe until the pandemic everywhere is under control. So the idea that we’re going to somehow insulate ourselves from the world by only worrying about us right now is very short-sighted.”

TRUMP’S TAX CUTS: THE RICH GET RICHER

REPUBLICANS PASSED TAX CUTS — THEN PROFITED

The 2017 Tax Cuts and Jobs Act is a case study of how lawmakers can make themselves richer with the bills they pass.
Republicans passed tax cuts — then profited
Introduction
Cut taxes, get paid?
‘All of the above is acceptable’
An affinity for small business
GOP real estate owners make out big
Closing the loopholes?

Peter Cary
Reporter

Published — January 24, 2020

This article was published in partnership with Vox.

INTRODUCTION

The Center for Public Integrity is a nonprofit newsroom that investigates betrayals of public trust. Sign up to receive our stories.

When the price of Apple stock hit a then-record high in October 2018, among the shareholders counting their gains were 43 Republicans in Congress, who collectively owned as much as $1.5 million worth of the tech giant’s shares. Apple’s stock jumped 37 percent in its run-up to that record. Several variables were behind the climb, including higher-than-expected earnings.

But congressional Republicans themselves had a hand in the spike, stock analysts say. Legislation they championed — the 2017 Tax Cuts and Jobs Act — doled out nearly $150 billion in corporate tax savings in 2018 alone. One effect: a big boost in stock prices.

Cutting tax rates for companies like Apple and hundreds of other stocks they own was one of many ways Republican lawmakers enriched themselves after they passed the tax law, according to a Center for Public Integrity analysis of the 186-page law and members’ financial disclosure forms. Democrats also stood to gain from the tax bill, though not one voted for it; all but 12 Republicans voted for the tax bill.

As part of the bill, Republicans approved tax breaks in 2017 for seven classes of assets many of the wealthier members of Congress held at the time, including partnerships, small corporations, real estate, and several esoteric investment vehicles. While they sold the bill as a package of business and middle-class tax cuts that would not help the wealthy, the cuts likely saved members of Congress hundreds of thousands of dollars in taxes collectively, while the corporate tax cut hiked the value of their holdings.

“It feels to me like a kleptocracy,” said Jeff Hauser, director of the Revolving Door Project at the Center for Economic and Policy Research, a left-leaning think tank in Washington, D.C.


Such congressional self-enrichment has been thrust into the 2020 presidential campaign. Democratic candidate Sen. Elizabeth Warren has said her first priority as president would be to pass an anti-corruption package that, among other things, would forbid members of Congress from owning individual stocks, bonds, and other securities so they could not benefit from tax or financial laws they passed.

“Under current law, members of Congress can trade stocks and then use their powerful positions to increase the value of those stocks and pad their own pockets,” Warren wrote in a September Medium post.

CUT TAXES, GET PAID?

Two years after the passage of the Trump tax act, its effects — some obvious, some hidden — are coming into focus. One is its cost: Contrary to Republican claims, the law is not paying for itself and is likely to burden the nation with an additional $1.9 trillion in debt over 11 years beginning in 2018, according to the Congressional Budget Office.

And while the law cut tax rates for people of all income brackets, some of its tax benefits overtly favored the wealthy, such as the 2.6 percentage point tax rate cut in the highest bracket and the doubling of the estate tax exemption to $11.2 million. Other provisions were subtler yet favored the wealthy even more: tax breaks for their investments, for instance, or changes that boosted the value of their stocks. Among the rich beneficiaries are members of Congress, more than half of whom were found to be millionaires in 2014.

The tax law’s centerpiece is its record cut in the corporate tax rate, from 35 percent to 21 percent. At the time of its passage, most of the bill’s Republican supporters said the cut would result in higher wages, factory expansions, and more jobs. Instead, it was mainly exploited by corporations, which bought back stock and raised dividends. In 2018, stock buybacks exceeded $1 trillion for the first time ever, according to TrimTabs, an investment research firm. Net corporate dividends reached a new high in 2018 of more than $1.3 trillion, nearly 6 percent more than the previous year. The result, analysts say: The buybacks boosted stock prices, and bigger dividends put even more money in the pockets of stockholders.

Promises that the tax act would boost investment have not panned out. Corporate investment is now at lower levels than before the act passed, according to the Commerce Department. Though employment and wages have increased, it is hard to separate the effect of the tax act from general economic improvements since the 2008 recession.

The boost in stock prices, however, was predictable. As the bill was reaching its final stages in 2017, Bryan Rich, the CEO of Logic Fund Management, a wealth advisory company, wrote that the proposed corporate rate cut “will go right to the bottom line of companies — popping EPS [earnings per share] and driving stocks even higher.”

Those benefits mainly went to the rich, as the wealthiest 10 percent of Americans own 84 percent of all stocks. The 10 richest Republicans in Congress in 2017 who voted for the tax bill held more than $731 million in assets, almost two-thirds of which were in stocks, bonds, mutual funds, and other instruments, according to Roll Call’s semiannual assessment of Congress’s wealth.

The precise amount of Republicans’ windfall can’t be determined without a review of the members’ tax returns, which they are not required to disclose.

All but one of the 47 Republicans who sat on the three key committees overseeing the drafting of the tax bill own stocks and stock mutual funds, according to Public Integrity’s analysis. Rep. Mike Kelly, R-Pa., was among them. A member of the Ways and Means Committee, which oversaw the writing of the tax bill in the House, Kelly reported in 2018 that his spouse owned 101 individual stocks, Apple included, with a minimum total value of $439,000.




Republican lawmakers involved in the writing and passage of the 2017 tax law held numerous investments that directly benefited from the tax cuts. Click below to see some of the wealthy members who held assets that got special tax favors.VIEW GALLERY

When he voted for the 2017 tax cuts, which will be funded by nearly $2 trillion in added debt, Kelly called it “the most important vote I’ve ever cast.” Yet 19 months later, he voted against a two-year budget agreement that added to the national debt by hiking government spending for defense and nondefense programs by $320 billion. Kelly warned that “America is driving toward a fiscal cliff.”

Orrin Hatch, R-Utah, was chair of the Senate Finance Committee in 2017, when he and his wife owned mutual funds and a limited liability corporation valued between $562,000 and $1.43 million, paying them between $12,700 and $38,500 in dividends and capital gains, according to Hatch’s financial disclosure forms. They also owned a blind trust worth between $1 million and $5 million. (Congressional financial disclosure forms do not require members to report the precise value of assets and income but rather in 11 different ranges, each with a minimum and a maximum value.)

For decades, Hatch, who retired in 2018, had been one of the loudest deficit hawks in Congress. Just 10 months before he would shepherd the tax bill through his committee, Hatch said, “The national debt crisis poses a significant and growing threat to the economic and national security of this country.”

His concern over national security lasted two months. In April, Hatch signaled he was open to a Republican tax bill that would likely add to the national debt. When Republicans passed the tax bill in December 2017, he beamed. “This is a historic night,” he said at a press conference.

(Public Integrity sought comment from 13 current or former members of Congress mentioned in this article; only two responded.)
‘ALL OF THE ABOVE IS ACCEPTABLE’

Republican lawmakers also boosted the value of their stock holdings when they encouraged American corporations to repatriate money they were holding overseas. The tax law decreed that future foreign profits would not be taxed at high rates, and that previously earned profits stashed abroad — an estimated $2.7 trillion — would be taxed one time at no more than 15.5 percent.

In 2017, Apple was sitting on $250 billion in overseas profits. In January 2018, the month after President Donald Trump signed the tax bill into law, the tech behemoth and third-largest American company said it would pay the new, lower tax and start bringing the cash home. Just four months later, Apple said it would buy back $100 billion of its stock and hike its dividend by 16 percent. Apple shares increased almost 9 percent by the week’s end. In April 2019, Apple announced $75 billion more in buybacks, a move analysts said would likely drive its stock price higher. A day after the announcement, shares increased in value nearly 5 percent. The stock continued to hit record highs late last year.

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That increase and higher dividends augmented the holdings of 43 Republicans who voted for the tax bill, including seven senators and their spouses who owned Apple stock in 2018: John Hoeven of North Dakota; David Perdue of Georgia; Arizona’s Jeff Flake, now retired; Jim Inhofe of Oklahoma; and the spouses of Pat Roberts of Kansas, Maine’s Susan Collins, and Shelley Capito of West Virginia.

A spokesperson for Hoeven said that he “follows Senate regulations and reporting requirements.” Sen. Collins’s husband’s portfolio decisions are all made by a financial adviser, a Collins spokesperson said, and he has not bought or sold Apple stock since 2015.

Perdue is one of the wealthiest senators, with a net worth of $15.8 million, $14 million of which is in stocks, according to Roll Call. In 2018, with his wife, Perdue owned $100,000 to $250,000 in Apple stock, he reported. The couple sold some of it and received annual dividends and capital gains that year between $15,000 and $50,000.

The optics that the tax cuts would boost the prices of stock he owned apparently didn’t concern Perdue. Weeks before Republicans passed the tax bill, Fox News host Maria Bartiromo asked Perdue if he was worried that the corporate cuts would result in buybacks and increased dividends instead of new jobs.

“Well, Maria,” he answered, “I come from the school that, you know, all of the above is acceptable. This is capitalism.” He later added that it was all about “capital flow,” whether for jobs, economic growth, or dividends.
AN AFFINITY FOR SMALL BUSINESS

Passing a law that helped fuel increases in stock prices wasn’t the only way Republicans enriched themselves. The new law also contained a 20 percent deduction for income from so-called “pass-through” businesses, a provision called the “crown jewel” of the act by the National Federation of Independent Businesses, a lobbying group.

Pass-throughs are single-owner businesses, partnerships, limited liability companies (known as LLCs) and special corporations called S-corps. Most real estate companies are organized as LLCs. Trump owns hundreds of them, and Public Integrity’s analysis found that 22 of the 47 members of the House and Senate tax-writing committees in 2017 were invested in them.

Pass-throughs can be found in any industry. They pay no corporate taxes and steer their profits as income to business owners or investors, who are taxed only once at their individual rates. Despite their favored treatment as a business vehicle, the 2017 tax act did them another favor: It allowed 20 percent to be deducted off the top of the pass-through income for tax purposes.

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In the Senate, the champion for the pass-through break was Ron Johnson, a Wisconsin Republican who was a Budget Committee member when the tax bill was being written. He argued that because the bill was slated to give big corporations a 14 percent cut in their tax rate, smaller businesses should get a break, too. “I just have in my heart a real affinity for these owner-operated pass-throughs,” he told the New York Times when the Senate was considering the tax bill in November 2017.

No doubt. Johnson, with his wife, held interests that year in four real estate or manufacturing LLCs worth between $6.2 million and $30.5 million, from which they received income that year between $250,000 and $2.1 million, according to his financial disclosure form.

How much money lawmakers will pocket from the 20 percent pass-through deduction can’t be determined without an examination of their tax returns. There are limits on how much of the deduction can be taken based on total income and business category. But in some cases, the tax savings could run into the tens of thousands of dollars. Johnson declined to comment for this article.

And while the provision did help small businesses in certain favored categories, the benefits of the pass-through deduction are heavily tilted toward the wealthy. Sixty-one percent of the benefits of this provision will go to the top 1 percent of taxpayers in 2024, according to the Joint Committee on Taxation, the congressional agency that analyzes tax bills.
GOP REAL ESTATE OWNERS MAKE OUT BIG

Besides the law’s benefits to real estate pass-throughs, real estate in general was hugely favored by the tax law, allowing property exchanges to avoid taxation, the deduction of new capital expenses in just one year versus longer depreciation schedules, and an exemption from limits on interest deductions.

“If you are a real estate developer, you never pay tax,” said Ed Kleinbard, a former head of Congress’s Joint Committee on Taxation.

Members of Congress own a lot of real estate. Public Integrity’s review of financial disclosures found that 29 of the 47 GOP members of the committees responsible for the tax bill hold interests in real estate, including small rental businesses, LLCs, and massive real estate investment trusts (REITs), which pay dividends to investors. The tax bill allows REIT investors to deduct 20 percent from their dividends for tax purposes.


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Real estate pass-throughs got an especially sweet gift in the form of a provision inserted into the tax bill behind the closed doors of the House-Senate conference committee. The Senate bill under consideration based a company’s pass-through deductions on the total amount of wages paid to employees. Because real-estate pass-through companies typically have few employees, however, this meant they could offer only tiny deductions to investors.

A stroke of the pen fixed that: Someone changed the law to allow real estate companies to use the value of their assets — in addition to the size of their payrolls — to calculate pass-through benefits. Because such companies can hold sizable assets, suddenly they, too, could offer the full 20 percent deduction to investors.

“In my judgment, it was a big giveaway to the real estate community, and they are very good lobbyists,” said Steve Rosenthal, a senior fellow at the nonpartisan Urban-Brookings Tax Policy Center in Washington, DC. That giveaway contributed to last year’s record $1.02 trillion federal revenue shortfall.

One Republican senator who benefited from the last-minute provision was Tennessee’s Bob Corker, who at the time owned or was a partner in 18 real estate businesses, LLCs, and partnerships, records show. His reported income from them was between $2.1 million and $11.1 million in 2017. Corker, who retired in 2018, told Public Integrity he had nothing to do with the provision or the 20 percent pass-through deduction. It was all Ron Johnson’s idea, Corker said.

“The budget deficit is going up so that people like Ron Johnson and Bob Corker can pay less in taxes,” said Hauser, of the Revolving Door Project.
CLOSING THE LOOPHOLES?

Republicans wouldn’t have had many of these apparent conflicts if Elizabeth Warren’s anti-corruption plan had been in effect.

Much of the plan was pulled from her Anti-Corruption and Public Integrity Act, which she introduced in the Senate in 2018. Among its provisions, the bill would forbid lawmakers to own or trade individual stocks, bonds, commodities, hedge funds, derivatives, or “complex investment vehicles.” Members would be required to put their assets in “widely held investment vehicles” such as mutual funds. Warren and her husband were invested in 20 mutual funds in 2017, but no individual stocks.
Democratic presidential candidate Sen. Elizabeth Warren, D-Mass., speaks during a campaign event, Sunday, Jan. 12, 2020, in Marshalltown, Iowa. (AP Photo/Patrick Semansky)

Members could no longer own commercial real estate, though they could keep businesses with revenue under $5 million — which could include a lot of pass-throughs. Warren’s bill hasn’t moved out of the Senate Finance Committee; an identical bill in the House also remains idle.

Warren’s plan faces an uphill climb, even among Democrats.

“It’s very difficult to get congresspeople to pass rules that make life exceedingly difficult for themselves,” said Beth Rotman, the money in politics and ethics director at Common Cause, a government watchdog in Washington, D.C.

But it’s happened in the past. In 1978, Congress passed the Ethics in Government Act in the wake of the Watergate scandal. It requires certain government officials, including members of Congress, to file annual financial forms — records Public Integrity used for this analysis. And in 2012, Congress passed a bill that made it unlawful to use insider information to trade stocks, required members to report stock trades within 45 days of the transaction, and required lawmakers to file disclosure forms online in a searchable, sortable, and downloadable database — so conflicts of interest would be easy to detect. (Within a year, Congress had removed the “searchable and sortable” language from the law. The financial disclosures are now available online, but they are not easily searched or sorted.)

Apparently just because of disclosure, stock trading by senators dropped by about two-thirds in the three years following the law’s enactment, according to a study by Craig Holman at the government watchdog group Public Citizen. But Holman said he found that some senators continued to trade in stocks in the very businesses they oversaw in their committees — a practice Public Citizen wants banned.

Ironically, it was Congress that passed laws that restrict other federal government officials from owning stocks or assets that would benefit from the officials’ decisions — or require them to recuse themselves from such decisions. Yet Congress has not passed legislation that bans itself from the same practice. “Congress should have the same rules put on them that the executive branch has,” said Rotman of Common Cause. “The executive branch conflict of interest rules are stronger.”

For the 2017 tax act, Holman of Public Citizen notes that about six years ago, researchers found that more than half of the members of Congress were millionaires. “They are passing tax laws and legislation that disproportionately favors the wealthy class,” Holman said. “And that means they personally benefit from this type of legislation.

“And, from what we’ve seen, especially from the tax cuts and jobs act of 2017,” he added, “that tax bill clearly favored the very wealthy over the rest of Americans. And that means it favored Congress over the rest of America.”

Alex Ellerbeck contributed reporting to this article.
Read more in Inequalit

Trump’s Tax Cuts Were a Disaster. Naturally, Republicans Want Even More.
Study up, because they’re about to try again.

KEVIN DRUM MOTHER JONES JULY/AUGUST 2020 ISSUE


In 1980 the federal deficit was soaring and Ronald Reagan campaigned on a singular promise: He planned to cut taxes on everyone, but especially the rich. He insisted that those benefits would quickly trickle down to everyone and supercharge the economy. Throw in some social safety net cuts, Republicans said, and the whole plan would pay for itself.

They were wrong. The rich got lower taxes all right, but the economy flatlined and the deficit skyrocketed. I should know: I graduated from college the same summer the tax cut passed, and I spent the next three years managing a Radio Shack waiting for the economy to get back on its feet. In 1982 Reagan was forced to raise taxes to make up for his cuts, and he continued raising them throughout his presidency.



In 1993 Bill Clinton passed a tax increase to reduce the deficit. Republicans insisted it would do no such thing. In fact, they said, it would cripple the economy.

They were wrong. The economy boomed, and for the first time since the Roaring ’20s the deficit turned into a surplus for four consecutive years.

In 2001—and again in 2003—George W. Bush passed a tax cut. Once again, Republicans said it would supercharge the economy and pay for itself.

They were wrong. All we got was a jobless recovery and a housing bubble that wrecked the economy. It produced the worst economic downturn since the Great Depression.

At the beginning of 2013, as part of the “fiscal cliff” negotiations, Barack Obama forced Republicans to accept a tax increase on high earners. But even though the bill passed with bipartisan support, some Republicans insisted it would kill the economy.

They were wrong. The deficit declined and Obama produced the longest economic recovery in American history—one that was still going strong until the coronavirus pandemic killed it.

Finally, in 2017, Republicans passed yet another tax cut. This one primarily benefited corporations and the rich, and once again Republicans insisted it would supercharge the economy and pay for itself.

They were wrong. No—scratch that. They lied. They knew the evidence of the past 40 years as well as anyone, but they sold the public a bill of goods anyway.

Every single economic indicator Republicans said would go up, didn’t.

Why? Because for all of Donald Trump’s bluster, this was the one thing he really, truly had to do. It’s the one thing the Republican Party’s big donors insist on. They don’t care about immigration or tariffs. Not much, anyway. But they care about lower taxes. As then-New York Rep. Chris Collins (since convicted of insider trading) told reporters shortly before the tax cut was signed into law, donors were telling him, “Get it done or don’t ever call me again.” So they got it done.

The 2017 tax cut had to be supported by a farrago of dishonesty for an obvious reason: The public would never support a tax cut aimed primarily at making the rich richer and swelling the coffers of large corporations—which also benefited the rich. Why would they? So Republicans had to lie. And this time they couldn’t rest with a single lie. Polls showed that voters were skeptical of their tax cut, so this time Repub­licans had to pile lie on top of lie.

Why does this matter? For two reasons—one, lies about tax cuts have determined the course of America’s economy, and the individual fortunes of millions of families including yours, for decades. Many of the inequities laid bare by the pandemic have been in the making since the Reagan era. And two, amid the coronavirus crisis, we’re about to have another debate over whether tax cuts can juice the economy. To evaluate those claims, it behooves us to look at what Republicans said about their 2017 tax cut—compared to what actually happened. Spoiler alert: Every single economic indicator Republicans said would go up, didn’t.

It all started with the initial justification for the tax cut: namely that American corporations paid the highest tax rates in the industrialized world, which put them at a huge competitive disadvantage. So at the end of 2017, while they still had full control of Congress, Republicans passed a $1.5 trillion tax cut—nearly the size of the gigantic coronavirus rescue bill passed in March. The 2017 bill contained cuts to both the personal tax rate—which mostly benefited the rich—and the corporate rate. But Republicans faced a cognitive dissonance problem: Weren’t American corporations actually doing pretty well? Why did they need a huge handout?

This is where the first lie came into play. It’s true that the United States had a high corporate tax rate, but few American corporations paid that official rate. In fact, if you look at actual corporate tax revenue, it turns out the United States has been pretty friendly toward big business. The real corporate tax rate is middling, and among the 20 richest developed countries, the US tied for dead last in how much of its GDP comes from such taxes.

This was no secret. So to justify cutting corporate tax rates even further, Republicans had to manufacture a laundry list of reasons it would be good for the economy. And that’s when the lies started piling up.
1. Business investment will skyrocket

The first and most fundamental logic behind the Republican predictions that a corporate tax cut would promote economic growth and higher tax revenues was a simple one. According to the academic language in a paper published by the White House Council of Economic Advisers, “A decrease in the tax rate on corporate profits…decreases the before-tax rate of return used to assess the profitability of an investment project.”

In plain English this means that corporations will only make investments that are likely to be profitable. Taxes are part of this, so if you decrease the tax rate on profits, more investments will go forward. In the words of Larry Kudlow, the lifelong supply-sider who became director of President Trump’s National Economic Council, corporate tax cuts produce an “investment boom.”



But Kudlow’s boom never came. Taxes may matter, but what matters a lot more is whether corporations have confidence that the economy will grow vigorously and produce more demand for their products and services. The Republican tax cut didn’t produce that confidence. Regardless of what they said in public, most CEOs knew perfectly well that a tax cut was just a temporary shot in the arm. It might modestly spur consumer demand for a short time, but in the long run it would do nothing—or maybe even produce a weaker economy.

Sure enough, business investment, which usually reflects decisions made in the past, grew on autopilot for a couple of quarters, but after that, steadily declined. In the last quarter of 2019, the level of business investment was lower than it was a year before.





You can also look at new orders for capital goods, which generally react quickly to changes in the economic outlook. But the growth rate of new orders began declining immediately after the tax cut was passed, reaching zero in late 2018 and falling into negative territory in mid-2019. (Charts are adjusted for inflation where relevant and run through the end of 2019, before the COVID-19 recession took hold.)





It’s been more than two years since the tax cut passed, and if an investment boom were going to happen, we would have seen it by now. We haven’t. Trump may like to brag about the “greatest economy in history” that he claims he built before the pandemic struck, but all we saw was an investment bust.


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2. The economy will be supercharged

If an investment boom was the big lie that drove everything, the arguments made to the general public in support of the tax cut mostly revolved around a better-­known metric: economic growth. The usual way of measuring this is by looking at gross domestic product, the sum of all goods and services produced in the United States. In the decade since the end of the Great Recession, GDP growth has averaged 2.3 percent per year.

Republicans claimed that the investment growth spurred by the tax cut would drive GDP growth higher. Kudlow predicted growth rates of 3 to 4 percent. Treasury Secretary Steven Mnuchin went with a more modest 2.9 percent. Trump himself told reporters at his Cabinet meeting that he was holding out for 6 percent growth. These projections were mostly just spun out of thin air.

So how did we do? Since the investment boom never materialized, it’s hardly a shock to learn that GDP growth didn’t boom either. The growth rate increased modestly for two quarters and then dropped steadily. In the last quarter unaffected by the coronavirus crisis, it was barely above 2 percent. Not only didn’t the tax cut usher in the growth that Republicans predicted, but growth rates started dropping soon after.


3. The tax cut will pay for itself

It was an article of faith among Republicans that their tax cut wouldn’t just boost economic growth, but would actually generate more revenue than the old, higher tax rates. “Not only will this tax plan pay for itself, but it will pay down debt,” Mnuchin said. Kevin Hassett, then chair of the White House Council of Economic Advisers, agreed: “You don’t really need to have a big growth effect to have Secretary Mnuchin be correct.” Former Rep. Jeb Hensarling, chair of the House Finan­cial Services Committee, insisted that economic growth would be “more than enough” to make up for the lower tax rates.



That growth failed to materialize. Unsurprisingly, so have higher tax revenues. Corp­orate tax receipts plummeted from $240 billion to $140 billion in the first quarter after the tax cut passed, and have stayed at that level ever since.





So what happened to the federal deficit? Republicans lied about the effect of their cut on tax receipts and at the same time they also decided to stop worrying about keeping spending down. As a result, the federal deficit has gone up—and that’s not even accounting for the COVID-19 stimulus spending. This comes as no surprise to anyone who has heard the same Republican tax argu­ments for decades and now recognizes them for the fabrications they are.




4. Corporations will bring back profits stashed overseas

Republicans did their best to include as many corporate giveaways as possible in their tax cut, but spun them as a benefit to the greater economy. Take “repatriated earnings.” American multinational corporations like to keep their overseas profits away from the IRS, and the Republican tax plan aimed to change this by offering companies a temporary “tax holiday.” Earnings kept overseas would be subject to a one-time tax at a very low rate that could be paid over the course of eight years. President Trump promised that this would produce a flood of repatriated earnings amounting to $4–$5 trillion—nearly twice the amount that corporations were actually storing overseas.

This was just another lie, one that no serious economist believed for a moment. And indeed, after a brief boom in repatriated earnings after the tax cut passed, there was a bust. Repatriations to date have amounted to only $840 billion above normal, and the total amount of repatriations in the last quarter of 2019 is only $60 billion higher than it was before the tax cut passed. The total will never come anywhere close to $4–$5 trillion.







Why does this matter? The Republican theory was that companies would use their repatriated earnings to invest in new capacity, which in turn would boost the economy. This was an unusually feeble lie since American companies were already sitting on huge stockpiles of cash that they could have spent if they wanted to. The four biggest US tech companies alone—Apple, Amazon, Google, and Microsoft—had more than $340 billion in cash on their books. But companies don’t invest simply because they have spare money lying around; they only invest if they think the economy is going to grow. If they don’t believe that, they’ll take the extra cash and return it instead to stockholders—i.e., the rich. And that’s exactly what they’ve done.





But maybe foreign investors responded more positively to the tax cut than domestic investors did? Nope. Foreign investment increased briefly but then plunged. Apparently they didn’t take Republican promises any more seriously than Americans did.




5. Your wages will skyrocket

If all this weren’t enraging enough, just wait. You see, the White House also promised something else: that the wages of ordinary workers like you would go up. How much? The claims were all over the map. In a single CEA paper, administration economists predicted that average incomes would rise at least $3,000 and perhaps as much as $9,000 after the tax changes had been “fully absorbed by the economy.” This was on top of the normal income growth already baked into economic forecasts. So what actually happened?





Well, not only are we nowhere near the White House projections, we’re actually still on the trend that was predicted without the tax cut. The Republican tax cut did your wages no good at all.

But wait. What about bonuses? Lots of companies promised they’d pay out extra bonuses if the tax cut passed. AT&T promised $1,000 per employee. Comcast followed suit and Southwest and American Airlines joined in too. Walmart was less generous: It also announced a $1,000 bonus, but only for workers who’d been with the company for at least 20 years.

It made for great headlines. But once the klieg lights were off, bonuses nose-dived to less than they had been before the tax cut.





In the end, the Republican tax cut didn’t help your wages and it reduced your bonus. Are you mad yet?
6. Jobs, jobs, jobs!

Mnuchin declared that the Republican tax bill would be a boon for employment. “This is about jobs,” he said. “This is a jobs bill.”

But it wasn’t. If you look at the total share of the country with jobs—the “employment-to-population ratio”—nothing happened after the tax cut passed. It had been growing since the end of the Great Recession and it continued growing at the exact same rate after the tax cut was passed, until COVID-19 hit.


7. Tax cuts for all

Of course, the Republican tax act did more than just reduce the corporate tax rate. It also reduced individual income taxes for nearly everyone—partly by cutting tax rates and partly by adding a hodgepodge of other benefits. But for most of us, there’s less there than meets the eye.

In 2018, nearly everyone got a tax break, and after-tax incomes went up—although the income of the rich went up a lot more than the income of the middle class. By 2025, the tax break for the middle class will start to vanish. And by 2027, the reduction in income tax rates will disappear for everyone. However, the rich—and only the rich—will continue to benefit from other tax breaks.





Republicans claimed that ending the rate cuts in 2027 was nothing more than an accounting requirement to meet congressional budget rules. They’ll restore it later. But this is just a con job. If they were really sure they could eliminate tax cuts and restore them later, why not zero out their patchwork of tax cuts for the rich? The question answers itself.

8. But guess what? Corporate profits soared

To summarize: The economy didn’t boom, investment didn’t increase, employment didn’t go up, household earnings didn’t surge, and the middle-class tax cuts started out small and then disappeared completely. But there’s one thing that has worked—besides tax cuts for the rich, that is: corporate profits have fattened nicely. Check that out. Corporate profits jumped 8 percent immediately after the tax cut was passed, and they’ve stayed at their new, higher level ever since. It all goes to show that Republicans can accomplish their goals when they put their mind to it. You just have to know what their goals really are.





Now it’s time for a look into the near future. But first let’s zoom out a bit because there’s more to this than just tax cuts for the rich. Republicans have long been devoted to a strategy called “starve the beast,” which has a simple goal: (a) cut taxes, (b) watch revenues fall, and (c) insist that spending has to be cut to avoid big budget deficits. And while the rich may get the tax cuts, the spending cuts are inevitably aimed at the poor and middle class. This is especially effective at the state level because most states aren’t allowed to run budget deficits. If tax revenues fall, they have to cut spending.

And now we have to deal with a pandemic. If the holes in our eroding social safety net seemed patchable before, they don’t any longer. Unemployment insurance? Democrats did a good job of demanding a temporary funding increase, but not everyone benefits because many states have spent years deliberately making their systems hard to use and they’re unable to hold up under hundreds of thousands of new applicants.When economists say “stimulus,” Republicans hear “tax cut.”

Food stamps? Republicans are trying to cut them back just as we need them more than ever. Medicaid? The federal government can still afford to pay its share, but can states? Their tax revenues have plummeted and Republicans have balked at helping them out.

Thanks to the pandemic, we’re about to get hammered by the business end of the starve-the-beast strategy. Tax revenues have already declined due to the Republican tax cut, and they’ll decline more because Republicans used the corona­virus rescue bills to quietly “fix” a few problems in their 2017 bill that turned out to be annoying to the rich. Beyond that, spending has exploded as the rescue bills create trillions in temporary new outlays to help people and businesses brought to their knees by lockdowns and closures. This is going to cause a massive increase in the federal deficit, and Republicans are already making noises about suddenly becoming deficit hawks again. In fact, within minutes of passing the April coronavirus bill, Senate Majority Leader Mitch McConnell was warning that “we can’t borrow enough money to solve the problem indefinitely.”

But even though Republicans may wish they could stop further rescue packages, as we come to grips with the scale of the wreckage, there will be demands for more. Epidemiologists think it’s likely we’ll have another surge of coronavirus cases in the fall, and that will produce more calls for large, broad-based stimulus bills to keep the economy afloat.

When economists say “stimulus,” Republicans hear “tax cut.” As it happens, there are actually good reasons to include certain kinds of tax cuts—those that help middle- and working-class people—in any stimulus package. They can be implemented quickly; they can be made as large as necessary; they put money directly in consumers’ pockets; and they can even be targeted to a certain degree, helping those who have suffered the biggest losses from the pandemic.

But they can also be targeted toward the rich. And that’s what Republicans are certain to propose. So here are some alternatives that Democrats would be well advised to look at.

The most obvious candidate is the Social Security payroll tax. You pay a flat tax of 6.2 percent—which makes it regressive to begin with—and it applies only to your first $137,700 of income. Everything above that is tax free, which is why millionaires pay an effective rate of less than 1 percent.

Suppose you reduce the worker’s share of the payroll tax by two percentage points. This barely affects the rich: A millionaire’s effective rate goes down from 0.9 percent to 0.6 percent. But everyone with less than $137,700 in income sees their rate go down from 6.2 percent to 4.2 percent. The nonrich benefit considerably while the rich barely even notice anything has happened.

But there’s a catch: Payroll tax cuts do nothing for you if you’re unemployed, or you’ve been laid off, or you’re paid under the table. This is why Democrats fought against a payroll tax cut in the first round of corona­virus rescue packages. But even more importantly, the payroll taxes fund Social Security, and if you reduce them, Social Security will be even more underfunded than it is now. The answer is to make sure that any loss of payroll tax revenue to Social Security is made good by infusions from the general fund. These would need to last as long as the stimulus bill is active.

Another candidate is an increase in tax credits. Unlike a deduction, tax credits are subtracted from your taxes owed. The higher the credit, the lower your taxes. Current examples include the child tax credit and the Earned Income Tax Credit.

Increasing credits is an attractive way to juice the economy because they often have fixed maximum amounts. If you lower the taxes of a millionaire by, say, $3,000, it’s a drop in the ocean. But for a middle-class family it’s real money. Democrats could propose increases in existing tax credits, or just a brand-new “pandemic tax credit.” Either way, it could cut taxes without shoveling money into the wallets of the rich.

Another subtler form of taxation that Democrats could target is tax expenditures. A tax expenditure is a deduction, exemption, or exclusion targeted at a specific activity. The most famous is the mortgage interest deduction, which is a straight-up subsidy to homeowners, but one that’s hidden in the tax system. There are more than 100 different expenditures adding up to well over $1 trillion—more than the revenue from Social Security taxes, corporate taxes, or excise taxes. (And not much less than we get from federal income taxes.)

Tax expenditures tend to favor the rich. For example, a middle-class homeowner might pay a 12 percent income tax rate and own a modest home that nets a deduction of $5,000. That’s a tax reduction of $600. And if they don’t have other expenditures to itemize, they might not get a reduction at all.

But a rich homeowner might pay an income tax rate of 37 percent and own an expensive home that nets a deduction of $50,000. That’s a tax reduction of $18,500.If it’s a tax cut fight they want, Democrats can come armed with a slate of their own options.

The easiest way to make this fairer is to cap the amount of the deduction—as, in fact, we do with the mortgage interest deduction. But the better bet is to increase the deduction for nonrich families. Maybe we could just double the deduction for anyone with an income under $100,000. That would cut their taxes without also giving a windfall to the rich.

Finally, there’s another class of taxes entirely: state and local taxes. The sales tax is the obvious target here: It’s big and regressive. The catch is that it’s not controlled by the federal government, and Congress can’t lower it by fiat.

That doesn’t mean Congress is helpless: It could pass a federal rebate on state sales taxes. It could, for example, allow a federal tax credit based on an estimate of how much you paid in sales taxes. This would be calculated from your income and your state’s sales tax rate and would necessarily be approximate. But it would also be progressive.

And there’s one more big lever that could be used. A combination of these cuts could obviously send taxes below zero for some people. At that point, working- and middle-­class families would lose the benefit of the cut since taxes can’t be less than zero.

Except they can: If a tax credit is refundable, it means your income taxes can become negative and the federal government owes you money. In all cases where it’s possible, progressive tax cuts should be refundable. The point, after all, is to give as much money as possible to the kind of people who will spend it to boost the economy. That means working- and middle-class families, who tend to spend most of the money they earn, as opposed to rich families who end up saving or investing much of it.

Will Republicans agree to any of this? Almost certainly not. They understand perfectly well who benefits from different kinds of tax cuts, and as 2017 demonstrated, they don’t care about spurring the economy or creating jobs for the middle class. Nor do they care about reducing the deficit or raising your wages. That was all just bread and circuses to keep the rubes happy.

What they do care about is increasing the income of corporations and the rich, and that’s what they’ll fight for. But if it’s a tax cut fight they want, Democrats can come armed with a slate of their own options. Maybe they won’t get everything they want. Maybe they’ll have to accept some Republican cuts in return for some of their own. But they’ll have a story to tell, and leverage, to get at least something for the middle and working classes.

In the past, Democrats have mostly just tried to gin up opposition to Republican tax cuts by pointing out how unfair they are. It’s never worked, but the fiasco of the 2017 cut, which even the Republican rank and file was lukewarm about, gives Democrats an opportunity to fight back. Instead of just opposing cuts even if there’s a strong case that we need them to stimulate the economy, they can propose better, more equitable tax cuts than Republicans. That would be something new: a chance to educate the electorate by having a showdown over competing tax plans. In the red corner, tax cuts for millionaires. In the blue corner, tax cuts for everyone else. That’s a fight worth having.

Trump and the National Debt
Instead of Eliminating the Debt, Trump Will Add $8.3 Trillion


KIMBERLY AMADEO
REVIEWED BY
MICHAEL J BOYLE
Updated July 01, 2020

During the 2016 presidential campaign, Republican candidate Donald Trump promised he would eliminate the nation’s debt in eight years.1 Instead, his budgets would add $8.3 trillion during that time. It would increase the U.S. debt to $28.5 trillion at the end of eight years, according to Trump's budget estimates.2


This figure will probably be higher once the impact of the COVID-19 pandemic is realized. The Congressional Budget Office predicted that the pandemic would raise the FY 2021 deficit to $2.1 trillion. The FY 2020 deficit will be $3.7 trillion.3


Key Takeaways

President Trump promised to eliminate the national debt in eight years. Instead, he plans to add $8.3 trillion. 

Trump treats the national debt like personal debt. 

He believes that economic growth through tax cuts will pay for itself, though the evidence paints this as unlikely.

Trump’s Two Strategies to Reduce the Debt

While a candidate, Trump had two strategies to reduce U.S. debt. He promised to grow the economy up to 6% annually to increase tax revenues.4 But once in office, he lowered his growth estimate to 2%-3%.5

These more realistic projections are within the 2%-3% healthy growth rate.6 When growth is more than that, it creates inflation. Too much money chases too few good business projects. Irrational exuberance grips investors. They create a boom-bust cycle that ends in a recession.

Trump had promised to achieve between 2%-4% growth with tax cuts.7 In his first 100 days, he released the outline of what would become the Tax Cuts and Jobs Act. It cut the corporate tax rate from 35% to 21% beginning in 2018. The top individual income tax rate drops to 37%.8 It doubles the standard deduction and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.

Trump's tax cuts won't stimulate the economy enough to make up for lost tax revenue. According to the Laffer curve, tax cuts only do that when the rates were above 50%. It worked during the Reagan administration because the highest tax rate was 70%.9

Trump’s second strategy was to eliminate waste and redundancy in federal spending.10 He demonstrated cost-consciousness in his campaign. He used his Twitter account and rallies instead of expensive television ads. He outlined his cost-cutting strategies in his book, "The Art of the Deal."

Trump was right that there is waste in federal spending. The problem isn't finding it. Both Presidents Bush and Obama did that. The problem is in cutting it.11 Each program has a constituency that lobbies Congress. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending in someone else’s district, but not in their own.

Any president must cut into the biggest programs to make an impact on the debt. More than two-thirds of government spending goes to mandatory obligations made by previous Acts of Congress. For FY 2021, Social Security benefits cost $1 trillion a year, Medicare costs $722 billion, and Medicaid costs $448 billion. The interest on the debt is $378 billion. Taken together, these total $3.3 trillion.

To lower the debt, military spending must also be cut. Instead, Trump had increased military spending in FY 2021 to $934 billion.12 That includes three components:

$636 billion base budget for the Department of Defense.
$69 billion in overseas contingency operations for DoD to fight the Islamic State group.
$228 billion to fund the other agencies that protect our nation. They include the Department of Veterans Affairs ($105 billion), Homeland Security ($50 billion), the State Department ($44 billion), the National Nuclear Security Administration in the Department of Energy ($20 billion), and the FBI and Cybersecurity in the Department of Justice ($9.8 billion).

What's left of the $4.8 trillion budgeted for FY 2021 after mandatory and military spending? Only $595 billion to pay for everything else. That includes agencies that process Social Security and other benefits. It also includes the necessary functions performed by the Justice Department and the Internal Revenue Service. You'd have to eliminate it all to make a dent in the $966 billion deficit. You can't reduce the deficit or debt without major cuts to defense and mandated benefits programs. Cutting waste isn't enough.

Trump’s Business Debt Influences His Approach to U.S. Debt

Trump has a cavalier attitude about the nation’s debt load. During the campaign, he said the nation could "borrow knowing that if the economy crashed, you could make a deal.”13 He added, “The United States will never default because you can print the money."


Trump thinks about the national debt as he does personal debt. A 2016 Fortune magazine analysis revealed Trump's business is $1.11 billion in debt.14 That includes $846 million owed on five properties. These include Trump Tower, 40 Wall Street, and 1290 Avenue of the Americas in New York. It also includes the Trump Hotel in Washington D.C. and 555 California Street in San Francisco. But the income generated by these properties easily pays their annual interest payment. In the business world, Trump's debt is reasonable.

But sovereign debt is different. The World Bank compares countries based on their total debt-to-gross domestic product ratio. It considers a country to be in trouble if that ratio is greater than 77%.15

The U.S. debt-to-GDP ratio is 108.2%. That's the $23.517 trillion U.S. debt as of March 23, 2020, divided by the $21.726 trillion nominal GDP.1617

So far, this high ratio hasn't discouraged investors. America is the safest economy in the world. It has the largest free market economy and its currency is the world's reserve currency. Even during a U.S. economic crisis, investors purchase U.S. Treasurys in a flight to safety. That's one reason why interest rates plunged to 200-year lows in March 2020 after the coronavirus outbreak.18 Those falling interest rates meant America's debt could increase, but interest payments remain stable.

The United States also has a massive fixed pension expense and health insurance costs. A business can renege on these benefits, ask for bankruptcy, and weather the resulting lawsuits. A president and Congress can't cut back those costs without losing their jobs at the next election. As such, Trump's experience in handling business debt does not transfer to managing the U.S. debt.

Trump is wrong to assume that the United States could simply print money to pay off the debt. It would send the dollar into decline and create hyperinflation. Interest rates would rise as creditors lost faith in U.S. Treasurys. That would create a recession. He's also wrong in thinking that he could make a deal with our lenders if the U.S. economy crashed. There would be no lenders left. It would send the dollar into a collapse. The entire world would plummet into another Great Depression.

National Debt Since Trump Took Office

At first, it seemed Trump was lowering the debt. It fell $102 billion in the first six months after Trump took office.19 On January 20th, the day Trump was inaugurated, the debt was $19.9 trillion. On July 30, it was $19.8 trillion. But it was not because of anything he did. Instead, it was because of the federal debt ceiling.


On September 8, 2017, Trump signed a bill increasing the debt ceiling.20 Later that day, the debt exceeded $20 trillion for the first time in U.S. history. On February 9, 2018, Trump signed a bill suspending the debt ceiling until March 1, 2019.21 It leapt to $22 trillion. In July 2019, Trump suspended the debt ceiling until after the 2020 presidential election.22 The debt soon rose to $23 trillion. Trump has overseen the fastest increase in the debt of any president.


Trump's Fiscal Year 2021 budget projects the debt would increase $4.8 trillion during his first term.23 That's as much as Obama added while fighting a recession. Trump has not fulfilled his campaign promise to cut the debt. Instead, he's done the opposite.

How It Affects You

The national debt doesn't affect you directly until it reaches the tipping point. Once the debt-to-GDP ratio exceeds 77% for an extended period of time, it slows economic growth.24

Every percentage point of debt above this level costs the country 0.017% in economic growth.

The first sign of trouble is when interest rates start to rise significantly. Investors need a higher return to offset the greater perceived risk. They start to doubt that the debt can be paid off.


The second sign is that the U.S. dollar loses value. You will notice that as inflation rises, imported goods will cost more. Gas and grocery prices will rise. Travel to other countries will also become much more expensive.


As interest rates and inflation rise, the cost of providing benefits and paying the interest on the debt will skyrocket. That leaves less money for other services. At that point, the government will be forced to cut services or raise taxes. That will further slow economic growth. At that point, continued deficit spending will no longer work.