TOPICS > Politics

An argument for how Trump’s tax plan could exacerbate inequality

April 26, 2017 at 6:40 PM EDT
President Trump's tax reform blueprint calls for eliminating the alternative minimum tax and the estate tax, cutting all itemized deductions except for mortgage interest and charitable giving, and getting rid of taxes on the first $24,000 if a couple's earnings. How does that affect tax revenue? William Brangham gets reaction from Jared Bernstein of the Center on Budget and Policy Priorities.
LISTENSEE PODCASTS

JUDY WOODRUFF: Now a very different view of the president’s tax plans.

William Brangham takes it from here.

WILLIAM BRANGHAM: In addition to cutting the corporate rate and reducing the number of tax brackets, the president’s blueprint calls for eliminating the Alternative Minimum Tax, or AMT, as well as the estate tax.

It would also eliminate any taxes on the first $24,000 of a couple’s earnings. And it would cut all itemized deductions, except for two big ones, mortgage interest and charitable giving.

I’m joined now by Jared Bernstein. He’s an economist who served in the Obama administration. He’s now a fellow at the Center on Budget and Policy Priorities.

Welcome.

JARED BERNSTEIN, Center on Budget and Policy Priorities: Thank you.

WILLIAM BRANGHAM: First reaction to the president’s tax proposal?

JARED BERNSTEIN: There are a lot of problems with this proposal.

I can think of three or four right off the top of my head, first of all on the revenues. This is a tax plan, even though we don’t know all the details yet, what we do know suggests very clearly that this is going to lead to a loss of north of at least $3 trillion to the treasury, and it could be as much as $6 trillion. That’s over 10 years.

WILLIAM BRANGHAM: So, potentially big deficit hits.

JARED BERNSTEIN: Big deficit. Big deficit debt hits.

And there are argument that the growth effects of these tax cuts will offset those revenue losses, those arguments are completely unfounded. There’s just not a shred of evidence, not a shred, that tax cuts pay for themselves in the totality, which is what they’re suggesting.

That’s not to say that tax cuts can’t have some growth effects, but they tend to be really quite small. So, that’s the first point. The growth point was number two.

The third point — and I really think Director Mulvaney got this pretty backwards — was, this tax cut plan exacerbates after-tax inequality. That means most its benefits accrue to those at the very top of the scale.

We can go through some of the details, some of the pieces that you announced that generate that effect, but it mostly has to do with this very sharp cut in the corporate rate and this pass-through rate that you heard him talk about.

And, finally — and this relates to this pass-through problem — this tax plan oppose up a huge loophole. Every high-end earner has an incentive now to become an independent business, an S Corp, an LLC, to take advantage of a pass-through rate is now going to be 15, 20 percentage points below what they would otherwise pay.

WILLIAM BRANGHAM: Secretary Mnuchin in his briefing today — and you heard Mick Mulvaney make the same argument — they argue that these taxes are geared largely to middle-income earn earners.

You don’t see any evidence that there’s targeted tax breaks for them in this?

JARED BERNSTEIN: Just a slightest bit, which is this increase in the standard deduction. So, that’s going to help some folks at the bottom.

But that’s tiny. The vast majority of the revenue losses that I was describing, the trillions that are not going to be flowing to the treasury if this tax cut ever becomes law, very much swamp anything to the middle class.

Let me give you an example. This sounds to me very similar to a House plan that was written by Paul Ryan quite recently. And with that plan, the top 1 percent, their after-tax income went up 11 percent. That’s about $240,000. OK?

The middle class, their income went up 0.1 percent, which we can just call zero. That’s 60 bucks. So that’s the kind of imbalance we’re looking at here. And that’s what I mean when I say this really exacerbates a problem we already have, which is one of high levels of inequality.

WILLIAM BRANGHAM: You heard Judy and Mick Mulvaney talk about these pass-through companies and the huge tax cut that they’re going to be getting.

Can you explain what those companies are and what that tax cut would mean?

JARED BERNSTEIN: These are the small businesses, but they’re not the moms and pops. That was another misleading part of that.

WILLIAM BRANGHAM: Well, they argue that this is — that that is largely a tax cut for small business.

JARED BERNSTEIN: So, that’s — well, it is a tax cut for some small business, but which small businesses are we talking about?

The moms and pops, you think about the corner store, they’re already paying a low rate on their pass-through income, something close to the 15 percent that we’re talking about. The ones who get the huge break here are high-end small businesses, you know, law firms and private equity funds and hedge funds.

And, again, the point here is that, if you’re being paid a high salary, you now — which you have to pay on your personal income side, which, under their plan, would be 35 percent, you now have a very big, very tempting incentive to go to your boss and say, starting tomorrow, you’re no longer paying me a paycheck. I’m Jared Bernstein LLC, and I’m going to tap that 30 — that 15 percent loophole.

WILLIAM BRANGHAM: You’re a veteran of a lot of tax battles in the Congress and the Senate and the administration. Isn’t this just the opening salvo of the Trump administration? This is their beginning of their negotiating position?

JARED BERNSTEIN: It is an opening salvo. I think that’s an important point and we shouldn’t forget that.

The problem is that the — this opening salvo goes completely in the wrong direction. We are a society, an economy, a government that is going to need more revenues in the future, not less. Think about demographics alone. The share of elderly people in our country is going to go from 15 to about 21 percent over the next couple of decades. Now, that’s baked in the cake. That’s going to happen.

That creates certain budgetary pressures. So, the idea that we’re even starting with an opening salvo that’s going to keep, you know, $3 trillion, $4 trillion, $5 trillion over 10 years of going into the coffers at the treasury is starting from precisely the wrong place.

WILLIAM BRANGHAM: Jared Bernstein, thanks very much for your analysis.

JARED BERNSTEIN: My pleasure.

SHARE VIA TEXT