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| Credit: Tax Policy Center |
When President Trump was running for office in 2016, he told the hosts of NBC's Today that he would raise taxes on the wealthy. He has long claimed that he favors policies that do not financially benefit him. He feigns concern for the "forgotten man." However, his new tax reform law will only worsen the decades-long, deep income inequality that created the conditions for his ascension. After President Obama's 2013 fiscal cliff deal increased the top tax rate to 39.6% from 35% and after his Affordable Care Act instituted higher Medicare and investment income taxes on the wealthy, there was a modest, positive effect on income inequality that was long overdue. The tax code became slightly more progressive and median incomes finally rose in 2015 and 2016 after several years of stagnation. The new law, which cuts the top federal income tax rate from 39.6 percent to 37 percent and doubles the exemption from the estate tax (among other regressive changes), will reverse those minimal, yet important, gains. The net effect of such a measure, even as middle-class tax rates are simultaneously cut, is the worsening of income inequality.
Already, the wealthiest Americans have amassed the lion's share of the growth in income during the recovery from the Great Recession: they have reaped far more of the benefits of the recovery than the middle and lower classes. As a consequence of these new measures, long sought by right-wing ideologues like House Speaker Paul Ryan, the richest individuals and families will proportionally see higher increases in their wealth than the middle class and the poorest Americans.
President George W. Bush's 2001 $1.3 trillion tax cut, which also largely benefited the rich, and President Ronald Reagan's massive 1981 tax cut were designed similarly. It does not have to be this way. The structure of this cut was something we were warned about in the campaign and yet the focus of that debate unfortunately drifted to Hillary Clinton's poor sloganeering rather than the substance of what she said. An "across-the-board" tax cut, a la the Trump/Bush/Reagan efforts, ultimately has the effect of disproportionately stuffing the coffers of the very wealthy.
The after-tax income of the extremely wealthy will also increase more, by percentage, than the after-tax income of lower and middle-class Americans because of changes like the aforementioned doubling of the estate tax exemption and shielding *millionaire* couples from the Alternative Minimum Tax. The Republican leadership in Congress likes to continually emphasize that everyone gets a tax cut in their law but the law's societal effects unfortunately negate benefits middle-class and lower-class individuals will receive.
It is true that the Child Tax Credit is doubled under this law and that is a positive element of tax reform but if the GOP were truly concerned about the "forgotten man," there are a range of proposals they could have adopted that would genuinely not tilt a tax cut to the rich and more substantially increase after-tax income for the lower and middle class.
These ideas include increasing the Earned Income Tax Credit for childless workers, wholly eliminating payroll taxes (that regressively, disproportionately impact the poor) for people making under $30,000, and dramatically reducing the lowest tax bracket (10%), in which individuals who are in poverty are currently paying federal income tax, all while still paying state and local taxes that hurt them more than anyone else, but cannot take advantage of generous loopholes that effectively bring rich Americans' tax rates down to the *rates* the poor pay.
A standard GOP response to this dilemma is that the law will result in increased economic growth which will thus benefit everyone. Besides the fact that such tax cuts previously did not ultimately benefit everyone in the way the GOP envisions, there is a gap in this explanation. While it is true that some tax cuts (i.e. those for the "bottom 95%") can be economically stimulative, they are far less stimulative than other measures the GOP could have adopted. Such prudent proposals include direct public works infrastructure spending - a professed priority for Trump who has yet to impress on this issue - and tax-and-transfer policies that boost after-tax income for the poor and middle class.
Further, a wealth of research and vast empirical evidence demonstrate that the most economically stimulative efforts are ones that largely benefit the middle class. Consider that the Obama-era Recovery Act included some of these genuinely, broadly stimulative measures. The stimulus featured billions in infrastructure spending and a "Making Work Pay" tax cut that only benefited the lower and middle classes.
Consider too that the two-year payroll tax holiday, promulgated by the Obama/McConnell tax cut deal of December 2010, also had a disproportionate impact on the lower and middle classes. They are the ones most hamstrung by the regressive FICA tax. A broad-based, flat cut like that cut was even more impactful for the poor for whom the effect of the credit on their finances was greater than on the rich who benefit from the so-called "payroll tax gap." The ultimate outcome of these efforts was genuine economic growth that resulted in some lessened inequality.
That was also the case when President Clinton raised the top rate on the wealthy in 1993 yet expanded the EITC, which only directly benefits the middle class. Indeed, economic research shows that, as Obama said accurately, "when the middle class does well, everyone else benefits too." As their incomes rise, their ability to contribute to the economy, through their increased purchasing power, rises which thus supports jobs in those stores, markets, etc. in which they shop and travel and consequently, gross domestic product rises.
Why is all of this important though? Even if some economic growth does result from the tax law, the effect of higher income inequality is truly dangerous for our society. The United States prides itself on being a pluralistic, classless, and vibrant democracy built on the grand notion of upward mobility. Trump's Tax Cuts and Jobs Act only makes that promise less realistic. As Thomas Piketty compellingly wrote in Capital in the Twenty-First Century, the social consequences, for the core identity of a country and for its political system, of deepened inequality can be tragic. "The risk of a drift toward oligarchy is real," Piketty feared; such warnings should have been heeded as it is that precise social ill that helped catapult Trump's rise.
Racial animosity was a centerpiece of Trump's campaign but the President's lambasting of concentrated wealth, though totally fraudulent on his part, gave his bid the economic veneer it needed to justify its faux populist brand. Disenchanted voters were driven to Trump's closing argument that railed against a "small handful of large corporations" that amassed massive wealth and tremendous political power; he chastised the cadre of "global elites" who were ostensibly determined to defeat him and destroy the working class. That is partly because many of those voters, in places like northeastern Pennsylvania, have borne the brunt of the economic and social effects of increased inequality. They further feel as if their voices and their economic concerns have been stifled in the political process.
It is true that the levels of political power and of social clout of the poor and middle class pale in comparison to the deference legislators give to the needs of the wealthy. A prime example of this phenomenon is when Congress rushed to mollify the negative impacts of the 2013 sequester for the wealthy before they touched other, more devastating aspects of the sequester. Already, a much-touted Princeton study, one that generated significant media attention at the time of its release, has found that the U.S. is a society in which the "elites" have far more success in their "political preferences...[than] the ordinary citizen."
Significant inequality tears at the very fabric of our country. High income inequality closes doors for those born into poverty even if they demonstrate incredible productivity and it makes access to basic goods and services more difficult. Further, it destroys a sense of a common, shared experiment and experience as a country such that we are then a less cohesive society. Economists, sociologists, and political analysts have documented a rise in these disturbing social trends over the course of the last four decades.
These experts have theorized, over the years, that these developments could lead to the rise of a dangerous figure like Donald Trump, who brazenly promises that he "alone can fix" our problems. Predictably though, Trump's lone major legislative achievement (so far) will magnify those problems that plagued the communities that made him president. It is up to a Democratic resistance to present the flip side of this coin of American populism to advance an agenda that genuinely reduces inequality and is focused on benefiting poor and middle-class Americans. If Democrats fail to offer serious, concrete proposals while Trump continues to disappoint working-class voters, a political crisis may unfold as voters' confidence in democracy could entirely collapse.
