Trump’s Big Tax Cut Is Unadulterated Trickle-Down Fundamentalism

(AP/Carolyn Kaster)

Treasury Secretary Steven Mnuchin, right, and National Economic Director Gary Cohn, arrive in the briefing room of the White House in Washington, Wednesday, April 26, 2017.

Donald Trump has been in office nearly 100 days with little to show for it, save for signing a bunch of fancy parchment that orders the roll back of several environmental and worker protections.

His fragile ego is driving his need to do something big. And so he’s doing what Republicans generally do when all else fails: propose steep tax cuts for the wealthy and corporations.

On Wednesday, Trump’s Treasury Secretary Steven Mnuchin and chief economic adviser Gary Cohn unveiled their tax plan, one that, as expected, is centered on unadulterated trickle-down economics.

Echoing his presidential campaign’s tax plan, Trump’s proposal calls for a 20 percent cut in the tax rate for corporations—from the current rate of 35 percent down to 15 percent. Furthermore, he wants to slash the rate for pass-through entities—owner-operated operations like his own real-estate empire—from a top rate of 39.6 to 15 percent as well. While his plan offers vague platitudes to end special interest deductions that benefit the wealthiest Americans, it fails to identify even one such loophole. On the other hand, Trump does call for ending the estate tax, which would be a tremendous giveaway to the heirs of the biggest family fortunes in the country. He also proposes ending the alternative minimum tax, a provision that forced Trump himself to pay $31 million in federal income taxes in 2005 that he could have otherwise avoided.

Experts on the left and right agree there’s no way the White House can cover the cost of those cuts—about $2.4 trillion in lost revenue over 10 years—just by limiting deductions, closing loopholes, or even including dubious revenue raisers like House Speaker Paul Ryan’s border-adjustment tax, which Trump has now ditched. Alas, Trump and his aides are turning to the only argument that politicians can make to justify trickle-down economics: that when the wealthy and corporations pay less in taxes, economic growth surges and make up for the lost revenue.

“The plan will pay for itself with growth,” Trump’s Treasury Secretary Steven Mnuchin pronounced last week. Factoring in economic growth with tax cuts is a dubious practice known as “dynamic scoring.” It’s the special sauce of voodoo economics that trickle-downers use to provide political cover for the otherwise humongous holes that their tax cuts leave in federal budgets.

Problem is, estimated rates of growth promised by tax-cut proponents never pan out. History has shown time and time (and time!) again that corporate tax cuts do not trickle down to average Americans and fail to boost economic growth. One only need to look back to how George W. Bush’s sweeping tax cuts in the early 2000s did little to boost the economy as it foundered for the rest of the decade and led to an anemic post-2008 recovery.

Meanwhile, the U.S. Chamber of Commerce and their Republican Party devotees ceaselessly harp about how the United States’ marginal 35 percent corporate tax rate is among the highest in the world and that the unwieldy tax burden is the only thing keeping Corporate America from unleashing economic nirvana for the masses.

Many companies pay nowhere near that rate, however, thanks to a litany of lucrative loopholes carved out by armies of corporate lobbyists and sophisticated offshore tax avoidance strategies orchestrated by high-powered tax lawyers. 

For instance, a report from the Institute on Taxation and Economic Policy that examined the corporate tax filings of 258 Fortune 500 companies from 2008 to 2015 provided a snapshot of the realities of corporate taxation. The findings show that some of the country’s biggest and most profitable companies pay nowhere near the 35 percent rate, oftentimes paying closer to half that. Forty-eight of those Fortune 500 companies paid between zero and 10 percent during that period. All told, those 250 corporations enjoyed $526 billion in tax breaks over those eight years, with half of that going to the 25 most profitable—including the likes of AT&T, J.P. Morgan, Wells Fargo, and Verizon.

Even more problematic, corporations aren’t taking those tax savings and investing them in growth-spurring research and development, capital improvements, and jobs. Instead, they pour their record-level profits into stock buybacks that only serve to further enrich shareholders. So who’s to say companies will take the money they would save from this rate cut to drive economic growth? The bottom line is that a straightforward corporate tax cut like Trump’s—without any provisions incentivizing smart investment—would only exacerbate economic inequality.

Trump also wants to slash the tax rate for business owners like himself who claim their business income as personal income—through vehicles known as pass-through entities—from a top rate of 39.6 percent down to 15 percent. Today, pass-through entities make up more than 90 percent of all businesses in the country, running the gamut from small independent businesses to hedge funds and real estate partnerships.

While cutting rates for small business owners sounds like a good idea, the benefits of the pass-through rate cut skews almost exclusively toward the wealthy—those hedge fund executives and real estate developers like, well, Trump. They do very little for the 70 percent of pass-through filers who already pay the lowest rate.

About half of all pass-through income streams into the top one percent (those making roughly $700,000 or more a year) while only about 27 percent goes to your average mom and pop shops in the bottom 90 percent of households, according to an analysis by the Center on Budget and Policy Priorities.

Those hedge funders and real estate moguls in the top tax brackets would see huge savings—all told, the rate cut would save pass-through entities nearly $900 billion. It would also create yet another tax avoidance incentive as wealthy households try to reclassify their non-business income to qualify for the lower rate, which is estimated to generate another $650 billion in lower taxes. All told, the pass-through rate cut would cost $1.5 trillion in lost federal revenue over the next 10 years, the Tax Policy Center estimates.

Trump is making an unfunded, unsustainable, deficit-ballooning tax cut for the rich the cornerstone of his first 100 days, with the fingers-crossed promise that it will drive unprecedented economic growth. It was a lie the last time Republicans pushed through a similar tax cut, and it’s still a lie today.

Tax Cuts for the rich. Deregulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives’ age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren’t made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.

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