Modern
conservatives have been lying about taxes pretty much from the beginning
of their movement. Made-up sob stories about family farms broken up to
pay inheritance taxes, magical claims about self-financing tax cuts, and
so on go all the way back to the 1970s. But the selling of tax cuts
under Trump has taken things to a whole new level, both in terms of the
brazenness of the lies and their sheer number. Both the depth and the
breadth of the dishonesty make it hard even for those of us who do this
for a living to keep track.
In fact, when I set
out to make a list of the bigger lies, I thought there would be six or
seven, and was surprised to come up with ten.
So I thought it might
be useful, both for myself and for others, to put together a crib sheet:
a fairly long-form description of ten big lies Trump and allies are
telling, what they’ve said, and how we know that they are lies. I’m
probably missing some stuff, and for all I know some new big lie will
have been tweeted out by the time this is posted. But we do what we can.
So here we go.
Lie #1: America is the most highly-taxed country in the world
This is a Trump special: he’s said it many, many times, most recently just this past week. Each time, fact-checkers have piled on to point out that it’s false. Here’s taxes as a percentage of GDP, from the OECD:
The blue bar is the US; the red bar the average for advanced countries.
Why does Trump keep
repeating what even he has to know by now is a flat lie? I suspect it’s a
power thing: he enjoys showing that he can lie repeatedly through his
teeth, be caught red-handed in his lie again and again, and his
followers will still believe him rather than the “fake news” media.
Lie #2: The estate tax is destroying farmers and truckers
Tales of struggling
family farms disbanded because they can’t afford the taxes when the
patriarch dies have flourished for decades, despite the absence of any
examples. I don’t mean examples are rare: I mean that advocates of
estate tax repeal haven’t been able to come up with a single example at
least since the late 1970s, when exemption levels were raised to the
equivalent of around $2 million in today’s dollars.
Lately Trump has added
a new twist, portraying the estate tax as a terrible burden on
hard-working truckers. For who among us doesn’t own an $11 million fleet
of trucks?
The reality, as this
graphic from the Center on Budget and Policy Priorities shows, is that
only a small number of very large estates pay any tax at all, and only a
tiny fraction of those tax-paying estates are small businesses or
family farms:
In fact, since
transportation and warehousing are only 3 percent of GDP and farming
less than 1 percent, it seems quite possible that this year only 2 or 3
truckers and not a single farmer will pay any estate tax.
Lie #3: Taxation of pass-through entities is a burden on small business
Most businesses in the
United States, at least for tax purposes, aren’t what we normally think
of as corporations subject to profits taxes. Instead, they’re
partnerships, sole proprietorships, and S corporations whose earnings
are simply “passed through”: counted as part of their owners’ personal
income and taxed accordingly.
Trump wants to change that, and let owners simply pay a 1525
percent tax on the earnings of pass-through entities, with no further
taxes owed. This is being billed as a reduction in the burden on
hard-working small business owners.
But as the Tax Policy Center
explains, many middle-income households who own pass-through entities
aren’t running businesses; they generally derive only a small fraction
of their income from these entities:
Rather, they may receive occasional income from the rental of a vacation home, or from the sale of odds and ends on eBay, that they report as business income.
High-income owners of
such entities, by contrast, get a lot of money from them – but they’re
not struggling small business people:
This high-income group is made up of doctors, lawyers, consultants, other professionals, and, at the very highest end, partners in hedge funds or other investment firms.
And these are, of
course, the people who would gain massively from the Trump proposal. The
vast majority of Americans are in a tax bracket of 15 percent or less,
so even if they control a pass-through entity, the Trump tax break is
worth nothing to them:
High-income individuals, however, would gain a lot by paying 1525
percent instead of the much higher rates they pay at the margin – 39.6
percent right now. And they’d also have a strong incentive to rearrange
their affairs so that more of their income pops up in their
pass-throughs. This wouldn’t be small-business creation; it wouldn’t add
jobs; it would just be tax avoidance. That’s what happened when Kansas
tried something similar, and played a big role in the state’s fiscal
disaster.
So this isn’t a tax break for small business, it’s a tax break for, surprise, wealthy individuals.
Lie #4: Cutting profits taxes really benefits workers
Tax incidence is a
headache-inducing subject at best, and my sense is that even the tax
policy experts have gotten behind the curve in thinking through the
implications of global capital markets for the subject. But I think
there’s a way to cut through at least some of the confusion.
Think about what
happens if you cut the taxes on corporate profits. The immediate impact
is that (duh) corporations have more money. Why would they spend that
extra money on hiring more workers or increasing their wages?
Not, surely, out of
the goodness of their hearts – and not in response to worker demands,
because these days nobody cares what workers think.
Now, they might be
inclined to invest more, increasing the demand for labor and therefore
raising wages indirectly while competing pre-tax profits down. But there
are a couple of major slippages in this story.
First, a lot of
corporate profits aren’t a return on physical capital and won’t be
competed down if capital gets cheaper. Apple, Google, Microsoft, and
others derive their profits from technological advantages, brand name,
and market power; cutting the taxes on those profits just leaves their
owners with more money.
Second, to raise wages
a tax cut must raise the overall stock of capital, which means it must
lead to higher total investment spending. Where does the money for that
increase in investment come from? The tax cuts are unlikely to raise
national saving.
The money might come
from abroad, via capital inflows. But the flip side of those capital
inflows would be a bigger trade deficit – hardly what the proponents of
tax cuts are advertising – and in any case running trade deficits on the
required scale is a much more problematic thing than people seem to
realize. The dollar would have to rise sharply – and the strength of the
dollar would itself deter foreign investment, very much slowing the process of wage rise.
So for an extended
period – at least 5 years, probably much more — cutting profits taxes is
good for owners of corporations. Workers, not so much.
Lie #5: Repatriating overseas profits will create jobs
For tax reasons,
corporations hold a lot of money in overseas tax shelters. Tax cutters
always claim that lower rates and/or an amnesty will bring that money
home and create a lot of jobs.
So, first of all,
there isn’t really a Scrooge McDuck-type pile of cash hidden overseas,
ready to be put to work if the taxman will let it. Those overseas
accounts are just an accounting device, which have very little real
effect. Many of the companies with big overseas hoards also have plenty
of idle cash at home; what’s holding them back is a lack of perceived
opportunities, not cash flow. And even those who don’t have surplus cash
can easily borrow at near-record low interest rates; remember, they can
always use the overseas cash to secure their loans.
And we have solid
empirical evidence here. In 2004 the U.S. enacted the Homeland
Investment Act, which offered a tax holiday for repatriation of foreign
earnings by U.S. multinationals. Careful study of its effects tells us that
Repatriations did not lead to an increase in domestic investment, employment or R&D — even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders.
Lie #6: This is not a tax cut for the rich
Trump says it isn’t, so that’s that, right? Oh, wait.
Actually, if you look
at the major provisions of the Unified Framework, the big items are (i)
Cuts in corporate taxes (ii) Pass-through tax cut (iii) elimination of
the estate tax (iv) cut in top marginal rate. All these strongly favor
very high incomes – and everything else is small change. Hence the Tax Policy Center estimate:
Administration flacks
and defenders are accusing TPC of reaching conclusions without adequate
information; but the administration is making lots of assertions about
what its plan will do, with apparently no more information than the
center. Furthermore, given the general shape of the plan there’s no way
it can fail to be very much a gift to the already very rich.
Lie #7: It’s a big tax cut for the middle class
See Lie #6 above. All
the big provisions benefit the rich, not the middle class. What’s left
is mostly small change – and some of it, like ending deductibility of
state and local taxes and other deductions, actually raises taxes on a
substantial number of middle-class Americans.
In total, by 2027,
according to TPC, 80 percent of the tax cut goes to the top 1 percent;
only 12 percent to the middle three quintiles.
Lie #8: It won’t increase the deficit
OK, we’re looking at
big cuts in corporate taxes, elimination of the estate tax, lower rates
on high-income individuals, and a massive new tax-avoidance loophole.
How can this not increase the budget deficit?
The only answer would
be if the tax proposal eliminated vast swathes of the existing set of
tax deductions, massively broadening the tax base. It doesn’t. The only
even halfway biggish thing here is the state and local deductibility end
– and that is already in very big political trouble. This is a
multi-trillion-dollar budget buster, unless it summons up deep voodoo.
But …
Lie #9: Cutting taxes will jump-start rapid growth
Insistence in the
magical power of tax cuts is the ultimate zombie lie of U.S. policy
discussion; nothing can kill it. And we know why: there’s a lot of money
behind the proposition that great things will happen if you cut the
donors’ taxes. It’s difficult to get a man to understand something when
his salary depends on his not understanding it.
Still, for the record:
Reagan cut taxes, and although his administration began with a terrible
recession, there was a fast recovery thereafter. Some of us think Paul
Volcker had more to do with both the recession and the recovery than
anything coming from the White House; but in any case we have more
evidence.
For Bill Clinton
raised taxes, amid cries from the right that he would destroy the
economy. Instead he presided over a boom that surpassed Reagan in every
dimension. For what it’s worth, I don’t think this boom was Clinton’s
doing. But it certainly refuted the proposition that cutting taxes is
both necessary and sufficient for prosperity.
Then Bush the younger
cut taxes, and there were many hosannahs about the “Bush boom.” What he
actually got was a lackluster recovery, followed by an epic crash.
Finally, Obama
inherited the aftermath of that crash, and despite scorched-earth
opposition from Republicans the economy gradually clawed its way back.
Then in 2013 Obama first raised taxes substantially, then implemented
the Affordable Care Act, again amid cries of disaster from the right.
The economy did fine.
Oh, and there were the
recent state-level experiments. Sam Brownback slashed taxes in Kansas,
promising an economic miracle; all he got was a fiscal crisis. Jerry
Brown raised taxes in California, amid predictions of – you guessed it –
disaster; the economy boomed, and the main problem is a housing
shortage.
There is nothing,
nothing at all, in this history that would make any open-minded person
believe that the Trump tax plan will cause dramatically accelerated
growth.
Lie #10: Tax cuts will pay for themselves
If tax cuts don’t
generate an economic miracle, it’s hard for them to generate a revenue
surge that makes up for lower rates. True, some hidden money may come
out of the woodwork and show up as taxable income, even if GDP doesn’t
rise. But this effect hasn’t historically been anywhere big enough to
offset the direct losses from lower taxes. Reagan’s tax cuts led to
deficits, Clinton’s tax hike to surpluses; Jerry Brown presided over
California’s fiscal revitalization, Sam Brownback over a fiscal crisis
that eventually prompted the legislature to overrule him and raise taxes
again.
So there we are: ten
big tax-cut lies. That was pretty exhausting, actually – and as I said,
I’ve probably missed a few, and/or Trump will invent some new ones. But I
hope this ends up being a useful reference.
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