During the 2016 Presidential Campaign, Donald Trump Released a tax plan and then subsequently a revised plan, which outlines his vision for taxation in the United States.2
Given the importance of taxes in our society, the gravity of even discussing the subject matter, and its philosophical implications I believe a post about my position on taxes is necessary and explain why I feel so negatively about Mr. Trump’s tax plan and provide alternative plans that I do support.
Before I begin I need to make a short disclaimer, I am not a tax expert, I am also not an economist or a historian. I have never taken a single course on taxation, econometrics, or any analytically intensive sociological course. Nevertheless, I believe I have read enough material to at the very least form a reasonable opinion on this subject. Lastly, as with all of my positions, they are subject to change based on sufficient information and changes will be reflected in this post and noted at the bottom.
As always feel free to comment and criticize. Enjoy.
To state it bluntly, Mr. Trump’s plan, among other things, is nothing but the same old tactics used in the past by conservatives – insane Tax Cuts for the richest people in this country both nominally and percentage of their total income.
Mr. Trump’s justification for this policy is when the wealthy have more money they can use to invest and grow the economy and in particular to start or expand businesses, which would subsequently employ more people. Furthermore, it is also argued that since the wealthiest people in this country pay most of the federal income taxes they deserve the tax cut the most out of any other income group. This position is commonly known as Supply-Side Economics or Reaganomics. The reality is that although this argument can work in short spurts. I believe this policy is not only morally and ethically wrong (a post for another time), but it is also not true in the long run and simply not equitable. 4 5
First, we must acknowledge a major misconception about how the wealthiest people in this country earn their money. The reality is most wealthy people do not make their money from income in the traditional sense from one’s labor; they make it from capital gains, which is profit from the sale of property of investments such as stocks and bonds.
Secondly, we have to consider the evidence if cutting taxes for the wealthiest people in this country after 25+ years grows the economy. The United States tax cutting policy has consisted of two tax cuts for the wealthy under Reagan (from the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986), two tax cuts under Bill Clinton (from the Omnibus Budget Reconciliation Act of 1993 and the Taxpayer Relief Act of 1997) 7, and two tax cuts under George W. Bush (from the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003). The answer is a resounding no. Cutting taxes for the wealthy does not grow the economy. But don’t take my word, take it from the Congressional Budget Office, Brookings, and the Tax Policy Center.
Let me highlight the seminal Congressional Research Service’s 65-year study on this point.
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced. 8
Here are some other studies which concluded the same or similar conclusion.
This policy will only continue to ravage our economy by increasing wealth inequality and decreasing social mobility. To repeat an adage, we have been here before.
To understand why I know this, let me start with the most fundamental aspect of the American Economy – consumer spending. Consumer Spending, better known as Personal Consumption Expenditures, is the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two-thirds of domestic spending, and thus it is the primary engine that drives economic growth in our country.9
Consumer spending is obviously driven by people. People spend money from their income and savings. From this fundamental aspect of the American economy, we have to ask ourselves who spends more of their money as a percentage of their total income. This point is important to know because large savings does not add anything to the economy, at least in the short run. Worse, too much saving can actually hurt the economy.10
This point is also important because if you are spending as much as you can, you are contributing as much to the economy as you can. Put another way, one person’s spending is another person’s income. It should be no surprise to you that lower income people, and by this I mean people who are not in the top 5% of our society, spend significantly more as a percentage of their income than those who are in the top 5%. The majority of these people (i.e. the middle class) drives the economy because it as a percentage of their total income they spend the most, which is money going back into the economy. 11 This point alludes to the concept of Aggregate Demand and its importance in understanding the economy. However, I will leave the discussion of this topic for another time
What does this mean exactly? A dollar given back to the lower income person is more likely to be spent, which would subsequently increase economic growth, than giving a dollar to a wealthy person. I can illuminate the answer with an example. Imagine if I were to give $100 is tax cuts to every citizen in the United States. Not a small sum, more many people that would be enough to feed a family for a week, so it is certain that the money will be spent. So, you must ask, how much impact will that money have on the top 5% of our society? I can say with it certainty it would have no effect at all. In the most extreme case, Bill Gates makes ~$114 a second.12 So for him by the time he even thinks about earning an extra $100 from the government he has figuratively and literally wasted time and money thinking about it. That $100 to Bill Gates will not change his spending never mind his lifestyle.
But how about our low-income worker, the answer is obvious. You may believe a week’s worth of groceries is not a lot. I would not underestimate the power to buy groceries especially if you can afford a good nutritional diet as the effects are well understood. 13http://www.sahealth.sa.gov.au/wps/wcm/connect/public+content/sa+health+internet/healthy+living/is+your+health+at+risk/the+risks+of+poor+nutrition and http://www.iaff.org/ET/jobaid/EAP/Poor_Nutrition.htm
Additionally, I also know that the extra $100 to most American’s given the lack of savings and retirement plans can certainly provide help. 14Savings in America: https://www.gobankingrates.com/personal-finance/data-americans-savings/ See also, Retirement in America: http://www.epi.org/publication/retirement-in-america/#charts and http://time.com/money/4258451/retirement-savings-survey/
Thus, even though this is a small example, it is a safe assumption that the wealthiest people in this country have already purchased all that they will ever need in several lifetimes. It begs the question, how many houses can a single individual buy, how many cars can they own, how many clothes can be purchased. It is hard to put an exact number, but I would implore you to contemplate an answer to each question. What must also be asked is at what cost and what are the societal consequences of allowing these people to have their money, which prevents others from having a fair share of what they earned. Remember there is only so much money in the economy thus in most cases it is not just about growing the available supply of money but also how it is distributed.
These tax cut policies, among other things, for the wealthy have significantly contributed to more income going to the top, while the rest of the population has either stagnated or decreased.
One would assume even if there is income disparity as long as the economy is growing everyone can benefit. This has not been the case at all.
When we look at the average incomes at each level, the view is nothing short of horrific.
The wealthy with their money are able to benefit even greater when the growth of capital exceeds the growth of the economy.
From a recent study, most people are not even aware that this is the reality of wealth inequality in the United States.2122
With this, we can see that most Americans want a more equitable tax policy, not an equal tax policy. The difference between the two concepts should be obvious, but we can illuminate why the wealthy should be taxed more and because most people see that as more equitable.
The wealth concentration that currently exists has not been seen since the Roaring Twenties, which should indicate something is drastically wrong with our economy.
Meanwhile, productivity has soared, but labor income has stagnated, which remember disproportionately impacts the bottom 95% of society.
I find it no coincidence that the highest growth in our country took place during the highest tax rates on the wealthy.
These policies have also created a weak and disappearing middle class because the benefits of our current policy are only for the wealthiest individuals in our society.
Viewing long-term unemployment further highlights this problem, since it is still above its historic peaks.
The disparities and unequal growth in the economy over time has weakened the middle class which has created an economic malaise fueled mostly by financial engineering, borrowing money, and incurring debt. 30
A deeper analysis is needed to highlight how disproportionate the gains are in the economy. We can start by investigating how much CEO’s, who can represent the top 0.1% of society, are paid as compared to their other workers.
I find it hard to justify the 300:1 pay gap for CEO’s versus the average worker. The only argument I am familiar with is that given the responsibility CEO’s have and the difficulty of their work they deserved to be compensated. To that, I invoke the following questions…
Who works harder the JP Morgan CEO or the teacher working with Special Ed children to ensure equitable education to all students?
Who works harder CEO of Pfizer or Coal Miner powering his state, while hoping he does not get emphysema?
Who works harder any member of the Walton family or the Cashier working at McDonald’s working as many hours as they can to ensure they can make their rent payments?
The answer should be obvious for all of them and if it is not I implore you to contemplate which job would you rather not have.
Many if not all of the latter positions mentioned in my questions are some of the most valuable employees we have here in the United States and valuing them as individuals through reasonable compensation and tax policy is equivalent to valuing the tireless work they do. These are just some professions where you simply can’t work harder. Coal miners, fast food workers, teachers, etc. cannot and should not be putting more hours into their job. Remember income at these levels creates incentives for people where to get jobs. Do we really need more CEO’s or teachers? Again, the answer is obvious.
Our current tax cut policy is not just concentrating wealth into the hands of a few, but it is also infecting one of the most fundamental aspects of the American dream – social mobility.
The public needs to understand what makes the United States a place of opportunity is oddly enough the existence or at least the chance of opportunity. Social mobility is the ability and probability of individuals, families, households, etc. to move within or between different economic classes in a society. The reality is that the United States, contrary to popular belief, is not a very mobile society.
When you watch the following video, which summarizes Brookings research on social mobility in the United States, it will further highlight how bad the problem is especially for Hispanics, Blacks, and Poor Americans.
Additionally, this lack of social mobility is unique to the United States as we rank poorly against other OECD countries.
The lack of at least reasonable social mobility can result in
- A desire to find a quick silver bullet instead of implementing broad changes in policy.
- Can damage economic growth 34
- Inefficient use of human capital
Other tangential problems can include
- Decreased belief that “the system” is fair and that hard work can result a better life. → really think for a moment the consequences of this point, when people don’t believe that hard work doesn’t lead to better outcomes.
- Frustration and fighting amongst the classes and inability to solve other societal problems. 35
The disparity is wealth creates incentives for Congress only to solve the problem where the wealthiest people in our society have, which can in turn not solve the problems that affect our society as a whole.
Our tax policies have only furthered this divided because it has given them the ability to make outrageous political campaign contributions.
Even when the data is normalized, it is still absurd.
This point is exemplified when just 132 Americans gave 60 of the Super PAC money in the 2012 election cycle. 39
As a quick side note, the problem of campaign finance in our election system is a problem acknowledged by both the left and the right. See Lawrence Lessig’s Republic Lost and Richard Painter’s Taxation Only With Representation.
Although our tax system is not the only reason for our country’s social and economic ails, it is the primary variable. The reality that taxes are a representation of how equitable our society is because it is the main mechanism government has to redistribute to others. This redistribution is justified from recognizing that there are millions of people throughout our nation who are simply not as intelligent, did not inherit money and assets from previous generations, did not have access to favorable government policy, are not represented in government, or not as lucky as others. I believe the failure to recognize this is one of the main culprits of our current tax system. Furthermore, our tax system is indicative of the type of society we want to have. I differ you to Supreme Court Justice Oliver Wendell Holmes – taxes he said, “are what we pay for a civilized society.” 40
The creation of a more equitable society would allow some of our greatest threats (i.e. water crisis, terrorism, climate change, money in politics etc.) to be tackled properly and not just in the interest of the wealthy. It would allow us to value a multitude of professions instead of just a handful.
We need a tax system that demands investments in our infrastructure healthcare, scientific research, and reasonable social safety nets to provide support when an almost inevitable economic downturn happens. 41
To fulfill this dream, unequivocally I would support the tax plan released by Senator Sanders during his 2016 campaign or the tax policy released by the Economic Policy Institute.
Here is the analysis from the Tax Policy Center on Senator Sanders tax policy: http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000639-an-analysis-of-senator-bernie-sanderss-tax-proposals.pdf
Changing tax policy is one of the fundamental ways to fix our inequitable society and provide one of the essential conditions to solve our other societal problems. To do this we need to make the wealthiest people in our society, who have that wealth in large part due to past policies, pay more in taxes. Donald Trump’s tax plan does not accomplish this and any of the other goals I have mentioned in this post and thus should be rejected.
I end with one of my favorite quotes from Jared Diamond:
The big problems facing the world today are not at all things beyond our control. Our biggest threat is not an asteroid about to crash into us, something we can do nothing about. Instead, all the major threats facing us today are problems entirely of our own making. And since we made the problems, we can also solve the problems. That then means that it’s entirely in our power to deal with these problems. In particular, what can all of us do? For those of you who are interested in these choices, there are lots of things you can do. There’s a lot that we don’t understand, and that we need to understand. And there’s a lot that we already do understand, but aren’t doing, and that we need to be doing. 42