Wednesday, December 06, 2017

The 2017 Tax Bill as Plutocratic Insurgency

The 2017 US federal tax bill, which as of this writing is currently undergoing reconciliation between the House and Senate versions, represents in significant ways the principles of plutocratic insurgency. Or rather, more accurately, it represents an opening volley in what looks likely to be a 'plutocratic insurgency' campaign set to last for as long as the GOP controls both chambers of Congress as well the White House.

While the details remain to be worked out, the bill most certainly does not represent tax "reform" in the way that the term has most usually been used in Washington. "Reform" measures have typically centered on three core ideas: lowering the top rates, broadening the tax base, and simplifying the code. The first two measures are broadly speaking regressive (or at least de-progressive) while the later mainly entails closing special interest loopholes of one sort or another.

The 2017 tax bill, however, does very little of any of these things. Whereas the Senate version of the bill slightly lowers the top marginal personal income (from 39.6 percent to 38.5 percent) tax rate, the main focus of both versions of the bill has been on dramatically lowering the corporate tax rate (from 35 percent to 20 percent), as well as on making it easier for certain kinds of partnerships to constitute themselves as corporations eligible for these rates. The net effect is that many rich individuals will effectively reclassify their income as corporate earnings, thus dramatically lowering their marginal tax rates. This is why, over the next ten years, the vast majority of the tax savings (about 80 percent, according to the nonpartisan Tax Policy Center) will go to the top 1 percent of earners – in other words, to plutocrats.

To make up for the shortfall, various alternative revenue enhancing schemes have been proposed, all of which have been carefully targeted to primarily affect blue states and heavily Democratic constituencies – for example targeting private university endowments and graduate students for heavy tax increases, as well as industries and earners concentrated in blue states. On a superficial level, this represents not so much ideology as a kind of political vengeance by way of the tax code. As right wing economist Stephen Moore cheerfully put it, “It’s death to Democrats.”

Political daggers aside, in what sense can this bill be said to represent the plutocratic insurgency in action? I believe there are four elements to this.

  • This bill represents a dramatic realization of the dream of plutocratic insurgents in United States to shield themselves from having to contribute financially to the country and its public goods. The bill either drastically scales back or abolishes the estate tax, something that affects only the largest 0.2 percent of estates in the United States – i.e. plutocrats. By enabling many more high earners to reclassify their businesses as “pass through corporations,” moreover, it will enable many members of the 1 percent to pay only about half of what they would as top individual earners. As such, it represents the further secession of plutocratic insurgents from any sense of shared economic fate with their fellow citizens. 
  • The tax bill contains a number of new deductions and special interest loopholes which are specifically designed to benefit the plutocrats. One that has received particular notoriety has been the deduction for maintenance costs on the ultimate symbol of plutocratic insurgency, namely private jets. Likewise, the carried interest loophole survived, allowing private equity managers, hedge fund managers, and real estate investors to pay the lower capital gains rate (20 percent) on their income rather than the top personal income tax rate (38.5 percent). And of course, this being a Trump-friendly tax bill, the bill contains plenty of breaks for golf course owners and real estate developers
  • One of the main sources of backfill for the revenues that will be lost by lowering the tax rates that plutocrats pay is the abolition and/or capping of the deduction for state and local taxes (SALT). SALT deductions have been standard ever since the federal income tax was first imposed over a century ago. Abolishing SALT deductions in effect punishes taxpayers in states where real estate is very expensive (and therefore property taxes are high) as well as states with significant income taxes. States with high income taxes – such as California, New Jersey, Massachusetts, and New York – are, not coincidentally, states that also tend to offer relatively generous social welfare packages to their less fortunate residents. The Republicans have been explicit that the goal in eliminating the SALT deduction is to punish states that choose to tax their citizens. In effect, they are trying to pressure blue states to lower their tax rates – which will all but inevitably force them also to cut the public benefits and social services they offer their residents. In other words, it is an effort by the legislative handmaidens of the plutocratic insurgency to force the socially generous blue states become more like the lousy-social-services-providing red states. 
  • And this last point underscores the most important way in which the tax bill is a representative product of the plutocratic insurgency: it presages the slashing of the core pillars of the welfare state. While the GOP has gamely claimed that the tax bill would not increase the deficit because of all the growth it was going to create (a claim roundly denied by all nonpartisan experts*), from the perspective of plutocratic insurgents, if the tax bill in fact ends up creating a huge new set of deficits, this will be not a bug but a feature, as it will provide the GOP controlled government with the lever they need to cut the entitlement programs they’ve had in their gun sights for a generation. Indeed, the tax bill seems expressly designed to add to the debt in a manner that will trigger automatic cuts to Medicare and other entitlement programs. The bottom line is that the 2017 tax bill aims to break of the fiscal camel’s back in a way that will enable and indeed mandate the rollback of the welfare state that the GOP has dreamed about since the 1980s. 
That taking a plutocratic machete to the welfare state is the ultimate agenda is not in doubt. Literally before the scribbles in the margins of the deficit-exploding tax bill were dry, the stewards of the plutocratic insurgency on Capitol Hill were already declaring that the huge deficit to come would require gashing cuts to the welfare state. “You also have to bring spending under control,” said Senator Marco Rubio (R-Florida) even before the vote on the tax bill was final. “And not discretionary spending. That isn't the driver of our debt. The driver of our debt is the structure of Social Security and Medicare for future beneficiaries.” “We’re spending ourselves into bankruptcy,” declared Senate Finance Committee Chairman Orrin Hatch (R-Utah) the same day. “Let's just be honest about it: We’re in trouble. This country is in deep debt. You don’t help the poor by not solving the problems of debt, and you don't help the poor by continually pushing more and more liberal programs through.”

Whether the project to roll back Medicare, Social Security, Obamacare, and the other major welfare entitlements succeeds remains to be seen. Both the GOP and the current resident of the White House are plumbing unprecedented depths of unpopularity, perhaps auguring not just a wave election in 2018 but perhaps an even more fundamental realignment of the party system in the United States, whose institutional foundations are crumbling before our eyes. We live in a time of profound political uncertainty. Meanwhile, the plutocratic insurgents seem intent on clearing out the shelves in the store before the hurricane rolls in. Whether they will be able to build their private sea walls high enough to hold back the political storm surge remains to be seen.

* The nonpartisan Joint Committee on Taxation claimed the Senate version of the bill would increase the debt by $1.6B over the next decade. The nonpartisan Congressional Budget Office claimed it would $1.4B. Even with “dynamic scoring” – i.e. modeling the additional revenues that will come from the additional growth which supposedly will materialize as a result of the tax cut – all of the nonpartisan experts expect an increase of at least a billion dollars in debt over the next decade. There is strong reason to believe that if anything this will be an underestimate, since it is highly likely that some of the additional revenue enhancements that the federal government is expecting, for example from closing the SALT deductions will not materialize, as blue states change their revenue mix away from income taxes and over to payroll taxes, which addition to being regressive and growth-retarding, will also mean less revenues flowing to the federal government.