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  September 29, 2017

The Poorest Tax Payers to Pay the Most Under Trump Plan

Economist Bill Black says that both Republicans and Democrats are financially illiterate when they speak about the deficit, and Trump's economic experts are 'completely disconnected from the real world'
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William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. Black was a central figure in exposing Congressional corruption during the Savings and Loan Crisis.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries coming to you from Baltimore. With all the tax cuts being proposed by President Trump of late, it might be the right time to discuss the effect the cuts will have on the US federal budget deficit. Jared Bernstein, Senior Fellow at the Center for Budget and Policy Priorities, penned an op-ed with The New York Times on Tuesday titled Do Republicans Really Care About the Deficit? Our guest today argues that both Republicans and Democrats are being financially illiterate and dishonest when they speak about the deficit.

Joining us today to discuss Jared Bernstein's response to Trump's proposed tax cuts, as well as the dishonesty around deficit discussion more generally, is Bill Black. Bill is a white collar criminologist, associate professor of economics and law at the University of Missouri, Kansas City, and he's the author of the book, The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.

BILL BLACK: Thank you.

SHARMINI PERIES: Bill, fundamental to our understanding in this area is the difference between the deficit and the debt. Explain that before we dive into this.

BILL BLACK: Sure. A debt is an IOU, and a deficit is the aggregate over time of those IOUs that have not been repaid.

SHARMINI PERIES: Then, taking that into consideration Bill, what is the issue you have with Bernstein's article?

BILL BLACK: Let's start with the agreement. Bernstein is absolutely correct that the Republican tax proposal is not a reform. It will slash taxes mostly for the wealthy, particularly for corporations, and it will have very little effect in expanding the economy. Therefore, contrary to Treasury Secretary Mnuchin who says not only will this not increase the deficit, it'll actually increase the surplus, that it will create so much money by slashing taxes, that's not true. It will increase the deficit.

My difference with Bernstein is that's the least important aspect of what the taxes are going to do, and that if the Democrats go down that road of emphasizing the deficit and the need to keep taxes very, very, very high. A, that's economically illiterate. We don't fund programs when we have a sovereign currency out of tax revenues. If he doesn't understand something that fundamental, then he doesn't understand money at all, especially money where a country has a sovereign currency like the United States. By the way, members of the EU that have picked up the euro gave up their sovereign currency, and that's one of the reasons they're in so much difficulty.

But it's also dumb politics. To be the party associated always with high taxes is of course political suicide.

SHARMINI PERIES: Bill, you say that most monetary theory taught in conventional economics classes these days is fiction arising from carryover from the era of the gold standard. Why are they teaching us such rubbish?

BILL BLACK: Because it fits very well with conservative precepts, and economics is dominated by very conservative thought that doesn't want the government, for example, providing ample safety nets and such. All these things you hear about, "Oh, we can't pay for it," "Oh, it's going to be a burden on our grandchildren," all of those things are simply false. They're financially illiterate.

But the tax changes proposed by Trump have important consequences, and they're well worth fighting on very different grounds. Primarily, A, they don't create good economic incentives. For example, when you get rid of the estate tax, that doesn't do anything to spur growth. What it does is create an aristocracy in which you get inherited wealth, and we've already seen with Trump the problems with that under the current system. The New York Times today estimates that Trump would save $1.1 billion in estate tax. He's simultaneously saying that this tax deal, A, has nothing in it for him — that's a lie — that it has nothing in it for the wealthy — that's a lie — and that it is rocket fuel for the economy that's going to spur massive growth. That's a lie.

Mnuchin, the Treasury Secretary, in addition to this fiction that this bill will create so much growth that it will more than pay for the tax cuts, which is a lie, Treasury just removed the paper, the economic paper by the tax analysts that showed that the reduction in the corporate tax rate would go overwhelmingly to corporations as opposed to workers.

Cohn has just said, Cohn is the Chief Economic Advisor to the President, Cohn has just said that the typical American family with two kids, A, has an income of $100,000, and, B, they'll get about $1,000 extra because of the tax change. The second part is probably wrong, but let's assume it was true for this purpose. First, the actually typical American family, that would be a median concept, with two kids has an income of $59,000. Second, Cohn said with this extra $1,000, you can buy a car, remodel your kitchen, or go on a big vacation. As somebody joked on Twitter, absolutely you can if you can get in a time machine and go back to 1905 when you could buy a car for 1,000 bucks.

These are people that are so disconnected with the real world. Remember, this is their economic expert who has no clue about America, no clue about what the taxes actually do, no clue about expenditures. This is a very bad deal, and it's going to get worse probably in Congress. It's also, by the way, stacked against blue states in terms of the ending of the deductibility of state and local taxes. You may see that as an acronym, SALT, state and local taxes.

Cohn and Mnuchin have just been out today saying, "Actually, that's not a red line. That goes mostly to upper middle income people. We'd be open to potentially doing that." Oh, and did I mention that this tax bill actually increases the marginal rate for only one group in America, and it is the poorest taxpayers, where their marginal rate goes up from 10% to 12%? That is the only marginal tax increase in the entire bill. That's what the Republicans designed.

SHARMINI PERIES: Wow. That is I understand almost the same as, at the end of the day, what the corporation might be paying on their tax income, which is roughly 12% once they have taken all the deductions and taken all the loopholes and so on, because, as is, apparently it's going down from 35% to 25%, but we know most corporations, the big ones, never even pay that.

BILL BLACK: Right. They don't even pay 25, but it will still have an effect in reducing taxes, particularly for corporations that have relatively fewer deductions. Guess what that means? This bill, this particular change in the corporate tax rate is particularly good for Wall Street banks.

Bernstein is pushing the Democrats to go into a political trap. I know it's attractive. I know that the Republicans have been complete hypocrites about deficits. Oh, under Obama we couldn't possibly have any revenue increases because they would add to the deficit. But don't go down that route, which is a route that MSNBC, their night crew is eagerly trying to push the Democrats down that route. They want us to say, "No bill that would add a penny to the deficit." That's insane. It doesn't make any sense economically, but it doesn't make any sense in terms of what the Democrats are going to want in the future.

We're going to face recessions, and you're going to need to have fiscal stimulus, and then the Republicans are just going to quote back that it's just somehow outrageous and absurd to increase the deficit through federal spending or reducing taxes. It isn't. That isn't the argument. That's, again, just a financial myth, and the Democrats should not join in to that conservative fiscal myth or they will ruin themselves. As I say, it's also political suicide to be the party that is always identified with higher taxes.

SHARMINI PERIES: Bill, something you said in your article is a shocking revelation, really, that federal tax revenues do not fund federal expenditures. What did you mean by that?

BILL BLACK: It actually works the other way around. The way you get a sovereign currency effective is to have a tax as a government, and you say that tax can only be paid in this currency, which we, by the way, are the monopoly provider of that. Therefore, you need to work and get money in this currency to be able to pay your taxes. But that's not how we actually fund the government. That's not how we create money and buy things. We do it literally with keystrokes on computers, and the government gets any services it wants through those processes.

Indeed, there have been substantial periods when if you actually sent cash in to the IRS, they burned it. Cash isn't limited. We can make all the cash we want. We don't even print it in the modern era, we just create it from keystrokes. Does that mean you can create unlimited amounts of everything? Of course not. There are real resource restraints, like you can't use up more molybdenum than you have molybdenum. But cash of a sovereign currency is not limited. We can make as much of that as we want.

You can see, and indeed, again, Bernstein said explicitly in his piece that his rationale for why the Democrats should be deficit hawks had nothing to do with economics. It had to do with politics. As I say, it's really stupid politics to be the one always associated with high taxes. He also noted that not only is inflation exceptionally low, inflation is too low. It not only is but has been below the desired target rate of very conservative economists at the Fed for the better part of a decade now. We actually would even benefit if we could get a little bit of inflation.

But, as Bernstein said, this isn't the type of thing likely to produce inflation either. We're not expecting that the Trump tax decreases would actually increase inflation substantially. That's not the problem. The problem is that, again, they are dramatically increasing what is already obscene levels of economic inequality. They are making Trump rich and they are also making the wealthy rich, but they're also selectively, at least in the initial proposals, going after the blue states and being less onerous towards the red states.

SHARMINI PERIES: Bill, when you look at the media blitz around the new tax proposals and everyone who's speaking about it, from Trump to Mnuchin to Cohn and others, they keep saying that this is going to benefit the middle class, middle class, middle class. We know that this is in fact not the case. Can you elaborate on that?

BILL BLACK: First, you have to remember this is another one of those flaky Republican proposals that Paul Ryan is famous for that doesn't actually have critical details to run the numbers, particularly on the middle class. They've said they want to increase the child deduction. How much? We don't know. The deduction for kids is a really big thing, especially for lower middle class folks. It can affect the numbers greatly. We can't run the numbers without that kind of information. There are a number of other places where it is simply open.

What we can say is, A, it isn't the same for everybody in the middle class. As I said, it'll be worse if you're in a blue state than if you are in a typical red state. Second, there certainly isn't very much in it for you if you're middle class. A number of folks could actually have their taxes go up, particularly again in the blue states.

Frankly, it's not going to be a very big change probably at the end of the day — again, we don't have all the numbers — for the middle class. It's going to be a very big change for the wealthy. It is designed to be a very big change for the wealthy. Within the wealthy, it's the absolute wealthiest, those subject to, remember, the estate tax only kicks in if you have an estate as an individual of $5 million or, if you're a married couple, roughly $11 million.

The Democrats would probably be happy to increase those numbers up to 20 million. But the super big numbers, the people that gain a billion dollars or more, that's not in the top 1%. That's in the top ten thousandth of 1%. That's people like Trump who, again, the New York Times estimate is that he would gain $1.1 billion just from the change in the estate tax.

SHARMINI PERIES: Bill, further, you say that the Republican and the new Democrat's deficit strategy is to force Democrats to make an endless series of choices you call Sophie's choices. What do you mean by that and what are these choices?

BILL BLACK: These are always the Democrats are told they have to decide which social program to kill, because you can't afford all of them, supposedly. In fact, you could, all of the programs that have been mentioned. You can fund Social Security. You can fund Medicare. You can fund Medicaid. You can keep doing so. I'm not limited when I say 100 years. You can do it throughout time. But there simply is every ability to fund those things.

It's only when people say, "Oh, no, no, no, that might have an effect on the deficit." So what? Is that going to cause inflation? No. Is that going to reduce your income? No. Is that going to mean that your grandkids have to support you? It doesn't mean any of those things. Those are just all myths that have been propounded by Wall Street and conservatives for a very long time.

The groups propounding that myth include Bill Clinton, Hillary Clinton and, at key times, President Obama, who infamously in the State of the Union adopted a nonsense, utterly nonsense meme from the conservatives and said, "Well, Americans are having to cinch up their belts, so we at the federal government need to tighten our belt." No. In economics it work exactly the opposite. It is precisely because in a recession consumers, regular consumers, we will reduce our consumption ... That's called a disaster, because as demand shrinks, you get less and less employment. It is absolutely essential in those circumstances.

This is the paradox of thrift in economics, as it's called. It is essential in those circumstances that the government counteract it by doing the opposite, by increasing spending. That reduces the length, it reduces the severity of a great recession. That's why the United States, which at least in the first year followed that policy of stimulus, did so much better in terms of its recovery than Europe, which followed the opposite policy of austerity. It was when the Obama administration switched to this pro-austerity message, which was really early if you look back to that State of the Union Address, that the recovery from the recession slowed. Of course, that slowing of the recovery helped lead to the midterm disasters in the elections.

SHARMINI PERIES: Bill, one of the reasons that ordinary people react to the argument of curtailing the deficit or debt, federal government debt, is because they often compare it to their own wallets and their own credit card bills and the debt that they have or what is owed to the bank in terms of your mortgage in the form of debt. How is personal debt different from the federal debt?

BILL BLACK: You're absolutely right. By the way, they don't compare it to corporations either. Corporations are somewhere in between. Corporations have massively expanded their debt over the last 60 years and such, and nobody tells corporations, "Oh my. How dare you borrow money? You should be repaying it all back." They call it leverage and they love it in economics and finance. A government with a sovereign currency is simply nothing like a household. We don't get our funding through the same process. We don't have the expected lives of 80 years. The government can last forever. It's not even apples and oranges. It's like apples and concrete. The two have nothing to do with each other.

Anybody who studies economic or finance knows that, and therefore any time you hear a metaphor that the government ought to be operating like cinching their belt up, tightening their belt because consumers are, that is a recipe for absolute disaster. Again, it's based on complete failure to understand the economy.

Look, does anybody think Donald Trump understands his tax bill? Does anybody still think that Ryan is actually a policy wonk that carefully runs numbers? Does anyone think that Gary Cohn, the top economic advisor who thinks that the median family of two has an income of $100,000 and that you can buy a car for 1,000 bucks? These are all people that have cultivated ignorance deliberately. They're pretending to be stupid. They actually know better.

One of the ways that you can test this is, hey, what happens when a war comes? How many countries over the course of history have said, "You know what? I guess we're going to have to surrender, because the alternative is we're going to run a deficit"?

SHARMINI PERIES: Perfect analogy. Thank you so much for joining us today, Bill.

BILL BLACK: Thank you.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.


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