Trump’s Tax Man, and Tax Plan, for the 1%
As Republicans prepare to unveil a tax plan favoring the wealthiest Americans, President Trump has quietly tapped a problematic interim IRS Director, says economist Dean Baker
AARON MATÉ: It’s the Real News. I’m Aaron Maté. President Trump’s new choice to head the IRS has received little notice, but could be highly consequential. Trump has tapped David Kautter, a person with no IRS background. Instead Kautter was previously employed at Ernst & Young, and accounting firm known for its tax avoidance strategies. Joining me is Dean Baker, co-director for the Center for Economic and Policy Research. Welcome Dean. Tell us who David Kautter is.
DEAN BAKER: Yeah. A couple points. First off, what’s really important to emphasize here is that he is an interim head. He’ll be the acting director. The reason why I’m emphasizing that is that means there’s no congressional scrutiny. There will be no hearings. He doesn’t have to go through any nomination process. There’s no opportunity for members of either party to ask him questions, ask him how he will treat various issues. This is really extraordinary. I mean, presidents of both parties in the past have selected people, nominated people to be directors so they undergo that scrutiny.
Then the flip side, he also has no background in tax enforcement as you said. He’s been at Ernst & Young. He headed their tax division. This is a division that is there to engage in tax avoidance, in principal legal tax avoidance. But the idea is to minimize the tax bills of their clients. They went so far that Ernst & Young had to pay a fine. They probably didn’t call it a fine. They had to pay $123 million in settlement to avoid criminal prosecution. This is a guy that’s about tax avoidance. That should have people concerned, because we could have any tax law we want, [inaudible 00:01:45] pay 90% taxes. But if the IRS isn’t enforcing it, the tax rate is zero. That’s what we have to worry about.
AARON MATÉ: But Dean, if he’s only an interim director, how long could he really be there for, and how much damage could he really do?
DEAN BAKER: He could do a huge amount. Basically it’s not clear. I mean, the law, the precedent here, the comptroller of the currency is also an interim appointment. He was only supposed to serve I believe it was 120 days. We’re now up to 190 days. No one is doing anything. In this case, I believe it would be 180 days that he legally would be allowed to serve, but that’s enforced by congress, and at the moment at least you have Republicans who control Congress who really don’t seem to care about the law. The joke is that they say rich people need tax cuts, and they aren’t going to let anything stand in the way.
AARON MATÉ: Last year it was reported that IRS audits had declined for the fifth year in a row. What’s going on with that?
DEAN BAKER: Well, the Republicans have engaged in an effort to gut IRS enforcement for really two decades. This dates back to the Clinton years. The Gingrich congress was making a big issue of the IRS being abusive in their enforcement efforts, and they cut back funding for enforcement so that funding has been way down. They are happy to appropriate funding to review earned income tax applications for the earned income tax credit, which at the end of the day you don’t want to see fraud anywhere, but the earned income tax credit maxes out around $5000. If someone is making millions a year and potentially owes hundreds of thousands or even millions of dollars to the IRS, that’s a big deal. That’s where they want to have cutbacks.
I should also point out one very specific issue that has already come before the IRS and is likely to be relevant with the new director here, acting director. Robert Mercer, the very conservative billionaire, he has a hedge fund, Renaissance Technologies, that was ruled to be in violation of tax code, $7 billion back taxes and penalties. That is still up for debate for final resolution. There’s a real concern that David Kautter will just give them a green light and say “Oh forget about that.” That’s a lot of money to Mr. Mercer and needless to say, I suspect a substantial portion of that will come back to the Republican party and other conservative organizations.
AARON MATÉ: Right Dean. Finally, speaking of billionaires, or speaking just as the Republicans are about to unveil their new tax plan. It was supposed to be today but it’s been delayed. Now, one aspect of it is this notion that cutting taxes for the rich and for corporations is going to lead to a huge boost in economic productivity, which will then increase the incomes of middle income people. Your thoughts on that as an economic theory?
DEAN BAKER: Yeah. You know, we’ve done this twice before. We did this with President Reagan, we did it with President George W. Bush. There was no spurt of growth. I just … My friend Josh Bivens at the Economic Policy Institute was just looking at very basic issues. Very fundamental point. I won’t go into details here, but the basic story is that lower corporate tax rates are supposed to lead to this big boost in investment. He looked at this. We were talking about it. He looked. Is there any evidence. We looked cross country, that countries with lower tax rates have more capital, more investment. He found the opposite. We’re not going to say that lowering the tax rates will lower investments, but that’s actually what he found. I mean we aren’t going to argue the causal relationship goes in that direction, but you sure can’t look at the evidence and say it goes the other way. That lower tax rates will lead to more investment. The data is not there.
AARON MATÉ: Dean, can you explain that? If corporations aren’t spending the money on investment that boosts growth, what are they doing with the money?
DEAN BAKER: Well what they’d likely do is what they’ve been doing recently. They’re going to pay it out either as dividends or share buy backs. The basic story, and there’s a lot to support this is that corporations invest when they see a demand for their product. We can have a big tax cut, that’s not going to create more demand for their product, so most likely this will end up as higher payments to shareholders as dividends, or they’ll use it to have stock buy backs. Neither of those does any particular good for the economy. It might make their shareholders happy, but it’s not going to help the rest of us.
AARON MATÉ: They’ll only invest if there’s a market for people to purchase their goods and products and services, but if the economy is in the tank and people have no money, and all the gains are going to the 1% then no one’s going to have money to be able to justify those investments.
DEAN BAKER: If you look back over the history, the period in which we had strongest investment was actually the period of weakest profit. In the late 1970s when the post-war profit rate was pretty much at it’s all time low, that was the period when we had the highest rate of investment. Then we get into the last decade when we’ve had very high profit rates, near or at the highest level of the post war period, and investment’s been weak. The relationship if anything is the opposite. Again, I’m not going to say that high profits cause investment to be low, but as a practical matter, it clearly doesn’t go the other way. High profits do not lead to more investment. We’ve researched that up the wazoo. That relationship doesn’t exist.
AARON MATÉ: It’s striking how we don’t hear that very often when we talk about investment and profits in the corporate media.
DEAN BAKER: Well, that’s true. I think part of the story is we sort of would naively would like to think that okay, higher profits means firms will invest more, but it just turns out not to be the case. Again, a lot of people spend a lot of time looking at the evidence on that. I think you have to really beat it up hard to find anything different.
AARON MATÉ: We’ll leave it there. Dean Baker, co-director of the Center for Economic and Policy Research. Thank you.
DEAN BAKER: Thanks for having me on.
AARON MATÉ: And thank you for joining us on the Real News.