No Evidence that Trump’s Tax Plan Would Boost Economy or Create Jobs
There is no evidence to support Republican arguments that cutting corporate and small-business taxes will boost the economy or create jobs, says Gerald Epstein of UMass Amherst. ‘In the end, the only ones that, of course, are going to gain, are the corporations’
GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. Last week Senator Ted Cruz and Senator Bernie Sanders debated Donald Trump’s tax reform proposal. One of the more hotly contested issues during the debate was how the federal government can support businesses by cutting taxes. Joining me to analyze how the Trump tax reform proposal would affect businesses is Gerald Epstein. Gerry is Professor of Economics at UMass Amherst and he’s the co-director of the Political Economy Research Institute at UMass Amherst. Thanks for being here today, Gerry.
GERALD EPSTEIN: Thanks for having me.
GREGORY WILPERT: Let’s start, first of all, with this response from Ted Cruz to a question about corporate taxes.
Kelsey Yarzab: Senator Cruz, I come from a middle-class family and I worked hard in high school to get into a competitive college but, even after academic scholarships, my parents and I are still struggling to afford my education and that’s without indirect costs. It’s hard, then, for families like mine to see the benefits of cutting corporate tax rates and reattempting trickle-down economics when that hasn’t been a long-term solution for the middle class in the past. How would you justify cutting the corporate tax rate by 15 percent, but only barely making a dent in the tax rate for middle-class Americans?
TED CRUZ: Kelsey, thank you for your question and congratulations on your studies. Look, I understand the frustration. And you know what? There are a lot of young people who feel frustrated. You’ve probably got student loans. I know when I was in college, I had about $100 grand in student loans and wasn’t sure how to pay for them, because my parents had declared bankruptcy when I was in high school.
I understand that’s hard. You asked why cut the corporate taxes for a young person, I’ll give you the single best reason, because when you graduate, you want a job.
GREGORY WILPERT: Ted Cruz goes on to claim that every time there have been corporate tax cuts, the economy boomed, specifically mentions the tax cuts under Reagan in the 1980s and under George Bush in the early 2000s. What’s your response to this claim, which has been an old claim, obviously, since Republicans have been making these arguments in favor of corporate tax cuts, that we need to because the corporations will otherwise go elsewhere? What’s your response to this, Gerry?
GERALD EPSTEIN: First of all, it’s not true in terms of the experience and it’s also, there’s no basis for the argument. Look, if you cut any kind of taxes, that’s going to put more money in the pocket of somebody and they’re, in the short run, going to spend it on something. What we know from corporate tax cuts is they mostly spend it on more kinds of speculation, buying back stock. Rarely do they spend most of it on new investment, especially if you’re in a situation like this now, where interest rates are already extremely low. Most corporations are sitting on piles of cash.
If you really want to get a short-run boost of a tax cut, you really should give it to working-class people, because it’s well known that they spend it all on consumption and that will boost the economy.
The longer term issue is, what kind of tax cuts or what kind of tax policy do you want to make the system fairer and to generate long-term, high-paying jobs? To answer the question of this person who was asking about her student loans, once they make all these $1.5 trillion in tax cuts, then they’re going to come after spending on things like Pell grants. That’s what Bernie Sanders said, subsidies for education. In fact, people like the person who asked the question are going to certainly end up getting hurt in the process.
GREGORY WILPERT: What about the argument that if countries don’t lower corporate taxes, the corporations move elsewhere? In other words, we need to lower taxes for corporations so that they stay in the United States or at least don’t try to shelter their money in tax havens. What can be done to prevent this kind of capital flight?
GERALD EPSTEIN: The Trump proposal, they’re very opposed to amnesty, amnesty for Dreamers, for immigrants, but they love tax amnesty. They want to give amnesty to all these corporations that have been dodging paying taxes by keeping their profits in various kinds of havens. The most legal of these havens is what’s called this tax deferment and they keep their money in separate accounts. They say all this money is being held overseas but, in fact, it’s not really being held overseas. It’s just being held in a separate account. More than half of it is held in New York and other financial centers in the U.S. They can borrow from that money, but they avoid having to pay taxes on it.
Now what the Trump Administration wants to do is give a tax amnesty, saying, “Bring the money back.” It’s already here. “We’ll cut the taxes so that you’ll invest it in job-creating growth here in the United States.” In fact, we know, and Kimberly Clausing and others have written important studies about this, we know that the last time they did this in 2004, what the corporations did mostly was use them to buy back stock to raise their stock prices so that they could give higher money to their stockholders and also to the CEO’s, who had options on buying stock.
The thing is about this tax amnesty and attempt to cut corporation income taxes, it’s really just a fraud. They keep saying that the U.S. corporate tax rate is 35 percent and among the highest in the industrialized world, but we know that with all these kinds of tax loopholes and many others, the average corporate tax rate is really, that they pay, is only 14 percent. You have these big companies like Apple and Google and others, by shopping around and getting tax breaks all around the world, they pay maybe six, seven percent at most. Some don’t pay anything at all.
What the Trump administration is going to do with this tax cut for corporations is lead to a massive beggar-thy-neighbor, race-to-the-bottom round of tax cuts around the world. They’re going to cut taxes on corporations, then Europe is going to cut taxes on corporations, less developed countries will cut taxes even further. In the end, the only ones that, of course, are going to gain, are the corporations.
GREGORY WILPERT: Let’s turn to the question about small businesses now. Here’s Bernie Sanders’ response to the question about taxes levied on small businesses.
Mark Hagar: One element of this plan calls for a reduction in the tax rate for small businesses like mine, who are already taxed at a higher rate than our corporate counterparts.
BERNIE SANDERS: Yes.
Mark Hagar: Can you clarify for me-
BERNIE SANDERS: Sure, look-
Mark Hagar: How that’s disastrous or-
BERNIE SANDERS: No [crosstalk 00:07:09] but here’s the point, Mark, and you make a good point. Small businesses are struggling with federal, state, local taxes. I got it, and we want to help small businesses. Mark, what this particular bill does, as I mentioned earlier, 80 percent of the benefits go to the top one percent, not to you, not to small businesses, and $269 billion go to the top two-tenths of one percent. We can, we come together in a bipartisan way, and said we need to help small business. Yeah, I think you do need help, and I’m there for you. Please, as a nation, we’ve got to look at your issues as a small business person in a different way than we look at the needs, or the so-called needs, of the Koch brothers and billionaires. That make sense to you?
Mark Hagar: Sure.
GREGORY WILPERT: I think we need to clarify this a little bit because right now small business owners that register as what’s called a pass-through corporation, they pay at the individual tax rate and, if they do well, that would be the highest tax bracket at 39 percent. This is obviously slightly higher than the current corporate tax rate, and Trump’s proposal would allow businesses that are pass-through corporations to take advantage of paying only 25 percent at the most. What’s your response, Gerry, to this kind of argument that the small businesses are being excessively taxed in this sense, even more than corporations as Sanders mentioned and the questioner mentioned? Wouldn’t it be fair to tax businesses lower than is currently the case since they supposedly create something like two-thirds of new jobs in the United States?
GERALD EPSTEIN: I think it’s important to note that most small businesses pay less than this 25 percent already. They pay, Paul Krugman showed that, and using other analyses at the Tax Policy Center and other places, that most of these small businesses actually pay taxes already below 25 percent. What that means is that this so-called pass-through tax cut to 25 percent is really designed for the largest wealth-holders, the largest businesses, large individual proprietors, who are then going to — and they pay more than 25 percent — so they’re going to design various kinds of tax schemes to make their income look like it’s tax pass-through to these other smaller entities, and they’re going to end up getting a huge tax cut.
Bernie Sanders is absolutely right, that the lion’s share of all this is going to go to the largest businesses and that includes, of course, President Trump himself, who is going to get, as David Cay Johnston and others have pointed out, hundreds of thousands of dollars in tax cuts. Jared Kushner and Ivanka Trump are going to get perhaps millions of dollars in tax cuts.
This is a way to design a tax system so that the wealthiest, through designing these kinds of pass-through entities, are going to make a bundle of money on this. Most small businesses really aren’t going to come out ahead. The same kind of argument is often used to get rid of the estate tax as well.
GREGORY WILPERT: Actually, that’s the next one that I want to touch on, which is the estate tax, which they argue also will affect, that is, getting rid of the estate tax, will positively affect small businesses.
TED CRUZ: To be honest, the death tax is, at the end of the day, it’s not about you or your kids. It’s about the thousand workers you said you employ. If you don’t want to hand the business over to your kids, if you want to shut it down and lay those workers off, that’s your choice. If you want to give the money to charity, God bless you. That is a wonderful thing to do, but I’ll tell you, it’s a terrible thing for those workers who are relying on that pay check to feed their kids, to pay their mortgage. What the death tax does is, other business owners like you, when they pass the business on, the simple fact that you die means you’ve got a massive tax bill that the only way to pay for it is to lay those people off.
The first question that was asked about as a young person, “Why should I care?” Young person may be saying, “Well, gosh, death tax,” when you’re 19 or 20, you think you’re going to live forever, “Why do I care about the death tax?” You care about it if you want to be one of those thousand employees, if you want to have an opportunity to grow in a small business, and small businesses provide two-thirds of all new jobs.
GREGORY WILPERT: First, let’s clarify one thing. During the debate, Sanders and Cruz mentioned very different statistics on how many people and how many estates would be affected by this. Let’s first get that out of the way. Does the estate tax affect a significant number of small businesses? The thing is, it has been mentioned that it’s only businesses that are, estates that worth $5.5 million or more. How many small businesses would be affected by this when they pass from one generation to another? Do you have an idea, Gerry?
GERALD EPSTEIN: I don’t know the precise number, but the estimates are that it’s really very low, that most small businesses are below the $5.5 million threshold. By the way, small businesses don’t create two-thirds of new jobs, two-thirds of workers work in small businesses. They’re not necessarily the most dynamic businesses but, anyway, small businesses feel under a lot of pressure in today’s economy, just like working-class people do and poor people do.
Most of them are not at the $5.5 million level. They won’t be subject to the estate tax, relatively small numbers are. Of course, it’s a total sham to call it the death tax, because 99.9 percent of the people, when they die, they don’t pay this tax. It’s a mogul tax, it’s a rich person’s tax. It is the estate tax.
This tax is going to affect just the really, really, the top ten, top one percent of the population. It’s not going to create more jobs, it’s just going to help sustain the oligarchy of the very wealthy, who are more and more solidifying their political and economic control over our economy.
GREGORY WILPERT: What about the argument that even though it only affects the top one-tenth of one percent of households, what about the argument that when they do die, that they will have to sell their business or go out of business in order to pay that tax? What’s your response to that argument?
GERALD EPSTEIN: There’s for evidence of that. They just pass the business and the liability along to their children if they want, and there are many different ways that these businesses can afford to pay a tax. They can borrow money, they stretch it out over time. There’s just no evidence that there’s a large number of these people right at the $5.5 million level, small businesses, that end up having to go out of business in order to pay the tax.
GREGORY WILPERT: We’ll probably come back to you once we get more information about the details of this tax plan, but we’ll leave it there for now. I’m speaking to Gerald Epstein, Professor of Economics at the Political Economics Research Institute at UMass Amherst. Thanks, Gerry, for joining us today.
GERALD EPSTEIN: Thanks a lot.
GREGORY WILPERT: And thank you for watching The Real News Network.