Trump's Tax Proposal Will Line His Own Pocket And Turn Us All Into Kansans

Some details of Trump's tax plan that will supposedly be announced today mimic the very ones that have failed massively in Kansas. The plan calls for lowering the tax on businesses from the current 35% to 15% and allows multinationals, that have been warehousing their profits overseas waiting for a day like today, to repatriate those profits at a 10% rate. In addition, pass-through businesses like Schedule C corporations and the Trump Organization would see their rate lowered from the personal tax rate as high as 39.6% to 15% as well. Needless to say, Wall Street rejoiced at this announcement, with the Nasdaq hitting a record high and the Dow not far from its own.

As with anything Trump proposes, it is doubtful that this plan, as is, will become law. Even if it were to gain traction in Congress, it faces the hurdle of getting 60 votes in the Senate under budget reconciliation, unless Mitch McConnell wants to nuke that rule as well. If Republicans want to avoid budget reconciliation and pass it with just 50 votes, then the bill can not add to the deficit beyond the ten year window. This is how the Bush tax cuts were passed and why they had to be phased out in 2011. But, as opposed to individual rate cuts, corporate taxes will almost immediately guarantee an increase in the deficit beyond the ten year window. One estimate would be that they would have to sunset in just two years in order to stay within the ten year window. So this a just another shiny object that Trump is putting out there to distract us from his 100 days of failure. But it is worth looking at this proposal on its own merits to show just how radical the thinking is in the current Republican party.

But, incredibly, this is actually worse than most Republican tax plans. Steve Mnuchin has already declared that there will be no attempt to offset the loss of tax revenue created by this plan. He has revived, once again, the old zombie of the Laffer (aka Laugher) curve that insists these tax cuts will pay for themselves through increased growth. It's never happened before, despite what they may tell you about Reagan's tax cuts, and it won't happen now.

To be blunt, the allowance of a 10% repatriation rate for multinationals is essentially a reward for years of tax avoidance, if not evasion, and it amounts to a huge gift to just a few dozen companies. Over half the current offshore profits are held by high-tech and pharmaceutical companies and 75% of the offshore profits are held by around 50 companies. None of these multinational companies are having trouble making money. Yes, this tax giveaway might produce a one time bump in federal revenue as billions in corporate profits finally get declared here in the US. But it is a huge gift to just a handful of companies.

The belief that high US corporate taxes are hurting American businesses is pure bunk, just propaganda put out by corporations and their cronies in the Republican party. The reality is, because of the wide variety of deductions, most businesses pay an effective tax rate in low 20% range. And there is no indication US businesses are hurting. After tax corporate profits as a share of GDP are near an all-time high that was reached in 2012 and the share of total income that is going to corporate profits has increased by over 13% in the last 30 years. That is a massive shift in the income distribution in this country. The real problem with US businesses is not they are not making money, it is the opposite. They are making plenty of money but not reinvesting that money in any useful manner, rather spending it on stock buybacks, higher director and CEO pay, and increased dividends for their shareholders.

The last prong in the Trump plan is to tax pass-through corporations at the 15% level rather than at the individual rate. This was Arther Laffer's (there he is again), Trump adviser Stephen Moore's, and Governor Sam Brownback's plan in Kansas. The idea was this would not only cut taxes on businesses, and, using the mythical Laffer curve, increase revenues but it would also spur company formation and economic growth. Of course, it was a disaster. Revenue cratered in Kansas, the budget went into serious deficit requiring the state to cut back on services. Education budgets were cut and some school districts could not keep schools open the entire year. Road maintenance was also gutted and some areas in the state reverted back to dirt roads in order to reduce maintenance. The state's $700 million rainy day fund was raided down to virtually nothing. And the expected economic boom and capital formation from that low business tax never materialized. In fact, Kansas lagged its neighbors in economic growth. The end result was far fewer services, far less state revenue, higher borrowing costs, and far slower income and economic growth. Brownback, having created the disaster, has taken some obscure Trump position as an agricultural representative in Rome.

Even worse, a study released last summer shows that the biggest effect of the pass-through tax rate change in Kansas was not the formation of new business but a clear pattern of tax avoidance as individuals converted normal wage income into pass-through income by setting up sole proprietorships without creating any new job or income. As the paper succinctly puts it, it was simply "recharacterization of wage income as contract labor".

It is important to note this is a huge tax break for the President himself. He is still a beneficial owner of the Trump Organization. For the rest of us, probably not so much. The possible appeal of a tax cut for wage earners by opting to voluntarily become contract labor will, of course, be a further boon for business. No longer would they have to contribute to health care or deal with thorny HR issues. Their costs would plummet and their profits would rise. For the individuals who opted to do so, however, expenses would rise and savings would probably drop. Healthcare would now be their cost and they would no longer get any benefits for corporate 401Ks, profit sharing, or bonuses.

Meanwhile, the federal deficit will go through the roof again and interest rates will rise accordingly while corporate profits will continue to explode. And there will still be no real investment, like infrastructure, in our country and our future. Just another massive shift of income to the already rich. No wonder Wall Street loves this plan. For the rest of us, we'll all be Kansans.