Rise of the Robots (part 3)

May 24, 2017

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Because Ford’s book is focused on the loss of human jobs to robots, he has next to nothing to say about job creation. If, however, a higher level of intelligence enables human beings to do things that machines cannot, as Ford himself admits, maybe we can do more of those things as we turn over the narrower thinking tasks to the machines.

The personalized service frontier

If there is any new frontier in job creation that can escape the rise of the robots, I think it would be in the realm of personalized services, the least routine and predictable things we do. In fact, when a service professional is helping a client, the problem of predictability is compounded.  If you’re a legal professional, artificial intelligence systems that process information about laws, cases and legal documents will be a great help. But lawyers still have to apply the law to the unique circumstances of the client’s case, and that is a more creative task.

Similarly, thousands of students can listen to the same lecture online, but they need a creative teacher to engage with their particular thought processes as they struggle to reconcile new ideas with what they already think. That’s why many educators are talking about “flipping the classroom”–letting students gather more information online while changing the classroom from a lecture hall into a setting for more creative collaboration. If all that students know how to do is take in lectures and cough up the material for the test, they will be at risk of being replaced by a machine. We can give in to the machines, or accept the invitation to take education to a new level that requires smaller classes and more teachers.

In so many areas, people need more personalized services than they are getting. In addition to teachers and financial planners, they need mental health services, legal services, job training, drug treatment programs, child care, and of course affordable health care. The question is whether these services will remain scarce and expensive, or whether we can expand the market for them in the information economy.

Making services more economical

We can be fairly sure that many menial service jobs will eventually be more economically performed by robots than by humans. The days of supermarket checkout clerks are numbered. The problem for aspiring professors, counselors, financial planners, and so forth is a little different. It is not so much that robots will replace them, but that too few people will be able to afford their services, or that they themselves will not be able to afford the price of admission to their desired profession.

I can think of several ways that the information revolution could help. As automation lowers the cost of producing goods and routine services, people can spend a larger portion of their income on personalized services. And information technology should also save labor in the personalized services themselves, bringing costs down there as well. A lawyer assisted by artificial intelligence shouldn’t have to spend as long preparing a case. I know that as a financial planner assisted by sophisticated software, I was able to prepare a financial plan in a very reasonable amount of time and at a very modest cost. My plans always had a human element, with personalized commentary as well as machine-generated tables and charts, but the human-machine collaboration made the service more affordable for my clients.

The technology was also very affordable for me. I did have to rely on a financial software company that no doubt made more money than I did. Ford emphasizes the centralization of information capital, a situation in which a few companies controlling software and Big Data can dominate markets while employing very few workers. But there is another side to that. Information can be duplicated at a very low marginal cost. Software development may be costly, but as the cost is spread over more and more copies, the unit cost keeps shrinking. An aspiring financial planner or other service provider can subscribe to software support for a very modest annual fee. Such easy access to information capital should make it easier to create personalized service jobs.

A big price of admission to many service professions is the cost of education. Education is such a public good that its cost should be widely spread throughout society. Making students go heavily into debt in order to learn what they need in order to be contributing members of society is not a very sensible policy. Ford agrees, and he hopes that new technologies can reduce the cost of instruction. He seems less interested in expanding higher education, since he expects people at all levels of education to have trouble finding jobs. I am more interested in such expansion, because I believe that the jobs we can create will usually require more education than the jobs we destroy.

The role of the public sector

If we agree that education is a public good whose cost should be widely spread throughout society, that suggests a major role for the public sphere in making it more accessible and affordable. The same logic could be extended to other services. Services that contribute to the general health, education and welfare of the population constitute public goods that are worthy of some public funding. Not only do such services create jobs in themselves, but they can help people build their human capital and meet the demands of the advanced economy, keeping them one step ahead of the robots.

Ford isn’t very supportive of this kind of public funding. Here’s what he has to say about elder-care:

The main problem with elder-care robots as they exist today is that they really don’t do a whole lot….The realization of an affordable, multitasking elder-care robot that can autonomously assist people who are almost completely dependent on others probably remains far in the future….It might seem reasonable to expect that the looming shortage of nursing home workers and home health aids will, to a significant extent, offset any technology-driven job losses that occur in other sectors of the economy….[But] by the time the majority of older people reach the point where they need personal, daily assistance, relatively few are likely to have the private means to hire home health aids, even if the wages for these jobs continue to be very low. As a result, these will probably be quasi-government jobs funded by programs like Medicare or Medicaid and will therefore be viewed as more of a problem than a solution.

So here we have a valuable service that isn’t being provided either by robots or enough human workers, and yet Ford rejects the expenditure of more public money to fund it. Once again, that reveals his narrow focus on his recommended basic income guarantee to support consumption. In effect, he would rather have government pay people not to work than to work. We can find more work for robots, but not create more jobs for humans.

Public funding requires some form of taxation. Conservatives often oppose higher taxes, especially on the wealthy, on the grounds that they will interfere with investments by the “job creators” in economic growth. If capital should become as self-serving as Ford expects, with businesses increasing profits by destroying jobs rather than creating them, that argument should become less convincing. One wonders how high unemployment will have to go before people turn to the public sector for job creation, as they did in the 1930s.

A broader moral argument

Ford is concerned about growing inequality, and he does make the argument that as taxpayers who have supported basic technological research, people have a legitimate claim on technology’s benefits. I agree, but I would also ground popular rights in a more basic principle, the dignity of human labor. Let the machines do the work they can do better than people can. But respect people as more than just purchasers of what the machines provide. Help people be as creative as they can be as producers–paid and unpaid–as well as consumers.

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Tax Reform in Name Only

April 28, 2017

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In a last-ditch effort to show some legislative progress in his first 100 days in office, President Trump presented a “tax reform plan” this week. I put that in quotes because I do not think it is tax reform in any meaningful sense of the term. I also agree with those who say it isn’t even a plan, just a one-page wish list of things the President would like to see in a plan. At this point, the proposal is too skimpy on details to evaluate in more than a very general way. One thing that seems clear is that it is mainly another tax cut for the wealthy that will add to the federal deficit.

The first section of the proposal lists “goals for tax reform”:

  • Grow the economy and create millions of jobs
  • Simplify our burdensome tax code
  • Provide tax relief to American families–especially middle-income families
  • Lower the business tax rate from one of the highest in the world to one of the lowest

One goal that is not on this list is making sure that all individuals and corporations pay their fair share by closing tax loopholes. That might be awkward for Donald Trump, since he is suspected of paying unreasonably low taxes on his own vast earnings. He feeds that suspicion by refusing to release his tax returns. (Later sections do refer to “eliminating tax breaks,” without mentioning any particular ones.)

Because the proposal emphasizes tax cuts more than anything else, it also does not promise to fulfil Trump’s pledge to reduce the deficit and reverse–or at least control–the growth in the national debt.

Some of the goals that are listed are questionable. For example, according to most analysts, the bulk of the tax relief would go to corporate shareholders, business owners, and other wealthy individuals, not to middle-income families as claimed.

Corporate taxes

The proposal would reduce the corporate tax from “one of the highest in the world”–35%–to “one of the lowest in the world”–15%. The 35% rate is misleading, since most corporations take advantage of various loopholes to pay much less than that, and many pay no taxes at all. Billionaire hedge fund managers pay only 15% now because of a loophole known as the “carried-interest deduction.”

The most obvious beneficiaries of corporate tax cuts would be shareholders, whose stockholdings would increase in value. Indeed, stock prices have already risen, at least partly in anticipation of the cuts. That benefit goes mainly to the wealthy, since the richest 10% of the population owns over 70% of the assets, and that certainly includes stock ownership. (See, for example, Piketty’s Capital in the Twenty-First Century.)

The proposal would also apply the 15% tax rate to unincorporated but owner-operated businesses such as limited partnerships. That would be a big break for business owners whose income currently “passes through” from the business to the individual and is taxed at ordinary income tax rates as high as 39.6%. That has the potential to create a new loophole for people who do not currently structure their work as a business but could find ways of doing so. Even employees might save taxes by starting a business and arranging to sell their services to their former employer.

The proposal calls for a “one-time tax on trillions of dollars held overseas,” in order to encourage companies to bring money back and invest it at home. On the other hand, it calls for a “territorial tax system” that eliminates taxes on future earnings in other countries. Whether on balance, these provisions encourage or discourage domestic job creation is not clear.

Individual taxes

The proposal would simplify taxes by reducing the number of tax brackets from seven (ranging from 10% to 39.6%) to three (10%, 25%, 35%) and eliminating most tax deductions.  Evaluating the financial impact with any precision is impossible, since the proposal does not even provide the income ranges covered by each bracket!  Based on ideas put forth during the campaign and some commonsense analysis, the overall effect would probably be to make the income tax flatter and less progressive.

Obviously taxpayers in the 39.6% bracket (incomes over $415,050 individual or $466,950 married) would have their marginal rate lowered to at least 35%. People who currently fall into the next three brackets (35%, 33% or 28%, with incomes over $91,150 individual or $151,900 married) would have the potential to be moved down to the 25% bracket. These are very nice tax reductions. Lower than that, the savings are more questionable, since the 10% and 25% brackets would remain, although not necessarily with the same income divisions. The 25% bracket contains so many people (incomes from $37,650 to $91,950 for individuals and $75,300 to $151,900 for couples) that moving very many of them all the way down to 10% would probably be too costly. The people in the very lowest brackets pay so little in taxes already that a further cut would not amount to very much. If the numbers turn out to be similar to a proposal Trump endorsed during his campaign, the savings would be much greater at the top of the distribution, and at least half of all the benefits would go to the top 1% of taxpayers.

The proposal doubles the standard deduction while eliminating most itemized deductions, the big exceptions being the mortgage interest deduction and the charitable deduction. Taxpayers who do not itemize deductions would benefit, but those who do would lose. The loss that affects the most people would be the inability to deduct state and local taxes. The Committee for a Responsible Federal Budget estimates that on the average, giving up itemized deductions would cost taxpayers a little more than getting a higher standard deduction.

The proposal would repeal the Alternative Minimum Tax, which was designed to keep wealthy people from avoiding too many taxes. Certain taxpayers have to calculate their tax two different ways and pay the higher of the two. Eliminating most itemized deductions would make some rich people pay more, but repealing the AMT would allow them to pay less, in some cases much less.

One proposal that is a flat-out gift to the wealthy is repeal of the estate tax, which affects only large estates. Currently individuals can shelter the first $5.5 million from estate taxes, and couples can shelter $11 million, so it makes no difference to most people. But for the 0.2% of estates that are larger than that, the tax savings could be substantial.

President Trump would benefit personally from many provisions of his own wish list. The New York Times analyzed his taxes based on the portion of his 2005 return that became public this year. If all of his proposals were to be enacted, he would save $31 million through repeal of the Alternative Minimum Tax, $27 million from reductions in business taxes, $1.5 million from repealing Obamacare taxes, and $0.5 million from reducing individual tax rates.  He would have to pay $3 million to $5 million more because of the elimination of most deductions, but he would still come out at least $55 million ahead. That’s just in one year. Presumably, he could have similar savings every year. Then when he died, he could transfer his property–worth an estimated $3 billion now–to his heirs without paying 40%–currently 1.2 billion–in estate taxes. That’s not reform; that’s just a raid on the Treasury.

The impact on federal debt and job creation

The Committee for a Responsible Federal Budget has produced a rough estimate of how much the proposed tax cuts would cost the federal government in lost revenue. They expect them to add about $5.5 trillion to the national debt over the next ten years ($6.2 trillion with interest). To put that in perspective, the debt is now about $20 trillion and rising. About two-thirds of the added debt would come from the corporate tax cuts and one-third from the individual tax cuts.

This creates a dilemma for Republicans, who generally love tax cuts but claim to hate deficits, at least when a Democrat occupies the White House. One way of dealing with that dilemma is to claim that tax cuts pay for themselves by growing the economy. Part of this claim is the standard “trickle-down economics” argument that tax cuts for corporations and the wealthy free up capital that can be used to create jobs. Take the argument a little further and it becomes “supply-side economics,” the idea that tax cuts can generate enough economic growth and new tax revenue to offset the cost of the tax cuts themselves.

However, few economists would go that far. The more mainstream consensus is that economic growth only offsets a portion of the revenue lost through unfunded tax cuts. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, says that “it seems the administration is using economic growth like magic beans: the cheap solution to all our problems.”

Beyond that, there is the larger argument about how to create jobs. Is the sluggish pace of job creation really due to a lack of capital in the hands of corporations and rich people? With economic inequality in the U.S. already at such a high point, the rich would seem to have plenty of money to invest. And corporations have found ways to make big profits without creating many domestic jobs, especially by offshoring manufacturing and replacing workers with machines.

Maybe our problems of job creation have more to do with the inability of low-wage workers to create growing markets for many goods and services. Maybe the areas in which we could be creating jobs require more public spending, such as on rebuilding infrastructure or making health care and education more affordable. (One thing Obamacare has been doing is creating jobs in healthcare, but another thing the Trump proposal would do is repeal the taxes on higher incomes that mostly pay for it.) The trouble with another tax cut for the wealthy is that it may be worse than economically ineffective; it may deprive government of the fiscal resources it needs to create jobs in a much more direct fashion. Also, the additional borrowing required to offset lost tax revenue could force up interest rates, discouraging such things as borrowing to buy homes.

If the jobs benefits of the tax proposal turn out to be grossly overstated, then it turns out to be what the New York Times called it this morning, “a multitrillion-dollar shift from federal coffers to America’s richest families and their heirs….” This is about the last thing that anyone who claims to be a populist should be doing. If that doesn’t make people wake up and see Donald Trump for what he really is, I don’t know if anything will.

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The Distribution of National Income (part 2)

February 21, 2017

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We have been looking at a report on the distribution of national income from the Washington Center for Equitable Growth, authored by Thomas Piketty, Emmanuel Saez and Gabriel Zucman. What makes it special is its attempt to account for all forms of income, not just those most often reported in surveys and tax returns. Based on this more complete accounting, the authors conclude that between 1980 and 2014, the top tenth of the adult population increased their share of the pre-tax national income from 34.2% to 47.0%. The share going to the next two-fifths of the population declined from 45.9% to 40.5%, and the share going to the bottom half of the population declined from 19.9% to 12.5%. During this period, economic growth was sluggish compared to the postwar era (1946-1980), but average real income more than doubled for the top tenth, while remaining essentially unchanged for the bottom half.

These figures are only for pre-tax income, however. They leave open the question of what role taxes and government spending play in the distribution of national income. Does post-tax income tell a different story?

Post-tax income

By considering the distribution of the entire national income, the report challenges the way we normally think about after-tax income. In our everyday experience, it’s what’s left after the taxes are taken out. That makes it always less than gross income. But in the national income accounting, total post-tax income and pre-tax income are the same! That’s because the national income does not go down just because some of it is taxed. The tax dollars are spent directly or indirectly on someone’s behalf, and so they can be counted as somebody’s income. Post-tax income is not a reduction in national income, but just a redistribution of national income.

The calculation of post-tax income from pre-tax income requires two steps: the subtraction of taxes paid, and the addition of government benefits received. Taxes include all levels (federal, state, local) and all types (income, sales, payroll, property). Government benefits include both monetary transfers (earned income tax credit, cash assistance payments, food stamps) and in-kind transfers (mainly health benefits through Medicare and Medicaid). Some cash income is already included in pretax income, such as Social Security payments.

The trickiest type of government benefit to account for is “collective consumption expenditures.” This is government spending on behalf of society in general. One might apportion it equally, on the assumption that each citizen gets the same benefit from it. But the researchers distribute it in proportion to other income, reasoning that higher-income people usually get more benefits from general public spending. For example, wealthier people are more likely to live in communities where the taxes support higher spending per student in the public schools. They are also more likely to be shareholders who benefit from the profits earned by defense contractors. The authors acknowledge that “our treatment of public goods could easily be improved as we learn more about who benefits from them.”

What if the government spends more than it receives in tax revenue? Then the deficit has to be allocated to individuals too, as a kind of negative benefit. Otherwise, total benefits received would be larger than total taxes paid, making post-tax income larger than total national income, upsetting the logic of the entire analysis.

The distribution of taxes and benefits

In general, the distribution of taxes and benefits is mildly progressive, but not markedly so. With all forms of taxation considered, higher incomes are a little more heavily taxed. The effective tax rates are 33.9% for the top tenth of adults, 28.6% for the next two-fifths, and 24.4% for the bottom half. The effective tax rate for the adult population as a whole is 30.5%.

Each group’s share of all taxes paid depends on how much income they have to begin with, as well as the rate at which it is taxed. In 2014, the top tenth got 47.0% of the pre-tax income and paid 52.2% of the taxes (hardly an unreasonable burden in my humble opinion). The next two-fifths got 40.5% of the income and paid 38% of the taxes. The bottom half of the population got 12.5% of the income and paid 10% of the taxes.

On the government benefits side, the top tenth got the smallest share–26.0%–which is lower than their share of income and taxes, but still much higher than their share of population. Although they didn’t qualify for means-tested assistance programs like Medicaid and food stamps, they got a lot of the general benefits of government spending. The next two-fifths, however, got the largest share–41.6%–roughly proportional to their share of the population. What they pay in taxes they get back in benefits such as good schools. The lower half of the population got 32.6% of the benefits, which is much more than their tax burden but much less than their 50% share of the population.

The redistribution of national income

The result of government taxation and spending is that a modest portion of national income is redistributed, primarily from the top tenth of the population to the bottom half.  A simple comparison of pre- and post-tax income shows this clearly.

Because the top tenth paid more in taxes than they received in benefits, their post-tax share of national income was 8 percentage points lower than their pre-tax share in 2014 (39.0% vs. 47.0%).

For the next two-fifths of the population, pre- and post-tax income came out about the same. They started out with 40.5% of the pre-tax income, paid 38% of the taxes, got 41.6% of the government benefits, and wound up with 41.6% of the after-tax national income. All the figures are roughly proportional to their 40% population size, so this group didn’t win or lose much from income redistribution.

The bottom half of the population gained more in benefits than they paid in taxes, so their post-tax share of national income was 6.9 points greater than their pre-tax share (19.4% vs. 12.5%). That difference consists mainly of non-cash benefits. That’s because their meager pretax incomes–averaging $16,200–were taxed at 24.4%, and that more than offset any cash benefits they received. The net benefits they got were primarily from health insurance programs.

To summarize, in 2014 the US transferred 8% of the national income by taxing the top tenth of the population, with 7 points of that going to the bottom half and 1 point to the other two-fifths. The transfer reduced the top tenth’s sizeable after-tax income by 17%. But the transferred income loomed much larger in the lives of the people at the bottom who received it in one form or another. Since they had so much less to begin with, it boosted their income by 54%. In dollar terms, it meant an increase in average income from $16,200 to $25,000, a significant improvement, but still leaving them far behind everyone else.

Redistribution and the trend toward inequality

Has the redistribution of income through taxes and government spending helped to offset the trend toward greater inequality? One would expect that as the rich got richer, they would be forced into higher tax brackets, increasing the tax revenue available for redistribution. One might also expect that as incomes at the bottom stagnated, political pressure would build to increase spending to augment them.

The point about tax revenue has some truth to it. Between 1980 and 2014, the top tenth increased their share of pre-tax national income from 34.2% to 47.0%, but some of that gain was offset by taxes. Still, their after-tax share of national income went from 29.5% to 39.0%. The increase in post-tax income was about three-quarters of the increase in pre-tax income. In other words, they got to keep three-fourths of their gains.

For the other nine-tenths of the population, tax offsets worked to reduce losses instead of gains. For the bottom half, the decline in their share of post-tax income was 85% as large as the decline in their share of pre-tax income. For the two-fifths of the population in between, the decline in their share of post-tax income was only  59% as large as the decline in their share of pre-tax income. To put it another way, the government absorbed 15% of the losses for the bottom half and 41% of the losses for the two-fifths in the upper middle of the distribution.

What the country did not do in those years was increase the overall rate of taxation or make the tax rates more progressive. The average tax rate considering all taxes went down slightly from 30.8% to 30.5%. Moreover, the effective rate of taxation went down for the upper half of the population (due mainly to income tax cuts), but went up for the lower half (due mainly to increases in payroll taxes). That’s why the government absorbed more losses for the upper-middle class than for the bottom half. Redistribution from top to bottom could still go up a little, because the rich had more money that could be taxed. But non-progressive tax policies left most of the increase in inequality untouched.

As for the second point, about political pressure to increase spending on the poor, that was outweighed by pressure to cut tax rates for the middle and upper classes. Between 1980 and 2014, the percentage of national income going to finance government benefits for the bottom half remained stuck around 10%, while benefits for the upper half remained around 20%. The upper middle class played a crucial political role here. With their own share of the national income shrinking, a majority of them sided with the rich in supporting low taxes, rather than with the poor in supporting policies to reduce inequality. I will have more to say about the political implications of the income distribution in my next post.

Continued

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Trump’s Taxes: Can the Fox Guard the Henhouse?

October 6, 2016

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David Cay Johnston has come up with a plausible explanation of how Donald Trump used business losses to avoid paying federal income taxes. Johnston is an expert on how the wealthy use the tax code to their advantage. My aim in calling attention to this is not just to criticize Trump for minimizing his tax bills, but to raise the larger question of what kind of tax reform is needed and whether a Trump administration is likely to pursue it.

Turning business failure into personal gain

In the early 1990s, Donald Trump was the owner of failing casinos and other unsuccessful business ventures. He had borrowed and spent so lavishly that his businesses couldn’t make their loan payments and still turn a profit. Trump was like a homeowner living in a flashy mansion but going broke trying to make the payments on it. He reported net operating losses of $916 million in 1995 and was $3 billion in debt.

The operating losses had a silver lining, however. The federal tax code allowed him to use those losses to offset personal income for as many as 18 years, running from two years before the reported loss to 15 years after.

As for the debt, he got the banks to forgive almost $1 billion of it by threatening “endless litigation” if they tried to collect what he owed. Trump has boasted about his habit of paying less than he owes. “I’ve borrowed knowing you can pay back with discounts.” Many borrowers who lost their homes in the real estate meltdown would have liked that deal. Conservatives accused President Obama of “subsidizing losers” when he proposed assisting such homeowners.  Trump also got a tax break on his debt forgiveness, which would normally be considered a form of income. But Congress created an exemption that allows real estate owners to avoid this tax liability if they sacrifice future deductions for depreciation instead. (One of the tax benefits of real estate is the ability to take a deduction each year for property depreciation.) Trump had personally testified on behalf of the exemption.

Trump still had a problem, however. He still owned properties that were losing money, and they were now worth even less as investments because he had forfeited the future tax benefit of depreciation in return for an immediate tax benefit for himself. Nevertheless, he was able to sell the properties to a new stock corporation he created, Trump Hotels and Casino Resorts. The investors must have grossly overestimated the potential return, perhaps as Johnston says because they “saw gold in his brand name.” They bought the shiny image and overlooked the ugly reality. Could there be a lesson here for voters?

As the chairman of Trump Hotels and Casino Resorts, Trump was well paid whether the company succeeded or failed. He also had the company borrow more money in order to pay off his previous loans, thus saddling the corporation with what had been his personal obligations. With him in charge, the company lost over a billion dollars; the stock value plummeted, and the investors were wiped out. He walked away with millions of dollars in tax-free income, but everyone else lost–investors, contractors, and the taxpayers who subsidized his me-first business practices.

Why does it matter?

All of the financial moves I’ve described may have been legal. (Johnston does charge him with tax fraud in other contexts, but that’s another matter.) Trump’s defenders blame his economic failures on economic conditions beyond his control, justify his tax maneuvers as normal efforts to avoid paying more than the tax code requires, and praise his “genius” in achieving personal success in the face of financial adversity.

All of those claims are controversial. Rather than dispute them, I want to emphasize something else, which is tax policy. Donald Trump himself has said something like this: The tax system is rigged, but since I know the tax code so well and have brilliantly used it to my advantage, I’m the best person to fix it! Or to put it a little more whimsically, I’m the smartest fox to guard the henhouse, since I’ve been feasting on chicken for a long time!

This is a clever argument. The problem I have with it is that I see no evidence of Trump’s interest in tax reform. Democrats continue to complain loudly about his failure to release his tax returns. I wish they would call more attention to what he has released, which is at least the main outline of a tax plan. As I described it in an earlier post, it is standard Republican fare. It makes the tax code flatter and less progressive by lowering tax rates for the wealthy, and it includes new goodies like the elimination of the estate taxes that are paid by only the richest one-fifth of one percent. Surprise surprise, Donald Trump and his family stand to make a fortune from his own tax proposals. In contrast, Hillary Clinton wants to increase estate taxes and implement the “Buffet rule,” which would require those with million-dollar incomes to pay at least 30% in income taxes. I see little chance that her plan will get through a Republican-controlled Congress, but at least it’s an authentic proposal for reform.

So Donald Trump, who has cultivated the image of the populist outsider, defender of the working people, is really the protector of the rich and powerful. Hillary Clinton, the Washington insider, is really the progressive reformer. The cunning fox shows no sign of giving up his chicken dinners. If we want someone to guard the henhouse, we’d better elect a hen.

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Clinton and Trump on Fiscal Policy (part 2)

August 17, 2016

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The last post discussed differences between the candidates in their approach to taxing and spending. Both have ambitious spending plans, but Hillary Clinton proposes to raise the revenue to finance hers by increasing taxes on the wealthy. Donald Trump proposes to increase spending and cut taxes at the same time, with the largest reductions for the wealthy.

Estate taxes

The candidates also sharply disagree over estate taxes. As a result of previous tax cuts, estate taxes only apply to individual estates valued at over $5.45 million, or $10.9 million for married couples. Only one estate out of every 500, or 0.2% of estates, are large enough to have to pay any estate taxes at all.

Amounts that exceed these thresholds are taxed at 40%. However,the wealthy are also able to use various legal devices to limit the size of their taxable estates, so that most pay less than half of that.

Consistent with her aim to get the rich to pay “their fair share,” Clinton proposes to raise the estate tax rate to 45% and to apply the tax to more estates. The new, lower thresholds would be $3.5 million for individuals and $7 million for couples.

Trump would abolish the estate tax altogether, creating another big tax break that would benefit only the richest 1/5 of the 1%. For those as rich as himself (or at least, as he claims to be), the tax savings could run into the billions.  Personally, I think that any candidate who claims to care about struggling working families could find a better use for that tax revenue.

I will cheerfully state my own bias here. I think that taxes on large estates are a good idea in a democracy. They help equalize opportunity, rather than letting the children of the rich be born with a gilt-edge guarantee of future prosperity. They also help avoid the formation of  hereditary aristocracies or plutocracies, which tilt power toward the wealthy and away from average citizens. How strange that an alleged populist cannot appreciate that!

Business taxes

In the area of corporate taxes, the Clinton plan is again more moderate than the Trump plan. She proposes some small changes to the tax code in order to discourage businesses from moving abroad. For example, she would crack down on “tax inversions,” where companies avoid US taxes by merging with a foreign company and moving their corporate headquarters to that country.

Donald Trump would reduce the incentive of companies to leave the United States by lowering the corporate tax rate, which at 35% is one of the highest in the world. Many corporations take advantage of the many deductions and loopholes in our tax code, some pretty reasonable and others pretty tricky. In general, Trump proposes to do what many tax critics recommend, lower the rate but close many of the loopholes.

However, the Trump plan is radical in some respects. He proposes a new corporate rate of 15%, which is below even the House Republican recommendation of 20%. He would also apply that rate to all sorts of businesses, including partnerships, limited liability companies and sole proprietorships. As it stands now, those entities “pass through” income to individuals, who pay taxes on it at “ordinary income” rates as high as 39.6% (or 33% after Trump’s other cuts). According to the Center on Budget and Policy Priorities, two-thirds of this pass-through income goes to the top 1% of taxpayers, who are obviously in the top bracket. Taxing those entities at only 15% would be another windfall for the wealthy.

In addition, it would create a new tax loophole for wealthy individuals. Many highly paid employees could lower their taxes to 15% simply by reclassifying themselves as independent contractors and selling their services to their former employers.

The choice

In her tax and spend proposals, Hillary Clinton comes off as the fiscal moderate but social progressive, wanting to finance her new spending plans with modest tax increases on the wealthy. Her tax plan is expected to bring in $1.1 trillion in additional revenue over ten years. Donald Trump comes off as the fiscal risk-taker and plutocrat, willing to increase the deficit in order to give out more tax breaks, primarily for the wealthy. His original plan would have reduced revenue by as much as $9.5 trillion over ten years, although he would hope to offset that by stimulating a higher rate of economic growth. (That’s what tax cutters always hope for but rarely achieve.) The current plan discussed here is just beginning to be analyzed, but I would be surprised if the cost in revenue would come out less than four or five trillion.

As I have said before, the Republican Party has the perennial problem of how to win electoral majorities while pursuing an economic agenda whose top priority is tax relief for rich people. The solution is often some form of cultural conservatism with broad appeal, such as Christian conservatism. Declining enthusiasm for the Religious Right has created an opportunity for a more troubling form of conservatism, more nativist and nationalist, to arise. In Donald Trump we have an odd marriage of nationalist populism and anti-tax plutocracy, the first appealing more to the less educated, and the second more to the rich. But not enough of the educated middle class are buying into this mix to make it the new ideological foundation for the party. Meanwhile, the Democrats are gradually becoming more progressive again, and they should be a formidable political force. For one thing, they are winning the battle for the hearts and minds of the younger generation, at least in this election.

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Posted by Ed Steffes

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