Back without popular demand: Tax cuts for the wealthy and corporations

U.S. 1040 Individual Income Tax forms are seen in New York

The Trump-GOP tax plan released today gives an enormous tax cut to wealthy people and corporations. These tax cuts have been a top priority for Republican leadership, despite the fact that, as I demonstrate in my new book, corporate tax breaks are among the least popular things the government can do, and most Americans think wealthy people should be paying more, not less. More tax cuts for very rich people are back without popular demand—and it remains a terrible idea.

The likely regressive impact of the tax plan is well-explained elsewhere. Self-interested millionaires and billionaires will smile at the elimination of the AMT and the estate tax. A new loophole for “pass-through” businesses will reward little mom-and-pop shops like the Trump Organization. Other beneficiaries include multinational corporations that have been hiding their profits overseas.

It’s worth noting, however, exactly how unpopular these policies are.

If you ask Americans what bothers them about taxes, the most common answer is “the feeling that some corporations don’t pay their fair share.” The next most common? “The feeling that some wealthy people don’t pay their fair share.” Not even ten percent of Americans say that the amount they pay is what bothers them most. And even Republicans are more likely to say they are bothered by corporate tax avoidance than by their own tax responsibilities.

Chart: What bothers Americans about taxes.
Asked of those who reported being bothered “a lot” by one or more of these (86 percent of sample). Citation: Pew Research Center for the People and the Press. February 18-22, 2015.

Moreover, one specific provision in the new Republican plan is clearly at odds with most Americans’ preferences – special rates for corporations to return money held overseas. Most Americans consider the use of offshore tax havens as “very unpatriotic,” so much so that a majority of Americans would support the withholding of government contracts from corporations that tax advantage of such loopholes. That’s a far cry from giving a special payday to those holding their money overseas, a policy that demonstrably fails to create jobs and only encourages holding money overseas until the next giveaway.

And yet here we are, facing another round of tax cuts at the top and special breaks for companies that kept their profits out of the United States. Why? One reason is that tax policy is complicated and unfamiliar to most people. Political scientists have demonstrated again and again that it is relatively easy for motivated politicians to mislead the public about the effect of tax legislation. This makes it hard for the public to hold their legislators accountable.

In the past, politicians have successfully distracted the public from the regressivity of tax cuts by emphasizing some relatively small tax reductions for working and middle class people. But the draft tax plan released today does not seem to have as clear-cut a widespread benefit as the Bush tax cuts did in the early 2000s.

In fact, it is not at all clear what the new tax plan will mean for working and middle class Americans. (It’s almost like this aspect of the plan was not the policymakers’ priority.) The tax rate of 10 percent is actually going up to 12 percent, but the standard deduction is supposed to double, meaning more people might not pay any net federal income tax. Some deductions might disappear, but not the regressive ones for home-mortgage interest or charitable donations. As legislation moves forward, we will get a clearer idea of its impact for the income tax responsibilities of most Americans—assuming Congress actually waits for their bills to be assessed, perhaps a naïve hope these days.

Of course, tax cuts at the top affect everyone because they put budgetary pressure on government spending.  A dollar spent on tax cuts is a dollar not spent on, for instance, infrastructure investments. So every American has a stake in the tax debate this fall.

The big question is how much of the plan Republicans will actually get passed. In January, I would have said tax cuts would be a walk in the park. But after six months of failure to repeal the Affordable Care Act, the future does not look quite so bright. First of all, the failure to repeal ACA gives Republicans far less time and fiscal wiggle-room, as my colleague Molly Reynolds has explained. Moreover, the intra-party difficulties Republicans faced on Obamacare are not totally absent from the tax cut fight, particularly the shortage of expertise and leadership from the White House. Molly and I will be chatting in the coming weeks about the challenges Republicans in Congress face as they hash this out—keep your eyes on this space.