The new tax plan is the worst Christmas present for the middle class

Editor's note:

This article was originally published on Monday, December 18 in The Guardian newspaper.

The Republican party has achieved something nobody thought possible. They have taken the broken, regressive, loophole-riddled US tax code, and made it worse.

The Tax Cuts and Jobs Act of 2017 has nothing to do with economics. It is pure politics. Economists struggling to understand the unwieldy legislation are like biochemists attempting to explain contemporary ballet. Nobody seriously believes that the bill will boost growth. Everybody knows that it will massively increase the deficit; the only argument is whether it will be by $1.5 trillion, or just $1 trillion. The legislation has been drafted at breakneck pace, with few opportunities for costings or analysis: a recipe for errors. Senator Elizabeth Warren joked that she spent more time choosing her new refrigerator than the Senate managed for tax reform.

But for Republican lawmakers, the bill hits some very sweet political spots. Corporations? Check. The wealthy? Check. Obamacare haters? Check? When the deficit balloons, as it must, Republicans will then use that to justify cutting spending, especially on pensions and healthcare. Their cynicism is breathtaking. Their ruthlessness is impressive. Wait for the new Alabama senator, Doug Jones, to take his seat before voting? Are you kidding? There will be no waiting. This is brute force politics.

It is a tragedy, too. The only potential silver lining of Trump’s presidency was that he might do something to help the struggling middle class, Main Street not Wall Street. He ran on this very promise. But this bill offers the working class and middle class little or nothing – crumbs from the table at best. It provides a huge boon, however, to corporations and to the wealthy. This is not a populist tax bill. It is a plutocrat one.

For business-friendly congressional Republicans, three provisions in particular represent big wins: doubling the threshold for paying estate tax to $11 million, slashing the corporate tax rate from 35 percent to 21 percent, and cutting the top rate of income tax to 37 percent. It is fitting that House Speaker Paul Ryan is heading for the exit. This is about as good as it will ever get for him.

Against a backdrop of rising inequality, the passage of this bill will mark an extraordinary triumph for doctrinaire conservative thinking. With control of both houses of Congress and the White House for the first time since 2005, Republicans have seized their moment.

During Trump’s ascent, congressional Republican leaders said, in effect, “He may be mad dog, but he’s our dog.” Ryan and Senate majority leader Mitch McConnell held their noses and hoped that, for all Trump’s populist rhetoric, they would be able to exploit his presidency to ram through some traditional Republican tax cuts.

For a while, it was not clear that Trump would be brought to heel. In one ear, he was being advised by Steve Bannon to raise taxes on the wealthy and give real cuts to the middle class. Into the other, multimillionaire treasury secretary Steve Mnuchin wanted surging tax cuts for the rich. Plutocrat Steve won the day; populist Steve has long since been banished. It says everything about the Trump administration that, on this single, narrow issue, it would have been a better one with Bannon still in it.

Trump describes the bill as “a great, big, beautiful Christmas present” for middle class Americans. But it’s not true. Even the handful of provisions helping ordinary families, such as an increase in the personal income deduction, will deliver modest gains. In the Senate version of the bill, on which the compromise version is largely based, families in the middle 20 percent of the income ladder will see a tax cut of less than $1,000 next year. Those in the top 1 percent will see an average $28,000 cut.

Wealth inequality has grown even more rapidly than income inequality in the US. But Republicans seem to think that protecting massive inheritances from tax is the way to go. Already, the estate tax is only paid by the richest 0.2 percent of families. After the bill passes, that number will shrink to a mere handful. Most of them will find a way to dodge it by creative movement of money. As Gary Cohn, economic advisor to the president, helpfully explained, “only morons pay the estate tax”.

Worse, even the meager initial benefits going to ordinary families are here today, gone tomorrow, because of two provisions in the bill that are not in the headlines. The income tax cuts expire in 2026 but the corporation tax cut does not. By 2026, many of the benefits for ordinary workers will have evaporated.

The bill is also likely to provoke a rush to self-employment. The dramatic cuts in rates for corporations and partnerships will create a huge incentive for workers to set themselves up as small businesses. A two wage-earner couple with an income of $250,000 a year would see little change in their tax bill; a couple with the same income generated through a small business would see an $11,000 annual cut, according to the Tax Policy Center.

To be fair, there are some elements of the bill that progressives would likely applaud in a different context. Reducing the cap on the mortgage interest deduction to $750,000 is a welcome step, hopefully the first towards gradual removal of this absurd and regressive provision. Capping state and local tax deductions at $10,000 will hit affluent taxpayers living in high-tax, mostly Democratic cities and states. It is a surgical strike on the liberal elite. But still, it is not clear why upper middle class Americans who choose to live in these places should be subsidized by those living in lower-tax, largely Republican areas.

The bill will impact the income and wealth of American households. But it also has significant consequences for health and education. This is because the US does a huge amount of social policy through the tax code, one reason it is so complex.

The abolition of the mandate associated with Obamacare, which will occur after a one-year delay, will help send health care markets into a death spiral, as the bill’s drafters know only too well.

Meanwhile, there is a tax boost in the bill for people sending their children to private elementary and secondary schools. Tax-exempt educational savings plans, known as 529 plans, previously restricted to spending during the college years, will be available for private K-12 education. Only affluent families benefit from these plans, of course, so it is yet another regressive element in a broadly regressive bill.

The Republican tax bill is sloppily designed and economically reckless. It is certain to lead to more tax avoidance and certain to massively increase the deficit. It provides a massive boon to the rich and little or nothing to the middle class and working class.

As such, it also represents a huge political risk. The gamble Republicans are taking is that the voters who put Trump into the White House will fail to notice that they are not among the beneficiaries of the first major piece of legislation to bear his signature. Trump is not draining the swamp. He is watering it.