Tax Cuts: Its All About Capitalism

Powerful corporations and the rich in the United States continue their winning ways.  By narrow margins, both the House of Representatives and Senate have agreed on a budget proposal that calls for an increase in the federal deficit of $1.5 trillion dollars in order to fund a major reform of the US tax system that will make the rich and powerful even more so.

Proposed tax changes

Republicans in each house of Congress still need to work out the specifics of their desired tax reform and then negotiate any differences before they can send the budget to President Trump for his signature.  But, there seems to be general consensus on the following business tax changes:

• slash the top tax rate on pass-through business income from partnerships and limited liability companies or sole proprietorships from 39.6 percent to 25 percent; most law firms, hedge fund and real-estate companies are pass-through companies in which profits are counted and taxed as the owner’s personal income
• reduce the corporate income tax from 35 percent down to 20 percent
• repealing the corporate alternative minimum tax
• replace the current global profit tax on business with a territorial tax, which means corporations will no longer be required to pay taxes on their foreign earnings.
• institute a one-time lower tax rate on repatriated corporate profits currently held outside the country.

The Tax Policy Center estimates that these and other less significant changes would give corporate America a $2.6 trillion tax cut over the next decade.

There will also be changes to the personal tax code, although in dollar terms not nearly as large as the likely business tax changes highlighted above.  There seems to be agreement in both the House and Senate on ending the inheritance tax and alternative minimum income tax and reducing the number of individual income tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, although some members of congress would like to add a fourth higher bracket for very high-income earners.

The only serious disagreements involve whether to raise funds to offset the huge deficits that will be generated by the business tax cuts by ending federal deductions for state and local government taxes and restricting the yearly contributions taxpayers can make to their tax deferred 401(k) retirement accounts, both changes that would hit middle income earners hard.

The Tax Policy Center estimates that the likely personal income tax changes would be roughly revenue neutral, although as much as two-thirds of the likely personal income tax cuts would go to the top 1 percent of income earners.

No doubt as both houses of congress set to work, public attention will be directed away from both corporate tax cutting, which is the main aim of the tax reform and the primary driver of a growing federal debt, and the various tax give-aways to high income earners, and towards possibly heated congressional debates over the possible loss of personal tax deductions enjoyed by middle income earners.

Business, at least for now, no longer cares about the deficit

It is the business community that is driving this push to slash corporate taxes.  As an article in Bloomberg Businesweek explains:

It was only about five years ago that powerful people in finance loved talking about the horrendous consequences for the U.S. if it didn’t get its finances under control. They warned that the federal debt—and the interest payments—could eventually get high enough to drag down the economy, burden future generations, and even threaten national security. Chief executive officers of five of the biggest U.S. banks joined a campaign called Fix the Debt, signing on with hedge fund billionaires, asset managers, and private equity executives, as well as former lawmakers and others.

It was not long after Trump’s election that everything changed.  From then on, the business community, including most of the leading members of Fix the Debt, embraced tax cuts without concern for the deficit:

Case in point: Goldman Sachs Group Inc. CEO Lloyd Blankfein, a Fix the Debt supporter who in 2012 told CNBC he’d be for higher taxes if they helped mend the fiscal gap. After the election, Blankfein told colleagues in a companywide voicemail that Trump’s proposals, including tax reform, “will be good for growth and, therefore, will be good for our clients and for our firm.”

He wasn’t alone. It’s “about capitalism,” JPMorgan Chase & Co. CEO Jamie Dimon said in February, as he pushed Washington to lower corporate taxes. He suggested that if corporate rates fell, wages would come up. A few weeks earlier, Bank of America Corp. head Brian Moynihan said Trump should focus on cutting taxes. They were part of the antidebt campaign, too.

Dimon is right—it is about capitalism, which means that business leaders have one goal—maximize profits.  And if their desired tax cuts cause deficit problems down the road, well, these business leaders will effortlessly shift their message back to “fix the debt,” which translates into the need to slash critical social programs, all in the name of promoting a healthy capitalism.

Ideological cover

Of course, there is always an attempt to present policies designed to enrich the powerful as beneficial for all.  The argument has to be made and publicized, regardless of who really believes it.  And here it is: Kevin Hassett, the Chair of President Trump’s Council of Economic Advisers, has announced that the corporate tax cuts being discussed could be expected to increase a typical American household’s income by $3000 to $7000 a year.

The argument made by Hassett and the rest of the Council of Economic Advisers is that high corporate taxes force companies to invest overseas and reduce hiring in the United States.  In contrast, lower corporate taxes ill lead corporations to invest and complete for workers, all of whom would be more productive thanks to the investment, thereby driving up growth and worker earnings.

There is, in fact, little support for this notion that tax cuts lead to higher wages.  As the New York Times reports:

Other research has cast doubt on the theory that businesses would pass tax savings on to their workers in the form of higher wages. A 2012 Treasury Department study, which Treasury recently removed from its website, found that less than a fifth of the corporate tax falls on workers. A Congressional Research Service report last month concluded that the effects of corporate taxes fell largely on high-income Americans, not average workers.

So, how did the Hassett and the Council get its result?  Jared Bernstein, a Senior Fellow at the Center on Budget and Policy Priorities, examined the model used.  As he explains:

The interesting economics question is to why the model predicts such an unrealistic result for the US economy? Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.

In this case, the model assumes that the US is a small, open economy such that capital inflows instantaneously fund more investment, such investment immediately boost productivity, and the benefits of faster productivity immediately accrue to paychecks. The simple model ignores the extent to which these inflows would raise the trade deficit as well as their impact on revenue losses and higher budget deficits.

The model assumes away imperfect competition, which is relevant today as a) monopolistic concentration is an increasing problem, and b) the one thing economists agree on in this space is that in these cases, the benefits of the corporate cut flows to profits and shareholders, not workers, other than maybe some “rent sharing” with high-end workers.

 

It may well be too late to stop this round of tax giveaways to business and the rich.  But it is not too late to use the moment to help working people develop a clearer picture of how capitalism works and a more critical understanding of the arguments used to defend its interests.  It wont be long before new economic tensions and difficulties present us with another opportunity to resist and hopefully, if we have used this time well, advance a meaningful movement for change.

Budget Wars: The Rich Want More

The rich and powerful keep pushing for more.  And the odds are increasingly good that they will get what they want through the federal budget process now underway. As the Center on Budget and Policy Priorities explains:

Congressional Republicans this fall are poised to launch step one of a likely two-step tax and budget agenda: enacting costly tax cuts now that are heavily skewed toward wealthy households and profitable corporations, then paying for them later through program cuts mostly affecting low- and middle-income families.

The potential gains for those at the top from this first step are enormous.  For example, the Republican plan currently calls for ending the estate tax, slashing the top tax rate on pass-through income from partnerships and limited liability companies from 39.6 percent to 25 percent, lowering the corporate income tax rate from 35 percent down to 20 percent, and repealing the corporate alternative minimum tax.  Republicans are also considering a tax holiday on repatriated multinational corporate profits.

The Tax Policy Center estimates that the Senate tax plan would lower personal income taxes by an average of $722,510 for the top 0.1 percent of income earners compared with just $60 for those in the lowest quintile; as much as two-thirds of personal income tax cuts would go to the top 1 percent.  Corporate America, for its part, would be reward with a $2.6 trillion cut in business taxes over the next decade.

Naturally, President Trump and his family are well positioned to gain from these changes.  Democracy Now reports that the Center for American Progress Action Fund estimates that “President Trump’s family and Trump’s Cabinet members would, combined, reap a $3.5 billion windfall from the proposed repeal of the estate tax alone.” And capping the pass-through income tax rate “would give Trump’s son-in-law, his senior adviser, Jared Kushner, an annual tax cut of up to $17 million.” The Center for American Progress estimates that Trump, based on his 2016 financial disclosures, would enjoy a $23 million tax cut.

As for the second step in two-step agenda, it would work as follows: the Senate’s budget resolution provides a very general outline of federal spending and revenues over the next decade.  It calls for an allowed increase in the budget deficit of $1.5 trillion as well as the achievement of a balanced budget within a decade.  House leaders are hopeful that the House will approve the Senate budget resolution with few if any changes, thereby speeding the path for the House and Senate to quickly agree on the specific tax changes that will drive the budget deficit and then deliver the completed budget to President Trump for his signature before the end of the year.

However, all independent analysts agree that the Republican tax plan will push the deficit far beyond its stated limit of $1.5 trillion.  The table below, based on estimates by the Tax Policy Center, is representative.

It shows that business tax cuts are likely to lead to $2.6 trillion in lost revenue, producing an overall estimate of a $2.4 trillion deficit increase.  What we can expect then, is the return of the “deficit hawks.”  If Republicans succeed in passing their desired tax cuts, and they produce the expected ever growing budget deficits, we can count on these legislators to step forward to sound the alarm and call for massive cuts in social spending, targeting key social programs, especially Medicare and Medicaid, thereby completing the second step.

Not surprisingly, the Republican leadership denies the danger of growing deficits.  It presents its tax plan as a pro-growth plan, one that will generate so much growth that the increased revenue will more than compensate for the tax cuts.  It’s the same old, same old: once we get government off our backs and unleash our private sector, investment will soar, job creation will speed ahead, and incomes will rise for everyone.  The history of the failure of past efforts along these lines is never mentioned.

Of course, it is possible that political differences between the House and Senate will throw a monkey wrench in the budget process, forcing Republicans to accept something much more modest.  But there are powerful political forces pushing for these tax changes and, at least at present, it appears likely that they will be approved.

One of the most important takeaways from what is happening is that those with wealth and power remain committed to get all they can regardless of the social consequences for the great majority.  In other words, they won’t stop on their own.  If we want meaningful improvements in working and living conditions we will have to do more to help build a popular movement, with strong organizational roots, capable of articulating and fighting for its own vision of the future.

Challenging US Foreign Policy Toward North Korea

It is an understatement to say that relations between the US and North Korea are very tense—the US government continues to threaten to further tighten economic sanctions on North Korea and launch a military attack to destroy the country’s missiles and nuclear weapons infrastructure.  And the North for its part has said it would respond to any attack with its own strikes against US bases in the region and even the US itself.

Making matters worse are Trump’s personal attacks on Kim Jong Un, the head of the North Korean government.  And as an indicator of how much tensions have ramped up, Kim himself spoke, responding in kind to Trump.  It is very rare, in fact this may be the first time, that a North Korean leader has personally responded to comments made by another government; usually the North Korean position is conveyed by a government official or their news service.

This is obviously not a good situation, but it is also important to realize that what is happening now is not new.  The US began conducting war games with South Korean forces directed against the North in 1976 and it was not long before those included simulated nuclear attacks against the North, and that was before the North had any nuclear weapons.  In 1994, President Bill Clinton came very close to launching a military attack on North Korea.  In 2002, President Bush talked about implementing a naval blockade of North Korea and seizing its ships, an act of war, and also announced the adoption of a new National Security Strategy under which the US announced its right to take pre-emptive military action against any nation that it felt posed a threat to US interests, with North Korea said to be at or near the top of the list.  Since 2013, the US has conducted annual war games involving planning for preemptive attacks on North Korean targets that include the use of nuclear weapons and what the military calls the decapitation of the North Korean leadership.

The point here is not just that we have a history of threatening war, including nuclear attack, against the DPRK, but that it is a bipartisan history, involving both Democratic and Republican administrations.

Although we have thankfully so far averted a new Korean war, the cycle of belligerency and threat making on both sides is intensifying, and it is always possible that a miscalculation could trigger the start of military actions.  However, and this is very important, even if war is averted, the high level of tension between the US and North Korea itself comes with unacceptably high costs.

President Trump is continuing the strategy of past administrations of responding to every North Korean missile launch or nuclear test with new sanctions.  These sanctions are cutting deep, hurting North Korean living conditions.  It is collective punishment of the entire North Korean population.  As Gregory Elich explains, the US is already at war with North Korea, “doing so through non-military means, with the aim of inducing economic collapse.”

For example: UN resolution 2371, passed August 5, 2017, aims to block North Korea “from exporting coal, iron, iron ore, lead, lead ore, and seafood, all key commodities in the nation’s international trade. The resolution also banned countries from opening new or expanding existing joint ventures with the DPRK.”  UN resolution 2375, passed September 11, 2017, is designed to further limit “North Korea’s ability to engage in international trade by barring the export of textiles. It is estimated that together, the sanctions may well eliminate 90 percent of the DPRK’s export earnings. . . . The September resolution also adversely impacts the livelihoods of North Korea’s overseas workers, who will not be allowed to renew their contracts once they expire.”

The social costs of US policy are not limited to North Koreans, although they bear the greatest burden.  The tensions generated by the escalating US-NK standoff are helping to fuel greater military spending and militarization in Japan and China, as well as the US.  This is a dynamic that strengthens the political power and influence of dangerous rightwing forces in all these countries.  And in South Korea, these tensions are already at work undermining democratic possibilities, as labor leaders are jailed, civil rights curtailed, and progressive political parties disbanded in the name of national security.

So, it is not enough for us to just work to oppose outright military conflict.  We need to change the dynamics driving US and North Korean relations.  And, there is no mystery about the best way to achieve this end: the US needs to accept DPRK offers for direct negotiations to end the state of hostility between the two countries.  Unfortunately, there is no shortcut to forcing the US to the negotiating table. It requires building a strong popular movement that can cut through the myths and distortions that the US media and government promote in defense of current policy.  For an example of some of what we must overcome, see “The need for a new US foreign policy towards North Korea.”

Cutting through the myths and distortions also requires that we hear progressive voices from South Korea.  Jang Jinsook, Director of Planning of the Minjung Party of South Korea, a new progressive party that will formally launch on October 15, is one such voice.  What follows is a short excerpt from her talk titled “Honoring The Candlelight Revolution In A Time Of Looming War In Korea” that was given at the People’s Congress of Resistance at Howard University in Washington, D.C., in mid-September: 

The U.S.-North Korea Conflict: The Final Stage

Military tension between North and South Korea has always been headline news in Korea. Every year in March and August, when the U.S. and South Korean militaries conduct their massive military exercises, tensions escalate, and each time, people in Korea experience renewed fear: “Maybe this time, it will really lead to war.”

The U.S. and South Korean militaries say these are routine exercises, but they deploy weapons of mass destruction, rehearse the occupation of North Korea, and simulate real-war scenarios as well as the decapitation of the North Korean leadership. North Korea has strongly objected to these exercises, but this has been going on for a long time.

The Korean peninsula has always lived with the imminent threat of war. But until recently, it never made headline news in the United States.

I’ve been seeing the headlines in U.S. news in the few days I’ve been here: “Kim Jong-un, North Korea, missiles….” This ironically pleased me because finally what was once considered only a problem of the Korean peninsula has now become a U.S. problem. Now that the war threats are acute, it has finally become headline news in the United States.

It is the United States that has conducted the greatest number of nuclear tests, possesses the greatest nuclear arsenal, and has actually dropped atomic bombs on a civilian population. North Korea is in the stage of developing and testing nuclear weapons, opposes U.S. aggression and sanctions, and demands a peace treaty. Which party is the real threat?

For the first time in a long time, defending the U.S. mainland from the threat of nuclear war has become a priority policy agenda for the U.S. government. Of course, news about North Korea must be distressing for the people who live in the United States.

But it is the U.S. government that has created this situation, and the solution is quite simple. It is to realize a peace agreement between the United States and North Korea.

The more the United States piles on sanctions against North Korea through the UN, the more North Korea will become hostile and the two countries will inch closer to war. And the more this crisis intensifies, the U.S. government will sell more weapons to South Korea and increasingly meddle in South Korea’s internal affairs.

For the past sixty years, since the Korean War and the 1953 signing of the Mutual Defense Treaty between South Korea and the United States, South Korea has been a military outpost for the United States. The so-called U.S.-ROK alliance seriously undermines the sovereignty of South Korea. The forced deployment of the U.S. THAAD missile defense system is a case in point.

We demand the following:

1. The United States must end sanctions against North Korea, which are an act of war.
2. North Korea and the United States must sign a permanent peace agreement.
3. U.S. forces in Korea should withdraw from the Korean peninsula along with their weapons of mass destruction.
4. The United States must stop meddling in South Korea’s internal affairs.
5. Lastly, we must build enduring solidarity for peace in Korea and across the world.

 

You can read her entire speech and learn more about the Minjung Party of South Korea here, on the Korea Policy Institute website.

The Bipartisan Militarization Of The US Federal Budget

The media likes to frame the limits of political struggle as between the Democratic and Republican parties, as if each side upholds a radically different political vision. However, in a number of key areas, leaders of both parties are happy to unite around an anti-worker agenda.  Support for the military and an aggressive foreign policy is one such area.

On September 18, US senators approved the National Defense Authorization Act (NDAA) of 2018.  Donald Trump had proposed increasing the military budget by $54 billion.  The Senate voted 89-9 to increase it by $37 billion more than Trump sought.  In the words of the New York Times:  “In a rare act of bipartisanship on Capitol Hill, the Senate passed a $700 billion defense policy bill on Monday that sets forth a muscular vision of America as a global power, with a Pentagon budget that far exceeds what President Trump has asked for.”

The NDAA calls for giving $640 billion to the Pentagon for its basic operations and another $60 billion for war operations in other countries, including Iraq, Syria, and Afghanistan.  The House passed its own version of the bill, which included a smaller increase over Trump’s request as well as new initiatives such as the creation of a Space Corps not supported by the Senate.  Thus, the House and Senate need to reconcile their differences before the bill goes to President Trump for his signature.

It is clear that Democratic Party opposition to Trump does not include opposition to US militarism and imperialism. As Ajamu Baraka points out:

Opposition to Trump has been framed in ways that supports the agenda of the Democratic Party—but not the anti-war agenda. Therefore, anti-Trumpism does not include a position against war and U.S. imperialism.

When the Trump administration proposed what many saw as an obscene request for an additional $54 billion in military spending, we witnessed a momentary negative response from some liberal Democrats. The thinking was that this could be highlighted as yet another one of the supposedly demonic moves by the administration and it was added to the talking points for the Democrats. That was until 117 Democrats voted with Republicans in the House—including a majority of the Congressional Black Caucus—to not only accept the administration’s proposal, but to exceed it by $18 billion. By that point, the Democrats went silent on the issue.

It is important to keep in mind that, as William D. Hartung shows, “there are hundreds of billions of dollars in ‘defense’ spending that aren’t even counted in the Pentagon budget.” Hartung goes agency by agency to show the “hidden” spending.  As he notes:

You might think that the most powerful weapons in the U.S. arsenal — nuclear warheads — would be paid for out of the Pentagon budget.   And you would, of course, be wrong.  The cost of researching, developing, maintaining, and “modernizing” the American arsenal of 6,800 nuclear warheads falls to an obscure agency located inside the Department of Energy, the National Nuclear Security Administration, or NNSA. It also works on naval nuclear reactors, pays for the environmental cleanup of nuclear weapons facilities, and funds the nation’s three nuclear weapons laboratories, at a total annual cost of more than $20 billion per year.

Hartung’s grand total, which includes, among other things, the costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, and the interest on the debt generated by past spending on the military, is $1.09 Trillion.  In short, our political leaders are far from forthcoming about the true size of our military spending.

Militarization comes home

Opponents of this huge military budget are right to stress how it greatly increases the dangers of war and the harm our military interventions do to people in other countries, but the costs of militarism are also felt by those living in the United States.

For example, ever escalating military budgets fund ever new and more deadly weapons of destruction, and much of the outdated equipment is sold to police departments, contributing to the militarization of our police and the growing use of force on domestic opponents of administration policies, the poor, and communities of color.  As Lisa Wade explains:

In 1996, the federal government passed a law giving the military permission to donate excess equipment to local police departments. Starting in 1998, millions of dollars worth of equipment was transferred each year, as shown in the figure below. Then, after 9/11, there was a huge increase in transfers. In 2014, they amounted to the equivalent of 796.8  million dollars.

Those concerned about police violence worried that police officers in possession of military equipment would be more likely to use violence against civilians, and new research suggests that they’re right.

Political scientist Casey Delehanty and his colleagues compared the number of civilians killed by police with the monetary value of transferred military equipment across 455 counties in four states. Controlling for other factors (e.g., race, poverty, drug use), they found that killings rose along with increasing transfers. In the case of the county that received the largest transfer of military equipment, killings more than doubled.

Militarization squeezes nondefense social spending 

Growing military spending also squeezes spending on vital domestic social services, including housing, health, education, and employment protections, as critical programs and agencies are starved for funds in the name of fiscal responsibility.

The federal budget is made up of nondiscretionary and discretionary spending.  Nondiscretionary spending is mandated by existing legislation, for example, interest payments on the national debt.  Discretionary spending is not, and thus its allocation among programs clearly reveals Congressional priorities.  The biggest divide in the discretionary budget is between defense and nondefense discretionary spending.

The nondefense discretionary budget is, as explained by the Center on Budget and Policy Priorities:

the main budget area that invests in the nation’s future productivity, supporting education, basic research, job training, and infrastructure.  It also supports priorities such as providing housing and child care assistance to low- and moderate-income families, protecting against infectious diseases, enforcing laws that protect workers and consumers, and caring for national parks and other public lands.  A significant share of this funding comes in the form of grants to state and local governments.

As we see below, nondefense discretionary appropriations have fallen dramatically in real terms and could potentially fall to a low of $516 billion if Congress does not waive the sequestration caps established in 2011.

The decline is even more dramatic when measured relative to GDP.  Under the caps and sequestration currently in place, nondefense spending in 2017 equaled 3.2 percent of GDP, just 0.1 percentage point above the lowest percentage on record going back to 1962.  According to the Center on Budget and Policy Priorities, “That percentage will continue to fall if the caps and sequestration remain unchanged, equaling the previous record low of 3.1 percent in 2018 and then continuing to fall (see the figure below).”

Looking ahead

As the next figure shows, the proposed Trump budget would intensify the attack on federal domestic social programs and agencies.

If approved, it “would take nondefense discretionary spending next year to its lowest level in at least six decades as a percentage of the economy and, by 2027, to its lowest on that basis since the Hoover Administration — possibly even earlier.”  Of course, some categories of the proposed nondefense discretionary budget are slated for growth–veterans’ affairs and homeland security–which means that the squeeze on other programs would be worse than the aggregate numbers suggest.

No doubt the Democratic Party will mount a fierce struggle to resist the worst of Trump’s proposed cuts, and they are likely to succeed.  But the important point is that the trend of militarizing our federal budget and society more generally will likely continue, a trend encouraged by past Democratic as well as Republican administrations.

If we are to advance our movement for social change, we need to do a better job of building a strong grassroots movement in opposition to militarism.  Among other things, that requires us to do a better job communicating all the ways in which militarism sets us back, in particular the ways in which militarism promotes racism and social division, globalization and economic decay, and the deterioration of our environment and quality of life, as well as death abroad and at home, all in the interest of corporate profits.  In other words, we have to find more effective ways of drawing together our various struggles for peace, jobs, and justice.