The Top Ten Fallacies About the New Trump-GOP Tax Act

Tom Williams/CQ Roll Call via AP Images

House Speaker Paul Ryan, House Majority Leader Kevin McCarthy, and House Majority Whip Steve Scalise, conduct a news conference on the GOP tax bill in December 2017.

This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here

1. It Will Pay for Itself. 

Even though the Trump tax cuts were originally estimated to lose $1.5 trillion in revenue, supporters claimed the shortfall would be made up through greater economic activity generating more tax revenue at lower rates. No reputable economist agreed. Now, the latest estimate from the Congressional Budget Office is that the Tax Act will in fact add $1.9 trillion to the nation’s debt over the next ten years.

We also now know how Trump really intends to pay for his tax cuts: with $1.7 trillion in spending cuts to vital public services, including Medicare, which he promised he’d never touch. Other funding cuts in Trump’s proposed budget include more than $750 billion over ten years from Medicaid (also supposedly sacrosanct under Trump) and subsidized private health insurance; $200 billion–plus from nutrition assistance; and more than $70 billion from low-income disability programs. Millions of Americans would lose services ranging from health care to tuition aid, from housing to food.

 

2. It’s Meant to Help Working Americans. 

Trump said of his tax plan last fall: “Our focus is on helping the folks who work in the mailrooms and machine shops of America—the plumbers and the carpenters, the cops and the teachers, the truck drivers and the pipe fitters.” In reality, once the Tax Act is fully phased in nine years from now, 83 percent of the benefits will go to the wealthiest 1 percent of American households. Nearly 70 million households making less than $100,000 a year—including plenty of carpenters, cops, and teachers—will pay higher taxes than they would have paid under the old tax law.

 

3. It Will Boost the Economy and Create Jobs.

Last November, when the basic outline of the Tax Act was clear, a survey of prominent economists found only 1 out of 42 believed it would substantially increase economic growth. Separate surveys of top corporate finance officers and Wall Street investors found equal pessimism that the tax plan would spur investment or hiring. Over recent decades, economic growth has actually been stronger after tax increases on the wealthy than after cuts.

 

4. The Corporate Tax Cuts Will Raise Worker Pay a Lot. 

One of President Trump’s top economic advisers claimed the corporate cuts would raise average household income by at least $4,000. “There really shouldn’t be much doubt about that,” confidently opined economist Kevin Hassett. Other economists were highly skeptical. Long before the tax cuts, big corporations held record amounts of cash with which they could have boosted wages if they wanted to. And in fact, rather than raising pay, corporations are so far using their tax cuts mostly to further enrich wealthy shareholders through stock buybacks and dividend increases.

 

5. It’s Already Responsible for Widespread Worker Bonuses and Wage Hikes. 

As of mid-June, only 4 percent of workers from just 400 employers (out of the nation’s 5.9 million) had received any kind of payout linked to the tax law. Three-quarters of those payouts were one-time bonuses, not permanent wage increases. Moreover, the $7 billion that workers are getting this year represents just 9 percent of the $77 billion in 2018 business tax cuts estimated so far. The vast majority of the tax cuts are instead going to wealthy CEOs and shareholders: Corporations have announced $484 billion in stock buybacks since the tax plan passed—69 times more than workers are getting in bonuses and raises.

 

6. The Corporate Tax Cuts Will Keep Jobs in America. 

In pushing tax changes last summer, House Speaker Paul Ryan complained that the then-current system “encourages companies to move operations overseas, to make things abroad, and to then sell them back into the U.S. This makes no sense, and it is costing us jobs.” But rather than curbing offshoring, the Tax Act actually creates new and stronger incentives to outsource operations and jobs, including by taxing foreign profits at half the rate of domestic earnings.

 

7. Before the Tax Act, U.S. Corporations Paid the Highest Taxes in the World. 

This claim is based on the former statutory income tax rate of 35 percent. (The new rate is just 21 percent.) But in reality, because of all the loopholes in the tax code, big corporations on average often paid less than half the official rate, and this “effective rate” was fully competitive with those of other advanced economies. The share of federal tax revenue coming from corporations dropped by more than two-thirds over the past 65 years, and some big companies like General Electric frequently went years without paying any federal income taxes at all.

 

8. It’s a Boon to Small Business. 

Republicans claimed that cutting the taxes paid by non-corporate businesses like partnerships and LLCs was intended to protect the “hard-earned business income of Main Street job creators.” But even after “guard rails” were inserted in the final bill to prevent the even bigger giveaway to wealthy business owners envisioned in preliminary plans, the real winners from the new rules continue to be huge enterprises like the Trump Organization, which is a collection of 500 such “pass-through” entities

 

9. It Simplifies the Tax Code. 

As the law took shape, we heard less of the GOP’s initial dubious claim that its plan would so simplify taxes that returns could be filed on a postcard. Daniel Shaviro, a tax professor at NYU School of Law, has declared that the new law’s rules for pass-through firms—which make up 95 percent of all businesses—have made the tax system “less efficient, less fair, and more complicated.” After years of cutting the IRS budget, congressional Republicans have been forced to give the agency more money to help Americans navigate the complex new law and combat the exploitation of fresh loopholes.

 

10. It Doesn’t Help Donald Trump. 

The president claimed his tax plan would “cost me a fortune”—but the opposite is undoubtedly true, though we can’t know precisely because he refuses to release his tax returns. But it’s clear that cuts to the top individual rate, the corporate rate, and the pass-through rate all benefit Trump enormously, and the weakening of the estate tax will be a boon to his family. The new law not only failed to close any of the many real-estate loopholes that Trump has exploited for years, it actually opens new ones that are particularly beneficial to the president.

The new lower “pass-through” rate was meant to be denied to organizations like Trump’s that have relatively few employees and lots of passive income, since the new rate was supposed to reward “job creators” pursuing real business activity. But dutiful Republican lawmakers made sure Trump benefited from the generous new tax regime. They allowed certain kinds of passive income to qualify (rents, royalties, and licensing fees—Trump’s bread and butter) and let heavy capital investment (such as in real estate) substitute for large-scale employment. 

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