How the Trump Tax Cuts Would Reshape (and/or Break) Our Economy

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Social engineers. Photo: Andrew Harrer/Bloomberg via Getty Images

The Trump tax cuts are zipping through Congress at the legislative version of light speed. House Republicans unveiled their plan for overhauling America’s tax code on November 2; they passed it two weeks later. The Senate GOP revealed its (actual) tax bill last Tuesday; Mitch McConnell plans to vote it out of the upper chamber the week after Thanksgiving.

The frenetic pace of the GOP’s tax “reform” push has left some of the party’s own members short of breath. “You’re rewriting a tax code for a generation, and you are doing it in ten days,” Republican congressman Peter King said Thursday. “In [1986], it took two years to put together a tax reform bill.”

King’s exasperation is warranted. A couple of weeks might be enough time for legislators, policy analysts, and voters to consider the legislation’s first-order effects: Whose taxes will go up, whose will go down, and how much revenue will be lost in the process. But it’s far too brief an interval for lawmakers (let alone, the public) to comprehend the broader consequences of those changes.

Tax policy is about a lot more than generating revenue. Every tax code rewards certain kinds of economic activity and disincentives others. In the United States, we are especially reliant on tax incentives for shaping our industrial policy and providing social welfare.

The tax bills sprinting through the House and Senate would restructure these incentives, in ways that the public scarcely appreciates, and that even experts need more time to fully understand.

This is what makes the Republican leadership’s haste so outrageous — and, also, unsurprising: When one examines the GOP bills’ likely effects, it becomes clear that extended exposure to sunlight won’t do the Trump tax cuts any favors.

Here’s a rundown of ten consequences those cuts could have for our economy:

1) Less home ownership (and, just maybe, another housing-market-fueled recession).
For the better part of a century, our government has made the promotion of home ownership a pillar of domestic policy. The Trump tax cuts represent a modest — but nonetheless, unprecedented — departure from this bipartisan consensus.

Both the Senate and House bills would double the standard deduction to $12,000 for individuals, and $24,400 for married couples. This will lead many Americans to stop itemizing their deductions, meaning they will have no use for the mortgage-interest deduction, which is the tax code’s primary incentive for home buying. According to the nonpartisan Tax Policy Center, the GOP bills could reduce the share of taxpayers who claim the mortgage deduction from 21 percent to 4 percent.

The House bill would also put a cap on the size of loans that qualify for that deduction at $500,000 — down from $1 million under current law — while eliminating the deduction altogether for second homes. On top of these changes, Americans would lose the ability to deduct some (under the House bill) or any (under the Senate one) of their property taxes.

On net, these measures are likely to reduce home values and push Americans toward renting instead of buying. It’s unclear how dramatic these effects will be — economists have had little time to study them.

Now, there are sound policy arguments for eliminating the mortgage-interest deduction, and encouraging renting over home ownership. But there are also sound reasons for opposing tax changes that would reduce the value of the middle class’s primary investment tool (housing), while increasing the value of the wealthy’s (corporate stocks). Regardless, GOP lawmakers have not even bothered to make the former or to rebut the latter. In fact, there’s been virtually no public debate about housing policy on Capitol Hill, even as Republicans are on the cusp of reshaping it.

The absence of open deliberation on this subject isn’t just contrary to democratic ideals — it’s also profoundly reckless. The downside risks of a decline in home values are immense, as anyone who was sentient nine years ago is surely aware. And some on Wall Street believe the Republican bills just might give the 2008 crisis a needless sequel.

The story goes like this: Ending the property-tax deduction would drastically increase the cost of homeownership in high-income tax states (a.k.a., where much of the nation’s high-value real estate is). As the annual cost of a home goes up, the value of that home goes down. According to a study commissioned by the (thoroughly biased) National Association of Realtors, eliminating this deduction alone would cause housing prices to dip between 10 and 17 percent. Vanity Fair’s William Cohan lays out one Wall Street executive’s worst fears about what could follow from that:

[A drop in home valuations that large] would wipe out a huge amount of homeowner equity, with the usual expected consequences: the sick feeling that comes from knowing that suddenly you are poorer, which can then lead to lower consumer spending, kicking off a recession. Furthermore, if the value of homes goes down, then whatever equity has been built up in those homes will also go down, and the ability to unlock that equity — through home-equity loans or reverse mortgages — will also decrease. Lower home values could also lead to problems — again — for the government-sponsored entities Fannie Mae and Freddie Mac that have guaranteed some home mortgages, which are secured by homes worth materially less. New problems for the G.S.E.s will make it harder for people to get mortgages, leading to a lower level of home ownership than already exists.

It’s possible that Cohan’s source is a Chicken Little. But congressional Republicans have made no effort to confirm that they aren’t about to bring down the sky.

2) An even more severe affordable-housing crisis.
Even as they depress home values for the upper middle class, the Trump tax cuts would actually make affordable housing harder to come by for nonaffluent Americans.

The demand for rental housing in the United States is growing at an unprecedented pace — while the number of affordable rental units is dropping by roughly 125,000 a year. The inevitable result of these developments: The rent is too damn high, and getting too damn higher.

Meanwhile, America’s public housing is becoming nigh uninhabitable. Cuts in federal funding have saddled our nation’s housing projects with a $49 billion backlog for basic repairs.

As of October, the Republican Party’s answer to these crises was to promote the use of private activity bonds (PABs). Such bonds function as an alternative to direct public financing of housing projects: Since interest income on PABs is tax exempt, investors are willing to buy them at very low interest rates, and this makes it relatively affordable for states, municipalities, and nonprofits to finance housing (and hospitals, infrastructure, and other public works) through the private capital market.

Today, PABs fund about half of all affordable housing development in the United States. Last month, Housing secretary Ben Carson told the Senate that the bonds were central to the administration’s vision for public housing.

And yet, the House GOP’s tax bill abolishes them, so as to reduce the deficit by $38.9 billion over the next decade — even as the legislation loses $1.3 trillion in revenue on its corporate-rate cut alone.

If that provision makes it into law, the supply of rental housing in the United States over the next decade would likely fall by roughly 1 million units, according to an analysis from the accounting firm Novogradac & Co.

(As of this writing, the Senate’s tax bill preserves PABs. In general, the upper chamber’s bill eliminates fewer deductions than the House’s. This is largely because the Senate version is less reliant on killing little deductions, since it fully eliminates the deductibility of property taxes — a measure that a critical mass of House Republicans say they oppose. Thus, if said House Republicans hold their ground, the abolition of PABs could make it into the final bill.)

3) More American manufacturing workers losing jobs to outsourcing and automation.
Right now, Uncle Sam taxes the profits of American corporations at the same top rate of 35 percent, no matter where on the planet that money is earned (statutorily, anyway). Most European countries, by contrast, only tax their firms’ domestic profits.

Both the Senate and House bills would move the United States in the direction of the European “territorial” system: Under the House bill, American companies would pay a mere 10 percent rate on the income of their high-profit foreign subsidiaries; under the Senate version, they would pay 12.5 percent on profits derived from intangible assets (i.e. intellectual property). Republicans have framed this as an “America First” policy — one that eliminates a source of competitive disadvantage for U.S. companies.

But if this quasi-territorial system looks protectionist from the standpoint of owners, it appears to be the worst kind of globalist from the perspective of workers. After all, if American companies need to pay a 20 percent tax rate on domestic earnings — but far less on those of their overseas affiliates — then the incentive to shift investment and earnings into foreign operations becomes even greater. As Rebecca M. Kysar, a professor of tax law at Fordham University, explains:

Faced with a 20 percent rate at home and a 12.5 percent (or less) effective rate on income earned abroad, companies would still be encouraged to move jobs and profits offshore … Other dynamics worsen the shifting problem. Because of the mechanics of the formula for calculating the minimum tax, the tax can be reduced by moving assets overseas … So, rather than paying 20 percent or even 12.5 percent on income earned in the United States, companies will move investment offshore to a tax haven until the global foreign tax rate is blended down to the minimum rate, avoiding paying American taxes altogether. In other words, the United States loses out on revenues and investment.

But the Republican bills don’t just encourage American companies to ship jobs overseas — they also increase the incentive to replace workers with robots. Both bills include “Full and Immediate Expensing” — a provision that allows companies to write off the cost of new capital investments right away, rather than when they sell those assets. Some economists expect this change to ramp up investment in new machines — and, thus, automation.

With a robustly redistributive welfare state, and full-employment labor policies, this could be a beneficent development. Everyone could, theoretically, benefit from the productivity gains of robotization. But, in our current system, Rust Belt manufacturing towns most certainly have not benefited — as Donald Trump once loved to lament.

4) An even more beleaguered American labor movement.
In addition to accelerating the offshoring and automation of American jobs, the Trump tax cuts would expedite the decline of trade unions in the United States. So-called “right-to-work” laws already hamper unionization in much of the U.S., by allowing workers in unionized shops to benefit from collective bargaining, without paying dues — an arrangement that can starve unions of the funds they need to survive. The House bill would increase the incentive for such “free riding” by ending the deductibility of union dues.

5) More Americans dying or going bankrupt for want of affordable health care.
In May, House Republicans believed that the medical-expense deduction was an effective and vital means of protecting America’s most vulnerable people. Paul Ryan was so passionate about this deduction — which allows severely ill, disabled, and elderly Americans to subtract much of their health-care costs from their taxable income — he called for dramatically expanding its scope in the American Health Care Act.

Now, he’s trying to end it, entirely.

Relatively few Americans use the medical expense deduction. But those who do — nursing-home residents, people with illnesses or disabilities that require chronic, expensive care — often rely on the benefit for financial solvency. Unfortunately for them, sparing such Americans from bankruptcy is (ostensibly) less important, in Ryan’s view, than channelling $144 billion more dollars into corporate tax cuts over the next decade.

The Senate’s tax bill does preserve the medical-expense deduction — but still sacrifices nonaffluent sick people on the altar of supply-side tax cuts. Mitch McConnell’s bill repeals Obamacare’s individual mandate, the tax penalty that Americans must pay if they choose to go without health insurance. This would raise premiums on the individual market by 10 percent in the near term, and swell the ranks of the uninsured by 13 million by decade’s end, according to the Congressional Budget Office.

Leaving 13 million more people without health insurance would increase the number of preventable deaths in the United States by roughly 15,600 people per year, according to the best available research.

But doing so would also save the government more than $300 billion over the next ten years. And Senate Republicans need that money to pass a permanent, 15-point cut in the corporate rate without the Democrats’ help.

6) Fewer non-rich people getting graduate degrees.
The House GOP’s plan would turn graduate students’ tuition waivers into taxable income. This will have the effect of increasing an ordinary American PhD candidate’s tax burden by nearly 400 percent. As Wired explains:

The annual stipend for a PhD student in Carnegie Mellon’s school of computer science is about $32,400. The university covers the student’s $43,000 tuition, in exchange for the research she conducts and the courses she teaches. Under current law, the government taxes only a student’s stipend; the waived tuition is not taken into account. But under the GOP bill, her annual taxable income would rise from $32,400 to $76,234. Even factoring in new deductions also included in the proposal…her taxes would amount to $10,209 per year—nearly four times the amount under current law. That would slash her net annual stipend by 25 percent, from $29,566 to $22,191.

The House bill also repeals the student-loan-interest deduction, which allows middle-income borrowers to subtract up to $2,500 from their tax bills. The downside of this provision would be ameliorated somewhat by the plan’s doubling of the standard deduction.

Nonetheless, taken together, Ryan’s bill would deepen higher education’s affordability crisis. This would not only impact nonaffluent young people hoping to pursue their intellectual ambitions and/or move up the socioeconomic ladder. It would also affect society more broadly — when you change the socioeconomic composition of the academic elite, you influence the kind of research that does and doesn’t get done.

7) More obstacles to progressive governance on the state level.
Both the Senate and House tax bills would eliminate the deductibility of state and local income taxes. And, as already mentioned, the upper chamber’s version also ends the deductibility of property taxes, while the House bill restricts it.

The immediate effect of both these measures is to increase the tax burden of upper-middle-class families in high-tax (i.e. deep-blue) states. By itself, the idea of affluent households paying a bit more taxes might not trouble progressives too deeply. But such a change also threatens to undermine the progress that liberals have made toward achieving social democracy on the state level.

New York recently established paid family leave, free public college, and, in New York City, universal prekindergarten. California boasts one of the most generous safety nets in the country, and is making significant investments in renewable energy. Sustaining these programs requires (relatively) high state and local taxes — while the federal government can run deficits, states can’t.

This last fact has always been an obstacle to state-level liberalism. But the state-and-local-tax deduction mitigates it: When affluent Californians can put (some of) the cost of funding their state’s public sector onto Uncle Sam’s tab, they’re less inclined to mobilize against progressive fiscal policies. Should they suddenly lose the ability to do that, such voters could move sharply to the right.

Thus, by eliminating that deduction, Republicans don’t just gain revenue to offset corporate cuts — they also hamper progressive governance in states where they otherwise have little power to do so.

8) Less research into rare medical problems.
One of the (many) problems with relying on the private sector for pharmaceutical research and development is that for-profit firms have little incentive to discover cures for rare diseases, which, by definition, have limited market appeal.

Right now, our tax code compensates for this by providing drug companies with a tax credit that they can spend on clinical testing for pharmaceuticals that treat rare diseases. The House bill would eliminate that credit.

9) More rich people sending their kids to private school.
Currently, Americans can save money for their children’s college educations in tax-advantaged savings plans. Republicans would allow (wealthy) parents to use up to $10,000 from those plans on tuition at private K-12 schools. This could exacerbate inequality in education — and disinvestment in public schools — as more wealthy families move their children into private institutions.

10) Owners of extreme wealth enjoying even greater power over our political system.
The Trump tax cuts’ primary, first-order effect will be to make the idle rich even richer. This is because the lion’s share of these cuts will go to corporate shareholders, owners of closely held firms — who don’t work at those firms — and the heirs of opulent fortunes. In other words: It is a plan to radically increase the share of economic growth that accrues to people who don’t have to work for a living.

Republicans claim that the second-order effect of these changes will be a boom in business investment — and thus, more jobs and higher wages for working people. But there’s virtually no reason to believe that this is true. To name just one piece of counter-evidence: When a Bank of America Merrill Lynch survey asked American CEOs what they would spend a tax windfall on last summer, the top three responses were paying down debt, stock buybacks, and mergers — while investments in new factories and research fell toward the bottom of the list.

Since 2000, the growth of income inequality in the United States has been driven, primarily, by sharp increases in the passive (i.e. capital) income of the super rich. The Republican plan would inflate such income further still.

And this, more than anything else, is why the true costs of Trump’s giveaway to the one percent can’t be measured in lost revenue alone: Vast economic inequality erodes social trust, stymies growth, and enables a tiny, oligarchic elite to exert so much influence over our politics they can get Congress to pass their preferred legislation before the public even has time to learn what it does.

How the Trump Tax Cuts Would Reshape Our Economy