A rising tide lifts all yachts.
Photo: Jabin Botsford/The Washington Post/Getty Images
In making their case for the president’s sweeping tax-cut package last year, Republicans made two major (and majorly ludicrous) promises: The law would neither increase the federal deficit, nor deliver the bulk of its benefits to the very wealthy.
“Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steven Mnuchin assured the public last September. That claim was echoed by the Republican Party’s preeminent “moderate,” Susan Collins, who informed Meet the Press that the tax cuts would “stimulate the economy, create more jobs,” and thus, “generate more revenue.” Meanwhile, President Trump insisted that “tax reform will protect low-income and middle-income households, not the wealthy and well-connected,” and National Economic Council director Gary Cohn vowed, “The wealthy are not getting a tax cut under our plan.”
Nearly a year later, Donald Trump’s experiment with supply-side economics confirmed the results of prior trials: Turns out, giving large tax cuts to the wealthy makes the rich richer, the government poorer, and ordinary Americans more or less unaffected (unless/until the lost revenue is recouped in cuts to social spending or public investment).
The congressional budget projects that the federal deficit will climb by 39 percent this year, as revenues from corporate taxation fall by 27 percent. In total, Uncle Sam will shell out $912 billion more this year than he collects in taxes.
And the GOP’s second promise isn’t holding up any better. Anyone familiar with arithmetic understood that the White House was lying through its teeth about the distributional implications of its tax plan. But the law’s effects have actually been more regressive than many on the left had anticipated. Although the idea that corporations would share their tax breaks with workers was always dubious, it was plausible that the law would produce a fiscal stimulus that tightened labor markets, and thus, lifted wages. And unemployment has, in fact, fallen to decades lows — but the inflation unleashed by Trump’s deficit spending has actually resulted in a decline in real wages (at least, by certain government measures).
Photo: The New York Times
These trends are likely to get worse before they get better — because the longer the tax law is on the books, the better the wealthy will get at exploiting its many, many loopholes. The biggest of these is the law’s special 20 percent tax deduction for income earned through “pass-through” businesses — i.e., businesses that are not set up as C corporations, but as partnerships or LLCs.
As Kansas’s experience amply demonstrated, this sort of provision encourages high-earning professionals to reclassify themselves as small businesses to avoid the top marginal tax rate. Republicans tried to preempt that maneuver by barring the owners of law firms and doctors’ offices from claiming the deduction if their household income is higher than $315,000 for married couples, or $157,000 for individuals.
But the thing about wealthy professionals is, they can afford to hire other wealthy professionals to help them artificially lower their annual income. On Wednesday, Bloomberg revealed that a growing number of small, professional services companies are reviving traditional pension plans to get their income below $315,000. The logic of this move is fairly simple: Whereas workers are only allowed to contribute $18,500 a year to 401(k) retirement plans, workers in their late 50s can contribute over $200,000 a year to “cash balance” pension plans. Large firms abandoned such plans long ago, since federal rules would require them to share such retirement benefits with all of their many workers. But medical offices and boutique law firms with just a handful of lower-level staffers can afford to do right by them and still make a killing off of tax savings. Bloomberg offers this example of how a typical owner of a small, professional business could profit off the scheme:
A 61-year-old married doctor with a practice earning $650,000 a year could set up a defined-benefit pension to get his taxable income under $315,000. He could put $268,000 in a cash balance pension, in addition to putting money in his 401(k) and contributing to employee retirement accounts, and get down to an effective tax rate of 20 percent, according to [retirement plan administrator] Kravitz’s calculations.
After several years of saving in a cash balance plan, recipients generally roll their account balance into an IRA and manage the money themselves. Most choose to do so since the IRA is a more cost-effective vehicle and they can invest more aggressively than in a cash balance plan. There’s no limit on how much users can roll over. They don’t pay taxes until they pull the money out, typically when they’re in retirement and in a much lower tax bracket.
The CBO did not take this maneuver into consideration when formulating its deficit projections. And the revival of traditional pensions is only one of the many tricks that tax advisers have developed since the law’s passage. Which is to say: In the field of tax avoidance counseling, the Trump tax cuts really have spurred a burst of innovation — all aimed at making the president’s promises about his signature legislative achievement even more mendacious than they already are.