The Progressive Ensign

insights and analytics to build an economy that works for all

Category: The Elite

IRS Takes Care of Wealthy in Pass-Through Tax Policy

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: calwatchdog.com

The IRS was tasked after passage of the Tax Bill last winter with defining which businesses and owners would qualify for a special 20 % deduction on pass through income.  Interpretations of the pass through 20 % deductions where announced yesterday.  As maybe expected the law favors the rich, and even gives the Trump Organization new benefits which the president can take advantage of as he still holds title to his businesses and properties while in office.

Half of all U.S. businesses use pass-through income structures with 70 % of the income flowing through to the top 1 % in wealth.

Sources: Joint Committee on Taxation, Center on Budget and Policy Priorities – 5/10/18

The tax bill provision for pass through deductions builds on a tax law that is already biased toward the wealthy who own businesses structured to maximize tax benefits. The Center on Budget and Policy Priorities (CBPC) notes due to a byzantine design opportunities for gaming are rampant, “ it could wind up being even more expensive and delivering larger tax cuts to high-income filers than current estimates show because it creates a significant gaming opportunity:  high-income individuals may now be able to secure very large tax savings by converting their labor income into pass-through income to take advantage of the new deduction.”

The CBPC estimates that over $50 billion will be lost in tax revenue each year for the nine years the law is in effect for a total of $450 billion of the $1.5 trillion deficit from the bill. When the law was written arbitrary winners and losers were chosen for example excluding architects and engineers.  New York University law professor David Kamin observed in recent congressional testimony, “This pass-through deduction represents the very worst kind of tax policy, picking winners and losers haphazardly in a complex tax provision, and then generating significant incentives for people to rearrange their businesses to try to get on the right side of the line.”

Next Steps

We have consistently noted that the Tax Bill of 2017 favoring the rich with 80 % of the tax benefits will torch taxpayers to the tune of $1.5 trillion deficit to be financed by bonds. This abusive blatant giveaway to the rich is a disaster both in terms of income equality and economics.  Our generation and many generations to come will be paying off bond interest instead of investing funds in education, infrastructure projects, job training, Heartland initiatives, medical care and apprenticeship programs.  The bill needs to be repealed, applying taxes to corporations and the wealthy to invest in programs that benefit the 80 % not the top 1 % in income.

US Steel and Nucor Use Tariffs To Monopolize Markets

 

Image: vice.com

Two major steel companies, US Steel and Nucor, last March lobbied the Trump Administration to post tariffs on imported steel at 25 %. They are now pressuring the Administration to deny any requests for waivers from the tariffs.  Over 1,600 applications have been filed for exclusion from the tariff provisions which blanketed the world including the European Union, Mexico, Canada, Japan and China.  The two steel giants are in fact creating a monopoly for their steel products in the U.S.

In order to protect about 33,000 steel worker jobs, several million jobs in steel using industries are jeopardized by the tariffs:

Sources: U.S. Bureau of Labor Statistics, Bloomberg – 3/2/18

Nucor paid for a film by presidential advisor Peter Navarro, when he was a professor at UC Irvine on the threat of China imported steel being dumped onto U.S. markets.  Certainly, there are issues related to China trade practices but is using 25 % tariffs on all imported steel even from allies going to force China to change their export practices?

Next Steps:

Companies that use steel in their products are reeling from soaring price increases in steel and sourcing issues because U.S. steel producers do not make the products they need.  Elite corporate CEOs are running their companies via the U.S. government to pick winners (themselves) and losers over 1,600 companies being denied exemptions to run their businesses successfully and keep jobs here in the U.S. Now, many firms are planning on moving operations to countries closer to their customers to avoid the tariffs all together – thus moving jobs out of the U.S. It seems already the tariff plan has backfired, moving jobs out of the U.S. and jeopardizing millions of jobs.  We should not be tolerating this state of oligarchy, where two major companies setup tariffs to their exclusive benefit in while damaging thousands of other companies businesses and threatening millions of U.S. jobs.  It is the job of our federal government to not pick winners and losers but to establish fair markets for innovation and entrepreneurship to triumph. The tariffs need to be lifted and an intelligent trade strategy in collaboriation with our allies to end China steel dumping practices be implemented.

Do We Need A $100 billion Tax Cut for the 1 % ? No.

Image: post.gazette.com

That’s right, the GOP Administration is working on jamming through before the next Congress is seated in January a capital gains tax cut of which almost 90 % of the benefits would go to the top 1 % in income.  Remember it is this same 1 % who received 80 % of the benefits in the Tax Cut bill Congress passed last winter.  We now have a deficit over the next 10 years added by that Tax Cut bill of $1.5 trillion. The federal government faces the largest deficit since the 2008 Great Recession and will be issuing nearly $800 billion in bond financing to make up the difference in the 2nd half of this year.

The following analysis by the Wharton School of Business shows that indexing capital gains to inflation would provide a windfall to the top 1 %:

Sources: Wharton School of Business, The Washington Post – 7/31/18

The Administration knows that it will be difficult to pass another tax cut for the rich through the Senate where 60 votes are needed.  So, Treasury Secretary Mnuchin noted at a Latin American conference last week,  “we are studying that (inflation indexing capital gains) internally, and we are also studying the economic costs and the impact on growth.” Many experts on tax law find going around Congress to be illegal.  The Bush administration in 1992 reviewed the legality of the Treasury department unilaterally making the inflation indexing change and found the department was not authorized to make such a major change in tax law.

Next Steps

We have the lowest level of corporate tax receipts in 75 years, and the tax level on the top 1 % is the lowest in history.  We don’t need to be giving the wealthy another tax cut, we know that trickle-down economics never worked.

Sources: World Inequality Database, The Washington Post – 7/31/18

What has really happened since the Reagan years is that tax policy, deductions, asset inflation, executive stock compensation deductions and other financial gimmicks has amounted to a ‘tsunami up’ phenomenon. Actually, our country has the highest level of concentration of wealth in the top 1 % since 1929. Remember from your history books, what happened after 1929 and the Smoot – Hawley trade wars? The Great Depression.

The real priority for our federal government is to Make America a Democracy Again (our post on the political power of the 1%), focusing on how to create basic economic opportunities for all; access to high quality healthcare, reducing student debt, investing in higher education and apprenticeship programs, welcoming immigrants to build our labor force, and investing in our Heartland to bring rural regions of the country into the economic mainstream.

The Elite Makes U.S. A Land of Renters

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: marketplace.org

Household formations have been trending down over the past 30 years from its peak reached after a continual increase since 1955.  More than a quarter of possible home buyers are unemployed, underemployed, saddled with student debt or living at home with their parents making home buying a challenge. The other possible household formation group is making such low income they are forced into renting as the only budgetary alternative.

Source: Real Investment Advice – 7/13/18

The housing market has shifted drastically toward high end homes for the wealthy, not first time buyers, and multi-unit rental units for investment.  As investors look outside the stock market for high returns rental units have been an excellent income stream with income streams totaling $800 billion per year.

So, while wages for the 80% in income, non – supervisory workers have been stagnant; profits, stock buybacks, executive salaries and other financial gimmicks have provided the top 10 % with 90 % of national income since 2008.  In effect, we have become a nation of renters due to two factors: wages being held down, and inflated assets benefiting the rich.

Source: Real Investment Advice – 7/13/18

Corporate executives do not make their stock price and profit targets by raising wages resulting in reduced profits.  Wages as a cost cut immediately into profits, which a CEO wants to stay clear of having to explain to the Board or shareholders.  Does it really make sense that workers are not getting wage increases in a job market with the lowest unemployment rate in 10 years? Until workers get enough countervailing power in wage negotiations worker wages are likely to stay stagnant. No, executives are allocating profits, offshore and tax cut funds to benefit themselves and shareholders while workers are left out of the economic feast.

Next steps:

We have outlined multiple reasons for lack of wage increases in earlier posts, the bottom line is executives don’t want to give raises beyond inflation.  Proposals like Senator Cory Booker’s Worker’s Dividend Act to share stock buyback dollars with workers is a good start, yet the sustainable solution lies in corporate governance, where activities shareholders required management to give workers their fair share of profits; for example if executives receive a 5 % cut of the profits workers should receive the same 5 % as well.

To give first time home buyers a boost, we need to reduce student loan debt by re financing their rates to the rates that the Federal Reserve offers bank.  After all we are ‘banking in the future’ of our young people.  Where possible student debt could be forgiven for domestic service corps work or working with corporations who hire graduates to reduce their loans as part of the offer package.  Government mortgage  agencies need to support first time buyers with reduced down payment requirements and other incentives.  To incentivize home builders set asides of homes for first time buyers need to be established to create inventory from which a first time buyer can select their home.

Increasing household formations should be a top priority for policy makers and the wealthy alike.  When household formations are moving ahead, furniture, appliances, home improvement hardware, and thousands of product and services are purchased. Plus, when people own a home they have a piece in the future of their neighborhood, schools and community which will increase property values for all.

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