A Tax Reform that Dramatically Increases America’s Social Divide

The so-called tax reform passed by Congress on Wednesday and promoted by Donald Trump risks repeating well-known episodes of American history: notably the massive tax breaks under Ronald Reagan, which prompted the White House to accept tax hikes just a year later.

In and of themselves, tax cuts are nothing to be ashamed of. That the law lowers the corporate and individual tax rates simply perpetuates ideological differences that are often expressed in a democracy. Tax cuts can thus be completely legitimate.

The Tax Cuts and Jobs Act that Congress passed on Wednesday, however, looks nothing like a normal law. Drafted on the sly, without input from the Democratic opposition, it undoubtedly renders the worst service to a country where inequality has exploded since Reagan decided, back in the 1980s, to attack the welfare queens and social programs he inherited from Lyndon Johnson’s Great Society.

Between a vibrant Silicon Valley and the extreme poverty in parts of Alabama, the United States is at the forefront of globalization, yet sometimes has nothing a developing country would envy. The tax reform was not designed to help the middle class, despite what Trump and House Speaker Paul Ryan proclaim. Instead, it will dramatically increase America’s social divide.

A Law for Friends

Low-income and job-seeking voters who wanted to see Trump as their savior are on one side. But the U.S. president and his colleagues in Congress have created a tax law that mostly benefits donors and wealthy contributors to the Republican Party. And it primarily serves the interests of those in Congress and the president himself. Take Bob Corker, a senator sometimes described as being the voice of reason for the GOP. The Tennessee Republican declared his opposition to the reform until recently. For Corker, a “fiscal hawk,” the law posed a major risk for the United States, adding to $20 trillion of astronomical debt.

But a few days before the vote, Corker came back to the fold. The unconfirmed reason: Congress had introduced a new clause providing tax breaks for the real estate gains Corker lives on. The result: He will pay about $1.2 million less in taxes. As for Trump and his son-in-law, Jared Kushner, both previously very active in real estate, they should also profit handsomely. We understand why the U.S. president still refuses to release his tax returns, contrary to what all of his predecessors have done.

Plutocracy

As Vox journalist Ezra Klein has noted, Trump and the Republicans have betrayed the American people by failing to actualize the election campaign’s populist message to help those left behind by globalization and technology. Instead, they are about to make America a plutocracy. If social programs, such as Medicare (state health insurance for people over 65), Medicaid (health insurance for the poor) and Social Security (pensions) need reform to stay on a sustainable path, Trump and the Republicans’ reform can be viewed as an attack against the state.

Together with his Education Secretary Betsy DeVos, Trump is dismantling U.S. public schools, which are already struggling. He is undermining the guarantee of a prosperous future economy: skilled workers ready to adapt to the demanding world of the 21st century. He has done this already with scientists, cutting resources and firing those who are working to combat climate change within the federal Environmental Protection Agency. His mantra is to maintain or even strengthen what is already the most powerful army in the world.

Arbitrary Tax Code

When the U.S. president speaks of the “biggest tax decrease … in … history,” he is perpetuating a long-lasting lie: It is not a question of reform, but rather of holding up the shrinking middle class. Trickle-down economics, the economics of supply and demand, does not have the mechanical growth effects that Republicans predict it will have. The U.S. Tax Code, however, urgently needs to be revised, as it is incomprehensible and arbitrary. A few years ago, billionaire Warren Buffett demonstrated the absurdity of the tax code, pointing out that he paid less in taxes than his secretary did. But the law passed by Congress and undoubtedly promulgated by the White House does not reform anything at all. It just further polarizes a country already divided in half.

The timing of this tax offensive is also inconvenient. In 2009, Republicans went out of their way to deny Barack Obama a $1 trillion stimulus package, instead limiting the package to $800 billion. But America was going through its worst economic and fiscal crisis since the 1930s. Obama’s plan made sense.

Little Room for the Fed to Maneuver

In 2017, the U.S. economy is doing relatively well, with almost full employment (4.2 percent unemployment) and steady growth. The effect of the Tax Cuts and Jobs Act on growth may be marginal in view of the massive impact it could have on the national debt. The Federal Reserve Board may even need to temper the eventual overheating if it gets too high. But in the event of another recession, America will be even less well prepared. Thanks to several years of extremely low interest rates, the Fed’s room to maneuver will be limited. With higher debt comes even less flexibility.

If the Republicans’ growth forecasts do not hold and the debt explodes, they can expect a Herculean task: convincing Americans that taxes must be raised and spending reduced. It is a task that Reagan took on in 1982, a year after he pushed for massive tax breaks that were supposed to be “self-financing.”

Finally, the tax reform, which also allows for oil drilling in protected territory in Alaska, contains another aspect that could complicate matters for Republicans. As Trump drove home on Wednesday, it repeals Obama’s health care law mandate to have health insurance. But medical coverage under the law passed during the Obama presidency is now very popular. By repealing this obligation (the individual mandate), the reform will deprive some 13 million Americans of health insurance. It will also ensure that future problems, like the explosion of disease premiums, will no longer be the Democrats’ responsibility, but rather the responsibility of the Republicans and the White House. The November 2018 midterm elections could reshuffle the cards.