Tuesday, July 31, 2018

Trump helps the rich get richer. Democrats have an issue.

We have an income distribution problem. Most of the increased income since 1970 has gone to the top 10% of income earners.


Click: inequality.org
Wages and incomes for lower and middle income people have been nearly flat for decades. The new GOP tax bill made the problem worse. It favored corporations, top income earners, and inheritors. 

Trump wants yet another tax cut for them.

Inequality has been growing since mid-century. The top 1% now gets 22% of the national income, up from 8%-10% during the post-WW2 decades. The rich get richer and the others struggle. We are back in the Great Gatsby pre-1929 bubble era on the concentration of wealth.

Progressive taxation helps ameliorate this. The structural problems remain (the gig economy, automation, foreign competition, reduced private sector unions) but the after tax result is that incomes are more equalized when we have progressive taxation.  The battle lines have been established, with constant tension between Democrats who advocate for more progressive taxation, and Republicans who have pushed to cut taxes for the wealthiest. 

This is a message the public understands. The 2017 tax bill was and remains unpopular for that reason. When it was passed only 17% of American thought it would help the middle class and only 29% of people liked the bill, measured by both Reuters and Quinnipiac. Click: Reuters
Click: Voters think it mostly helps the richest.

It is still unpopular, and for the same reason. Voters see a pattern and have integrated it into their minds: it helps other people, people richer than themselves.


Now Trump wants to make inequality worse, with a proposal to cut capital gains taxation. People who work and earn money pay taxes on the money they get. They pay Social Security taxes, Medicare taxes, and then regular income taxes on that money. That is called earned income and this pays at the highest rates, up to 37%, plus additional Medicare surcharge of up to 2.35%

Click: Oregonlive.com
Capital gains: When a taxpayer has an investment asset that gets sold at a profit the taxpayer pays either no taxes at all on the gain, or for the wealthiest, a 20% top tax rate. 

Earnings from work is taxed at a much higher rate than earnings from capital appreciation. Many voters are only dimly aware of this fact.

Who has significant capital gains? People with significant capital, i.e. wealthy people. Income from capital already gets favorable tax treatment, and Trump would make it an even better deal.  Some 97% of the benefit of the Trump proposal on capital gains would go to the wealthiest 10%.  Click: Wharton Study, March 2018

He would accomplish this by indexing the "cost basis" to inflation. Trump wants the IRS and Treasury to implement a change in the tax law by executive order--not legislation--by instructing the IRS to re-define the calculation of "basis,", i.e. by indexing the original cost of the asset to inflation, so the taxable gain would be less--often much less. Doing it by executive mandate creates its own controversy. Previous GOP presidents had considered this and concluded that it was an illegal usurpation of Congressional authority, but GOP legislators might not raise a fuss. Trump wants the "credit," and perhaps vulnerable Members of Congress can avoid the political fallout.

Trump is presenting Democrats with a good clear issue that is congruent with the current progressive direction of Democrats: reduce income inequality.

Trump has been better than Democrats at creating a simple, clear overarching message that clicks into place in the public mind. He denied the economy was recovering under Obama and said it was fake news and fake statistics. He said economic problems were due to foreign nations and illegal immigrants. He said liberal political correctness kept Democrats from caring or doing anything about it.  But he would do something, boldly, and stop foreigners taking advantage of us. He would make America great again.

Simple. It made sense to many voters as a diagnosis, a villain identified, and a cure.


Click: NY Times article

Democrats have an opportunity here. Now it is their turn. 

Voters understand that the changes in the economy in the past 4 decades have created winners at the top and strugglers among the bottom 80%. Democrats need a message with a diagnosis, a villain, and a cure. 

The diagnosis is that the vast majority of Americans are being hurt by a system that benefits the very top. The system is rigged in favor of capital, not earners. The privileged are protecting their own and the workers cannot get ahead, and indeed cannot get out of debt. The villains are Trump and the GOP Congress that is openly--flagrantly, even--creating even more benefits to the richest with the increased inheritance benefit, income tax cuts, and now capital gains tax cuts. They pretended to want to drain the swamp but in reality they are chest deep in the swamp, under the influence of their special interest donors. The cure is to elect liberal progressive Democrats who will reverse that by de-rigging the system, by restoring progressively to the tax structure so the wealthiest don't get away with paying a lower tax rate less than a struggling family with both adults working, which is what happens today, with the blessing of Trump and the GOP.

Voters would understand this. They already are primed to understand this by what they already know and think. 

Democrats have an issue if they spell it out clearly and forcefully.





7 comments:

Rick Millward said...

This sounds like a Kudlow whisper, I don't think Trump came up with it on his own. It might just be today's shiny object.

Democrats are terrified to utter the words "raise taxes", since Regressives have co-opted the tax discussion by using the "tax and spend" pejorative label. It would mean allying with Bernie so my guess is that this is not going to become an issue. You are right in that most people are removed from the issue of capital gains, having none, and politicians shy away because it only affects the donors. The hypocrisy of GOP "deficit warriors" isn't much of an issue either. So we will continue to be stuck in this loop of underfunded government continually under attack as being incompetent and wasteful as Republicans continually exacerbate the issue by cutting taxes, mostly for donors, whenever they can.

Just the suggestion of this rule, which may take some time to implement, will goose the market so whether it goes through or not it's going to help the Republicans as long as the economy is growing. Most voters, certainly Trump voters, have a hard time equating economic policy with their own finances because year to year they spend and borrow in a way that masks larger policy effects. They measure their wealth in terms of how many things they can purchase, not appreciable assets, so loose credit gives them the illusion of progress, until the overall system falters. If more Americans were savers they would immediately see that these policies would impact how much they can put aside and then it might matter more.

Up Close: Road to the White House said...

Good comment, Rick. Thanks.

Curt said...
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Anonymous said...

Curt, please explain how one does not pay any taxes on a $1M (or $10M) capital gain.

If the sale does not happen, there is only a gain on paper. No money is credited to the seller.

If the seller has tax-loss carry forward, gains can be ofset.

As noted elsewhere, if one pays taxes, tax cuts benefit those who pay the most. If one doesn't pay taxes, near impossible to benefit, except for earned income tax credits.

Curt said...
This comment has been removed by the author.
Curt said...
This comment has been removed by the author.
Anonymous said...

Curt, yes. Unrealized gains are not taxed. Your original wording implied that the owner doesn't ever pay a tax on a capital gain.

The casual reader may not understand this.

That gain on paper this year may disappear the next year, if the investor doesn't protect their portfolio.