tag:theconversation.com,2011:/au/topics/trump-tax-plan-38226/articlesTrump tax plan – The Conversation2024-03-26T12:40:26Ztag:theconversation.com,2011:article/2205742024-03-26T12:40:26Z2024-03-26T12:40:26ZTrump-era tax cuts contributed to a decline in higher ed giving, with fewer Americans donating to colleges and universities<figure><img src="https://images.theconversation.com/files/580516/original/file-20240307-22-jtbky3.jpg?ixlib=rb-1.1.0&rect=165%2C141%2C7710%2C4498&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How many college grads will frequently donate to their alma mater?</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/los-angeles-ca-ucla-holds-a-commencement-ceremony-in-pauley-news-photo/1499075648?adppopup=true">Sarah Reingewirtz/MediaNews Group/Los Angeles Daily News via Getty Images</a></span></figcaption></figure><p>Policy changes brought on by the <a href="https://www.irs.gov/tax-reform">Tax Cuts and Jobs Act</a>, which former President Donald Trump signed into law at the end of 2017, appear to have led many small-dollar donors to give less money to colleges and universities – or to stop giving altogether.</p>
<p>Individual donations, whether from graduates or people who didn’t attend those colleges and universities, declined by 4% from US$44.3 billion in the 2017-2018 academic year to $42.6 billion two years later. That’s what <a href="https://scholar.google.com/citations?user=KWFRsxEAAAAJ&hl=en">my colleague</a>, Sungsil Lee, <a href="https://scholar.google.com/citations?user=_iTiG64AAAAJ&hl=en">and I</a> found when <a href="https://doi.org/10.1080/1360080X.2023.2288735">we examined a decade of data</a> regarding charitable contributions to 660 colleges and universities and adjusted the totals for inflation. </p>
<p>We also found that the Trump-era tax reforms led to a 7% decline in the number of individual donors, after controlling for other factors such as enrollment size and tuition. </p>
<p>To estimate the impact of the tax changes, we analyzed data that the Council for Advancement and Support of Education, a nonprofit, collected in its annual <a href="https://www.case.org/research/surveys/case-insights-voluntary-support-education">Voluntary Support of Education Survey</a>.</p>
<p>We analyzed data from 660 public and private colleges and universities from the 2010-2011 to the 2019-2020 academic years – 12-month periods that run from July 1 of a given year through June 30 of the next.</p>
<p>Because we reviewed complete records for the number of donors and the total amount of donations over the decade, we could observe what changes the tax policy reform may have spurred.</p>
<h2>Why it matters</h2>
<p>Many states have essentially <a href="https://www.cbpp.org/research/state-budget-and-tax/unkept-promises-state-cuts-to-higher-education-threaten-access-and">frozen their spending on higher education since 2008</a>, while the cost of running colleges and universities has increased. As a result, public institutions <a href="https://sheeo.org/wp-content/uploads/2019/04/SHEEO_SHEF_FY18_Report.pdf">rely more heavily on the money they get from tuition</a> <a href="https://www.clevelandfed.org/publications/economic-commentary/2017/ec-201705-trends-in-revenues-at-us-colleges-and-universities-1987-2013">and donors</a> than they used to. The declines in both the amount donated by individuals and the number of donors, however, fell more sharply for private institutions than for public ones.</p>
<p>Gifts from individuals, rather than organizations or companies, accounted for <a href="https://www.case.org/resources/voluntary-support-education-key-findings-2020-21">more than 40% of all the money donated</a> in the 2020 academic year – with much of that money coming from very wealthy people. Most of the $21 billion from individuals donations came in very large sums.</p>
<p><a href="https://www.irs.gov/newsroom/heres-a-quick-overview-of-tax-reform-changes-and-where-taxpayers-can-find-more-info">The Trump tax reforms</a>, by sharply increasing the standard deduction, led millions of taxpayers to stop itemizing their tax returns. That means far fewer Americans are deducting charitable donations from their taxable income today.</p>
<p>While more than 43% of all taxpayers with an adjusted gross income between $50,000 and $100,000 <a href="https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-complete-report-publication-1304">filed itemized tax returns for their 2017 earnings</a>, less than 14% itemized in 2018, according to the IRS.</p>
<p>Those who no longer itemize <a href="https://doi.org/10.1086/708172">have lost a tax break</a>, and for them, every dollar they give to higher ed or any charity has become more expensive.</p>
<p>Although <a href="https://www.case.org/system/files/media/inline/VSE%202022%20Key%20Findings.pdf">approximately 60% of donations to colleges</a> came from foundations and other philanthropic organizations, <a href="https://doi.org/10.2979/phileduc.1.1.02">these donations are highly concentrated</a> and primarily benefit a few dozen prominent universities. The decline of individual donations can be a particularly big problem for small colleges, we found. </p>
<p>To be sure, other factors, such as <a href="https://doi.org/10.1177/0899764018800791">economic trends</a> and <a href="https://doi.org/10.1007/s10734-020-00543-0">the stock market’s performance</a>, can influence giving too. </p>
<h2>What’s next</h2>
<p>We are now researching how colleges and universities are responding to the tax changes and whether their fundraising initiatives and promotional efforts are persuading more individual donors to give – even if they no longer can take advantage of the charitable tax deduction.</p>
<p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em></p><img src="https://counter.theconversation.com/content/220574/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jin Lee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Researchers who analyzed a decade of data detected a reduction in giving after millions of Americans stopped getting a tax break tied to charitable giving.Jin Lee, Associate Professor of Educational Foundations and Leadership, University of Louisiana at LafayetteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1235512019-09-13T18:29:19Z2019-09-13T18:29:19ZThe Senate filibuster explained – and why it should be allowed to die<figure><img src="https://images.theconversation.com/files/292468/original/file-20190913-8674-p6pzrj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The filibuster is like a stoplight that's always red.
</span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p>Sen. Elizabeth Warren <a href="https://www.npr.org/2019/09/12/760375754/what-is-the-filibuster-and-why-do-some-democrats-want-to-end-it">is the latest Democrat</a> to argue an arcane Senate rule governing debate stands in the way of passing a progressive agenda, such as meaningful gun control. </p>
<p>The procedure, known as the filibuster, allows a 41-vote minority in the Senate to block legislation. Its power has been steadily eroding, however, as both Democratic and Republican lawmakers create procedures to get around the roadblock to pass everything from the Affordable Care Act to President Donald Trump’s Supreme Court nominees. </p>
<p>Should the Senate move even farther toward being a legislative body characterized by majority rule rather than minority obstruction?</p>
<p>Many Democrats, including me, might resist anything that helps Trump and his GOP Senate majority pass their agenda. Yet as a <a href="https://jhupbooks.press.jhu.edu/content/invention-united-states-senate">scholar of the Senate</a> and advocate of responsible government, I believe the end of the 60-vote Senate would nonetheless be a good thing for the country – and conform to the founders’ intentions.</p>
<h2>The filibuster explained</h2>
<p>The filibuster, which comes <a href="https://www.senate.gov/artandhistory/history/common/briefing/Filibuster_Cloture.htm">from the Dutch word</a> for pirate, is embodied in Senate Rule XXII. It says cloture – a motion to end debate on a bill – requires a supermajority of at least 60 votes on most matters under consideration.</p>
<p>Although <a href="http://www.politico.com/story/2017/04/senators-urge-save-filibuster-237014">some lawmakers argue</a> the filibuster is what makes the Senate unique, a supermajority threshold is not what defines the legislative chamber.</p>
<p>As <a href="https://www.brookings.edu/book/politics-or-principle/">political scientists</a> and historians have noted over and over again, supermajority cloture is not part of – and cannot be derived from – the Constitution or any original understanding of the Senate. Elements such as equal representation by the states, six-year terms and a higher age requirement <a href="https://jhupbooks.press.jhu.edu/content/invention-united-states-senate">are what distinguish</a> the Senate’s style of deliberation and decision-making from the House.</p>
<p>In fact, although it may seem like the 60-vote filibuster has been with us forever, <a href="https://www.senate.gov/reference/reference_index_subjects/Cloture_vrd.htm">it’s actually only been around</a> since 1917.</p>
<p>Moreover, the protection of the minority, often cited as a justification for the filibuster, is of the system as a whole: the separate branches, the checks, federalism. It’s not the role of the Senate alone to protect minority interests.</p>
<h2>Filibuster erosion</h2>
<p>Over several decades, Congress has used dozens of legislative “carve-outs” that have eroded the filibuster and protected specific categories of legislation from minority obstruction in the Senate.</p>
<p>For example, lawmakers use a <a href="https://www.senate.gov/CRSpubs/445f5bac-e33d-403b-b78e-ab7d2610c421.pdf">“fast-track” procedure</a> to pass <a href="https://fas.org/sgp/crs/misc/R43491.pdf">trade agreements</a> and <a href="https://fas.org/sgp/crs/natsec/R43102.pdf">decide whether to close military bases</a>. This places a time limit on consideration and quashes minority obstruction in the Senate because a simple majority vote will be held at the end of the time restriction. </p>
<p>Increased use of <a href="https://www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation">budget reconciliation</a> for <a href="https://www.politico.com/magazine/story/2017/10/15/how-budget-reconciliation-broke-congress-215706">major legislation</a> is another carve-out. The <a href="https://www.ehealthinsurance.com/resources/affordable-care-act/history-timeline-affordable-care-act-aca">Affordable Care Act</a>, <a href="https://constitutioncenter.org/blog/will-the-legislative-filibuster-fall-along-with-obamacare">efforts to repeal</a> that law and the <a href="https://www.vox.com/policy-and-politics/2017/11/14/16634200/republican-tax-reform-byrd-rule">2017 Trump tax cut</a> are examples of this process. </p>
<p>In 2013, Democrats controlling the Senate took it a step farther and <a href="https://www.washingtonpost.com/politics/senate-poised-to-limit-filibusters-in-party-line-vote-that-would-alter-centuries-of-precedent/2013/11/21/d065cfe8-52b6-11e3-9fe0-fd2ca728e67c_story.html">voted to allow all nominations</a> other than for the Supreme Court to be approved by majority vote. This was the most important change in Senate standing rules – or, to be precise, in their interpretation – since at least 1975. It allowed Democrats to confirm a <a href="https://www.degruyter.com/downloadpdf/j/for.2015.13.issue-4/for-2015-0042/for-2015-0042.pdf">significant number of nominations</a> for President Barack Obama who were being blocked by the Republican minority. </p>
<p>Just over three years later, the Senate, now under GOP control, <a href="http://thehill.com/homenews/senate/327591-gop-triggers-nuclear-option-gutting-filibuster-in-gorsuch-fight">voted</a> to apply the same interpretation to nominations to the Supreme Court. The immediate result, of course, was the <a href="https://www.nytimes.com/interactive/2017/04/07/us/politics/gorsuch-confirmation-vote.html">slim confirmations</a> of Neil Gorsuch and later <a href="https://www.cnn.com/2018/10/06/politics/how-senators-voted-on-brett-kavanaugh/index.html">Brett Kavanaugh</a>. </p>
<h2>Restoring the Senate’s important but limited role</h2>
<p>Today, the 60-vote Senate remains powerful but circumscribed. </p>
<p>This threshold for ending debate still applies to most legislation, including appropriations bills and most laws in areas such as military policy, the environment or civil rights. And for Democrats hoping to occupy the White House in 2020, the need of a supermajority would likely prevent action on gun control, a Green New Deal and significant health care legislation like “Medicare for All.”</p>
<p>But by creating the various restrictions on its use in recent years, the Senate has repeatedly recognized that the 60-vote threshold is often dysfunctional and that the costs to effective governance are too high. The norms that support the supermajority Senate are eroding. </p>
<p>It’s also contributed to broader congressional dysfunction. The Senate behaves less and less like the world’s “<a href="https://www.loc.gov/item/2016683162/">greatest deliberative body</a>” – as some like to believe – and more like the least deliberative, particularly under the leadership of Majority Leader Mitch McConnell. The Senate <a href="https://www.nytimes.com/2019/08/03/us/politics/senate-votes-mcconnell.html?searchResultPosition=4">rarely debates</a>, and McConnell – in his <a href="https://thehill.com/homenews/senate/440041-mcconnell-pledges-to-be-grim-reaper-for-progressive-policies">self-styled role as the “grim reaper”</a> – doesn’t allow amendments or legislation that he or the president disagrees with to come up for a vote, regardless of how much support it has in the chamber.</p>
<p>I believe the Senate should change its rules to allow a simple majority to close debate on any bill, nomination or other matter, while also guaranteeing a minimum period of debate for any piece of legislation, which would allow the minority position to be voiced and debated. </p>
<p>In so doing, the Senate would end its undemocratic pretensions and resume its prescribed and limited role in the system of checks and balances. That would be a good thing no matter which party controls the Senate and regardless of who is, or will be, president.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/trumps-right-about-one-thing-the-us-senate-should-end-its-60-vote-majority-88761">article originally published</a> on Dec. 13, 2017.</em></p>
<p>[ <em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/123551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Wirls is on the Board of the Council for a Livable World.</span></em></p>Sen. Warren said the filibuster stands in the way of gun reform. It does, and so much more.Daniel Wirls, Professor of Politics, University of California, Santa CruzLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1040272018-10-24T10:51:52Z2018-10-24T10:51:52ZHow American tax laws encourage inequality<figure><img src="https://images.theconversation.com/files/241931/original/file-20181023-169810-2c17dk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People of color, women and the LGBTQ community are just some of the groups who often get slighted with tax reforms.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/closeup-african-businessman-doing-calculations-using-172981091?src=QO2AydriU1h6CvYh8CGVhw-1-31">Andrey_Popov/shutterstock.com</a></span></figcaption></figure><p>Talk of tax reform always seems to be in the air. </p>
<p>Last fall, Republicans in Congress hastily pushed through the <a href="https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.pdf">Tax Cuts and Jobs Act</a>, hailing it as “<a href="https://waysandmeans.house.gov/signed-law-first-overhaul-nations-tax-code-31-years/">historic legislation</a>” and “<a href="https://waysandmeans.house.gov/house-passes-generation-tax-reform-legislation-deliver-tax-relief-grow-economy/">once-in-a-generation tax reform</a>.” But that legislation has proved unpopular because it is <a href="https://www.washingtonpost.com/news/politics/wp/2017/11/30/how-the-republican-tax-bill-benefits-the-rich-according-to-government-analysis/">widely</a> and <a href="https://www.nytimes.com/2017/12/18/business/dealbook/tax-bill-wealthy.html">accurately</a> viewed as <a href="https://www.vox.com/policy-and-politics/2018/2/26/17044440/gop-tax-cut-tax-reform-law-chart-regressive-rich-poor-graph">tax cuts</a> for the <a href="https://www.cbpp.org/research/federal-tax/corporate-tax-cut-benefits-wealthiest-loses-needed-revenue-and-encourages-tax">wealthy and corporations</a>, with any effort at reform being merely coincidental.</p>
<p>Despite the unpopularity of last fall’s effort, this fall House Republicans <a href="https://www.cnbc.com/2018/09/27/house-poised-to-pass-tax-cut-bills-despite-unlikely-senate-vote.html">pushed through</a> what they are calling “<a href="https://waysandmeansforms.house.gov/uploadedfiles/tax_reform_2.0_house_gop_listening_session_framework_.pdf">Tax Reform 2.0</a>.” They seem to hope to win over voters prior to the midterm elections with the mere promise of further tax cuts – since the legislation was <a href="https://www.cnbc.com/2018/09/27/house-poised-to-pass-tax-cut-bills-despite-unlikely-senate-vote.html">dead on arrival</a> in the Senate.</p>
<p>That didn’t deter President Donald Trump from recently <a href="https://www.nytimes.com/2018/10/21/business/trump-tax-cut-republicans.html?action=click&module=Top%20Stories&pgtype=Homepage">touting</a> a vague plan for a “major” middle-class tax cut before the midterm elections.</p>
<p>But reducing tax reform to little more than a series of tax cuts designed to appease campaign donors and secure votes ignores the expressive role that a tax system plays in society. </p>
<p>What and how a country chooses to tax says a lot about its values, a subject I explore in <a href="https://mitpress.mit.edu/books/our-selfish-tax-laws">my new book</a>, “Our Selfish Tax Laws: Toward Tax Reform That Mirrors Our Better Selves.”</p>
<h2>Imagining equality</h2>
<p>A core value <a href="https://www.loc.gov/exhibits/creating-the-united-states/interactives/declaration-of-independence/equal/index.html">built into the DNA</a> of America, for example, is equality. </p>
<p>And in practice, <a href="https://www.theatlantic.com/business/archive/2012/08/americans-want-to-live-in-a-much-more-equal-country-they-just-dont-realize-it/260639/">Americans imagine</a> their country to be more equal than it is and strive to treat every member of society that way. </p>
<p>But America’s tax laws paint a different picture. Instead of reflecting a society constantly striving to better itself, U.S. tax laws are mired in the past as they reinforce the social and economic marginalization of women, racial and ethnic minorities, the poor, members of the LGBTQ community, immigrants and people with disabilities.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241930/original/file-20181023-169816-1r4owqd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Women and other minority groups get the short end of the stick when it comes to tax reform.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-woman-stressed-because-bills-59318305?src=PlKHNAd504sqzzg_wtkVIw-1-16">B-D-S Piotr Marcinski/shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Tax and marriage</h2>
<p>For instance, U.S. tax law has chosen marriage as the defining characteristic of all individuals when deciding how income tax returns should be filed. That is, <a href="https://www.irs.gov/pub/irs-soi/16in16ag.xls">most Americans</a> file their <a href="https://www.irs.gov/pub/irs-pdf/f1040.pdf">1040s</a> either as “single” individuals or as “married filing jointly.” But even when taxpayers in these two groups have equal incomes, they aren’t necessarily treated equally.</p>
<p>Among married couples, our tax laws give preferential treatment to those whose marriages comport with “tradition” – that is, with one spouse working in the labor market and the other in the home. These couples are rewarded with marriage “<a href="https://taxfoundation.org/tax-cuts-and-jobs-act-marriage-penalty-marriage-bonus/">bonuses</a>” because they pay less tax than if they earned the same amount but hadn’t married. </p>
<p>In contrast, those in “modern” marriages, where both spouses work outside the home, often suffer marriage penalties. These couples pay more tax than if they earned the same amount but hadn’t married. </p>
<p>And <a href="https://www.huffingtonpost.com/bella-depaulo/married-single-taxes_b_3079065.html">“single” taxpayers</a> never receive a bonus but instead often pay more tax than a married couple with the same income.</p>
<p>While the Tax Cuts and Jobs Act temporarily mitigates the marriage penalties for some two-earner married couples, it fails to address <a href="https://taxfoundation.org/understanding-marriage-penalty-and-marriage-bonus/">other aspects</a> of the tax laws that contribute to the marriage penalty. Low-income married couples, for example, are still hit with significant marriage penalties under the <a href="http://prospect.org/article/penalizing-marriage-poor">Earned Income Tax Credit</a>. </p>
<p>At the same time, the act increased the bonuses paid to single-earner married couples that provide financial encouragement for one spouse – traditionally, the wife – to stay at home. To take a simple example, an individual making US$100,000 with no dependents who takes the standard deduction would see a 43 percent reduction in taxes in 2018 by marrying a stay-at-home spouse but would have seen a reduction of only about 38 percent in 2017. </p>
<p>The penalty for not marrying increased correspondingly. </p>
<h2>Rewarding discrimination</h2>
<p>The tax treatment of employment discrimination awards is another example. </p>
<p>Traditionally, <a href="https://www.law.cornell.edu/uscode/text/26/104">personal injury awards</a> have been excluded from taxable income. Courts <a href="https://www.congress.gov/104/crpt/hrpt586/CRPT-104hrpt586.pdf">differed</a> on whether employment discrimination awards were covered by this exclusion, with some courts allowing these awards to be recovered tax-free and others requiring them to be taxed. In 1996, Congress <a href="https://www.congress.gov/104/plaws/publ188/PLAW-104publ188.pdf">stepped in</a> to end litigation over this issue and decided to take away the exclusion, thus requiring workers to report an employment discrimination award on their federal taxes. </p>
<p>Disadvantaged groups are the ones most likely to suffer from employment discrimination. The top categories of discrimination <a href="https://www.lexology.com/library/detail.aspx?g=876b4bbe-d177-4e60-a52f-8352c47552b6">reported by the EEOC</a> include race, disability, sex, age, and national origin. Members of the LGBTQ community also suffer <a href="http://www.latimes.com/business/la-fi-mo-a-rundown-of-lgbt-workplace-discrimination-20131121-story.html">discrimination</a>, but legal protection is <a href="https://www.hrc.org/state-maps/employment/pdf">not available</a> for them in every state. </p>
<p>All of these groups bear significant <a href="https://www.eeoc.gov/employers/remedies.cfm">monetary and psychological costs</a> as a result of employment discrimination. The awards they are given are intended to help mitigate those costs – to make them whole. Such awards <a href="https://heinonline.org/HOL/Page?handle=hein.journals/scws7&div=17&g_sent=1&casa_token=">should not be taxed</a> any more than the awards that make victims of car accidents whole for their injuries, which are still covered by the exclusion. </p>
<p>On the other side of the ledger, Congress continues to let employers required to pay these discrimination awards deduct them from their tax bills as <a href="https://www.law.cornell.edu/uscode/text/26/162">business expenses</a>.</p>
<p>If the <a href="https://www.eeoc.gov/laws/statutes">goal</a> is to prevent employment discrimination, it’s counterproductive to penalize victimized workers with a tax while rewarding employers who allegedly or actually discriminated with a benefit.</p>
<p>Again the Tax Cuts and Jobs Act <a href="http://mjbuscalaw.com/new-tax-law-prohibits-sexual-harassment-deductions/">made a nod at reform</a> – and the #MeToo movement – by taking away that employer deduction for settlements in certain sexual harassment cases. But that misses the bigger picture and deeper problem with the tax code. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241929/original/file-20181023-169819-uvvh2s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump supporters gathered for his tax reform speech.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/president-trump-supporters-gathering-trumps-tax-773792755?src=q1PUTuRcqov0iOw9qB2row-1-65">steve Hayeslip/shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Meaningful tax reform</h2>
<p>These are but two examples among many of how the tax laws present a distorted picture of what Americans value and the type of society that America aspires to be. </p>
<p>Much more is at stake in tax reform than retaining political power or doling out tax cuts. True tax reform takes time and should entail discussions among the electorate and with politicians regarding the role that the tax laws play in exacerbating social and economic inequality.</p>
<p>Instead of empty tax talk aimed at buying votes, we would be better off if those who wish to serve in Congress spent the time before – and after – Election Day talking with their constituents about the ways in which our tax system can help to create a more just society rather than a society that just rewards privilege.</p>
<p>
<section class="inline-content">
<img src="https://images.theconversation.com/files/248895/original/file-20181204-133100-t34yqm.png?w=128&h=128">
<div>
<header>Anthony C. Infanti is the author of:</header>
<p><a href="https://mitpress.mit.edu/books/our-selfish-tax-laws">Our Selfish Tax Laws: Toward Tax Reform That Mirrors Our Better Selves</a></p>
<footer>MIT Press provides funding as a member of The Conversation US.</footer>
</div>
</section>
</p><img src="https://counter.theconversation.com/content/104027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>MIT Press provides funding as a member of The Conversation US.</span></em></p>Real tax reform is about more than cutting taxes to woo voters. It’s about making the system fairer.Anthony C. Infanti, Professor of Law, University of PittsburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1019452018-08-28T12:25:27Z2018-08-28T12:25:27ZDonald Trump’s economic gamble with trade wars and tax cuts – he could win big or lose everything<figure><img src="https://images.theconversation.com/files/233854/original/file-20180828-86150-95l05h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>Picture the US-China trade spat as a boxing match (Donald Trump probably has). The US is the slugger – the pulverising champion – and China is the fast-rising challenger. A bit like George Foreman against Muhammad Ali in the <a href="https://www.bbc.co.uk/sport/boxing/29824124">Rumble in the Jungle</a>. The champion slugger both can and must land a knockout punch early – because he hasn’t trained to go the distance. If he doesn’t, he’s in trouble.</p>
<p>The early rounds appear to be going Trump’s way. Reports from Beijing <a href="https://nyti.ms/2nNTKxy">suggest</a> the Chinese leadership was caught off guard by the intensity of Trump’s early assault. As if expecting him to jab gently to probe their defences, they were rocked on their heels by the ferocity of the barrage: some US$200 billion of tariffs on Chinese imports, with more where that came from.</p>
<p>Although China emerged from the 2008 global financial crisis in <a href="https://www.ft.com/content/94314bde-91a3-11de-879d-00144feabdc0">better shape than most countries</a>, thanks to a US$4 trillion stimulus programme, the resulting investment boom sent China’s <a href="http://voxchina.org/show-3-17.html">gross debt soaring</a>. Worse, much of the investment yielded low returns, making some debt difficult to service. A severe economic hit now could drive up defaults, possibly inducing a financial crisis. China is vulnerable.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/233878/original/file-20180828-86123-9vryhd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The US stock market is enjoying a massive bull run.</span>
<span class="attribution"><span class="source">newphotoservice / Shutterstock.com</span></span>
</figcaption>
</figure>
<p>In contrast, the US has rarely looked stronger. Real GDP growth recently <a href="https://www.bea.gov/news/glance">surpassed 4%</a> while the unemployment rate is <a href="https://data.bls.gov/timeseries/LNS14000000">below that</a>. And, to further swell his arsenal, the president got Congressional Republicans to cut taxes, pumping another estimated US$1.5 trillion into the US economy over the next decade, with most of the gains expected in the <a href="http://bit.ly/2MyvSfu">first three years</a>.</p>
<p>In short, the US can withstand almost any punishment that China can mete out in the coming months. Investors are thus betting on the US. Since Trump first announced tariffs, the Chinese currency and stock markets <a href="https://on.mktw.net/2PHXk9d">have plunged</a>, whereas America’s bond and stock markets have <a href="https://on.mktw.net/2LxsoWd">barely hiccupped</a>. Indicating how painless it’s all felt, <a href="https://cnb.cx/2PbefzR">Trump told CNBC</a>, “We’re playing with the bank’s money”.</p>
<h2>‘The wrong moment’</h2>
<p>Were the fight to last beyond a few rounds, however, American stamina would quickly wane. Outside the White House, most economists believe the US is now probably at the peak of its business cycle, and some worry that the tax cuts may actually worsen the downturn when it comes. </p>
<p>Former Fed chairman Ben Bernanke <a href="https://read.bi/2ocQFHF">echoed a view</a> widespread among economists that the tax cuts came at “the very wrong moment”. Because fiscal stimulus is generally considered most effective at the opposite end of the business cycle, amid recession, the long-term impact on economic growth <a href="http://bit.ly/2MoWGPS">may be minimal</a> to <a href="http://bit.ly/2MyvSfu">nil</a>. The principal effect of the tax cuts may thus be to redistribute <a href="http://bit.ly/2vVfj3X">some future growth to the present</a> – supercharging the economy today and worsening the recession when it comes. Or, as Bernanke put it, “In 2020, Wile E. Coyote is going to go off the cliff, and he’s going to look down” – the stimulus will run out just as Trump is campaigning for reelection.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Gq_bjaI0NTo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>It’s as if before leaving the locker room, the champion gorged on candy bars instead of whole grains. He came out swinging, but will be spent by the middle rounds. </p>
<h2>Taking the punches</h2>
<p>Of course, the Trump administration begs to differ, touting the wage gains and new investment that will result from this influx of new money, thereby permanently raising the economy’s growth rate. That is, of course, possible. But not, on present evidence, likely. </p>
<p>Although it’s still early days, so far the vast majority of the tax cuts have been used by corporations to pad profits <a href="https://wapo.st/2nQrFWG">and buy back shares</a>. This supports share prices, not to mention any executive compensation packages tied to those share prices. But while a rising stock market creates a wealth effect, and thus stimulates consumption, there’s been little new investment beyond what one would expect <a href="http://bit.ly/2OIrHLs">at this point in the business cycle</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/233849/original/file-20180828-75993-1yhymd7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ready for the fight?</span>
<span class="attribution"><span class="source">Evan El-Amin / Shutterstock.com</span></span>
</figcaption>
</figure>
<p>When the burst of consumption tapers off, there won’t be new output to pick up the slack. Nor, for that matter, will workers be in a position to step up. So far, <a href="https://wapo.st/2nQrFWG">less than 3%</a> of the tax money has gone towards improving worker compensation, and most of that has taken the form of one-time bonuses. Real wage growth remains sluggish.</p>
<p>As Muhammad Ali knew on that steamy Kinshasa night when he stepped into the ring with George Foreman, title fights are determined less by who can do the most damage as by who is willing to take the most punches. There are suggestions the Chinese leadership is now adopting a long-term view of the trade conflict, interpreting it as a strategic attempt by Washington <a href="https://bloom.bg/2BoHRYH">to thwart China’s rise</a>. Were the Beijing leadership able to find a way to survive the early rounds of this contest, it may be prepared to go the distance.</p>
<p>Donald Trump, on the other hand, may find himself facing voters in the midst of a recession, or at least when the shine is fading from the economy. Who knows? As happened to George Foreman in 1974, he may face his knockout punch well before distance.</p><img src="https://counter.theconversation.com/content/101945/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rapley’s most recent book is Twilight of the Money Gods: Economics as a Religion and How It all Went Wrong (Simon & Schuster).</span></em></p>The US economy has rarely looked stronger, but it could all come crashing down just in time for the next presidential election.John Rapley, Visitor to Senior Combination Room, St. Edmunds College, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/917102018-03-06T11:39:09Z2018-03-06T11:39:09ZGOP tax law snubs US expats and ‘accidental Americans’<figure><img src="https://images.theconversation.com/files/208528/original/file-20180301-152593-7ifm9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It may opens doors but follows wherever you go.</span> <span class="attribution"><span class="source">AP Photo/Benny Snyder</span></span></figcaption></figure><p>Since Congress began taxing incomes, American citizens have been unable to escape the reach of Uncle Sam: They must report their income, no matter where they live or where it’s earned. It’s known as a worldwide citizenship-based tax system. </p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1578272">Most other countries</a>, however, have a residence-based system. That means their citizens are only taxed where they live or where their income is earned. The U.S. income of a British expat living in New York, for example, is off limits to <a href="https://www.gov.uk/government/organisations/hm-treasury">Her Majesty’s Treasury</a>. </p>
<p>The <a href="https://www.congress.gov/bill/115th-congress/house-bill/1">Tax Cuts and Jobs Act</a>, passed in December, <a href="https://www.ft.com/content/4909d804-b9a1-11e7-8c12-5661783e5589">was supposed to change how the U.S. treats Americans abroad</a>. Instead, it only addressed a similar issue faced by American multinational corporations by allowing their foreign subsidiaries to send home certain profits without paying U.S. taxes on them. </p>
<p>Meanwhile, Congress left U.S. citizens living overseas under the old, punitive system even though, as my research shows, it puts them at a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">significant disadvantage</a>.</p>
<p>Fortunately, there’s a chance to fix this. The new law <a href="https://www.bloomberg.com/view/articles/2017-12-28/the-next-step-in-tax-reform-is-tax-repair">included</a> many inadvertent errors and omissions, and lawmakers <a href="https://www.politico.com/story/2018/02/24/tax-law-glitches-gop-423434">are working on legislation</a> to fix them. In my view, switching the individual income tax to a residence-based system should be part of any repair effort. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=475&fit=crop&dpr=1 600w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=475&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=475&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=597&fit=crop&dpr=1 754w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=597&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=597&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The 1040 is a familiar sight to Americans, and bulldogs too.</span>
<span class="attribution"><span class="source">AP Photo</span></span>
</figcaption>
</figure>
<h2>Birth of the income tax</h2>
<p>Since <a href="http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=012/llsl012.db&recNum=504">first taxing individual incomes</a> during the Civil War, the U.S. has targeted its citizens’ income regardless where they live. </p>
<p>By at least 1914, a year after states ratified the <a href="https://constitutioncenter.org/interactive-constitution/amendments/amendment-xvi">16th Amendment</a>, which made the income tax constitutional, <a href="http://query.nytimes.com/mem/archive-free/pdf?res=9A0CEFDE163AE633A25754C0A9659C946596D6CF">Americans abroad were complaining of double taxation</a> and renouncing their citizenship as a result. </p>
<p>While current law offers <a href="https://www.irs.gov/publications/p54#en_US_2017_publink100047498">exclusions</a> and <a href="https://www.irs.gov/publications/p514">credits</a> to prevent double taxation for most Americans, many other provisions are punitive to long-term expats by targeting foreign <a href="https://www.irs.gov/instructions/i8621#idm139845798808528">investments</a>, <a href="https://www.irs.gov/instructions/i5471">businesses</a> and <a href="https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions">retirement savings</a>. </p>
<p>The reporting requirements and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">incompatibility with local tax laws</a> create significant compliance costs for nonresident Americans that often greatly exceed the amount of U.S. tax they owe, which is zero for most expats.</p>
<p>In 2010, the U.S. further complicated their financial lives by enacting the <a href="https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca">Foreign Account Tax Compliance Act</a>, which required banks to report to the IRS on all accounts held by U.S. taxpayers.</p>
<p>The act had two consequences: First, many banks <a href="http://money.cnn.com/2013/09/15/news/banks-americans-lockout/">closed accounts held by U.S. citizens</a> because the <a href="https://www.wsj.com/articles/the-law-that-makes-u-s-expats-toxic-1444330827">banks were scared</a> of the significant penalties for noncompliance. And second, many people learned for the first time that they were subject to U.S. taxation. </p>
<p>This resulted in a <a href="http://intltax.typepad.com/intltax_blog/2018/02/2017-fourth-quarter-published-expatriates-first-annual-decrease-in-five-years.html">spike</a> in the rate of U.S. citizenship renunciations, from under 800 per year before 2010 to over 5,000 in both 2016 and 2017. </p>
<p>The GOP <a href="https://republicansoverseas.com/timeline/gop-includes-anti-fatca-language-2016-platform/">even included</a> a provision to repeal the act in its 2016 election platform, which also supported moving to a residence-based system of taxation for individuals and a territorial system for corporations. </p>
<h2>‘Accidental Americans’</h2>
<p>The main problem with a citizenship-based taxation is that the U.S. is taxing the foreign income of an American or a dual citizen working, living and paying tax in another country, without a dime going through any entity under U.S. jurisdiction. </p>
<p>Currently, the U.S. is the <a href="http://heinonline.org/HOL/Page?handle=hein.journals/scal89&div=11&g_sent=1&casa_token=16xrVaFmaCMAAAAA:915EU3zdgv6S7WoFvstb5OYA2YPUt5_ZksGdRoOIpiT6FsiZ9fN0fNJNGTA9vxxt7KyKy7iV&collection=journals">only country</a> – apart from Eritrea – to do this. </p>
<p>In addition, many of the American nonresidents being taxed are “<a href="https://www.americains-accidentels.fr">Accidental Americans</a>,” who have few or no ties to the United States but are U.S. citizens due to an accident of birth. Accidental Americans exist because <a href="http://heinonline.org/HOL/Page?handle=hein.journals/mjil38&div=12&g_sent=1&casa_token=HWDd4thBHhMAAAAA:EenC6gTNFSxmeulMtlgUW_4frPK3_Idj0zvHY9mXhg--Dj3CbbPpe-Cwg2TyBPMqozosni72&collection=journals">the U.S. grants citizenship broadly</a>, based on both <a href="https://www.law.cornell.edu/constitution/amendmentxiv">place of birth</a> and <a href="https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Acquisition-US-Citizenship-Child-Born-Abroad.html">parentage</a>. </p>
<p>They have all the tax responsibilities of U.S. citizenship but often <a href="http://heinonline.org/HOL/Page?handle=hein.journals/mjil38&div=13&g_sent=1&casa_token=&collection=journals">don’t even know it</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=359&fit=crop&dpr=1 600w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=359&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=359&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=451&fit=crop&dpr=1 754w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=451&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=451&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">If you’re an American looking for a home in Sydney, count on Uncle Sam tagging along.</span>
<span class="attribution"><span class="source">siwawut/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Kate’s situation</h2>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">My own research</a> focuses on tax issues faced by Americans and dual nationals living in Australia. </p>
<p>To illustrate the impact of the U.S. tax system, let’s take the situation of “Kate,” a U.S.-Australia dual citizen living in Sydney. She earns AU$70,000 (US$54,900) per year as a marketing manager at a locally owned company. Fortunately for her, she’s able to exclude this income from U.S. taxation, yet she still must file a 1040 every year and report the AU$20,000 in her local bank account to the <a href="https://www.fincen.gov/resources/filing-information">Financial Crimes Enforcement Network</a> or face a hefty fine. </p>
<p>Most of Kate’s problems emerge when she tries to take part in a variety of other normal aspects of living somewhere for any significant period of time, from saving for retirement to buying a home. And in general, the exclusions and credits intended to prevent double taxation won’t be sufficient.</p>
<p>For example, Australia has one of the <a href="https://www.globalpensionindex.com/country-summaries-2/australia/">best retirement systems in the world</a> available to all residents, with mandatory employer contributions and low taxes. Withdrawals after age 60 are tax-free in Australia. </p>
<p>Unfortunately, Kate will face lots of <a href="http://fixthetaxtreaty.org/problem/superannuation/">complexity</a> and <a href="https://globenewswire.com/news-release/2016/04/04/825555/0/en/Brager-Tax-Law-Group-Finally-Receives-IRS-Documents-under-FOIA-for-Foreign-Retirement-Account.html">uncertainty</a> when it comes to the U.S. treatment of her Australian retirement savings. If she chooses to contribute more to her retirement fund than her employer, the U.S. could tax some of the income accumulating inside her account, even though she has no access to that income. And when she eventually retires, a portion of her withdrawals will also be subject to U.S. taxation. </p>
<p>Let’s say Kate buys a home. She’ll confront the U.S. taxman again if she eventually wants to sell, depending on fluctuations of the exchange rate between the purchase and sale. If the Australian dollar falls, that will mean the mortgage will be smaller in U.S. dollars, triggering a <a href="http://isaacbrocksociety.ca/2015/05/31/congress-knew-about-diaspora-phantom-gains-problem-1986-refused-fix/">taxable gain</a> upon repayment. If the Australian dollar appreciates, it increases the likelihood Kate will have to pay U.S. tax on any gain from the sale itself. (The U.S. excludes only the first $250,000.) Either way, Kate will likely lose. </p>
<p>Kate will face similar complexity and potential tax liability if she <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321349">simply wants to invest</a> in a local <a href="https://www.irs.gov/instructions/i8621#idm139845801047392">mutual fund</a> or <a href="https://www.irs.gov/instructions/i5471">start a business</a> in Sydney. </p>
<p>Essentially, every transaction that Kate enters into will be seen as a cross-border transaction by the IRS, even though all parties may be Australian citizens resident in Australia.</p>
<h2>Seeking redress</h2>
<p>Kate’s situation is not unique. A survey of U.S. expats <a href="http://www.tandfonline.com/doi/abs/10.1080/1369183X.2017.1409173">shows</a> that about one-third of respondents were actively considering renouncing their U.S. citizenship, with open-ended responses indicating that tax compliance- and bank-related issues were major factors. </p>
<p>These tax and reporting obligations have cost them the <a href="https://www.theguardian.com/money/2014/sep/24/americans-chased-by-irs-give-up-citizenship-after-being-forced-out-of-bank-accounts">ability to bank and invest</a>, the <a href="http://fixthetaxtreaty.org/about/our-stories/shauns-story/">ability to save for retirement</a> and <a href="http://isaacbrocksociety.ca/2015/10/25/how-the-fatca-iga-has-made-u-s-citizenship-a-disability-in-canada-and-highlighted-the-issue-of-law-firm-trust-accounts/">even jobs</a>, when employers and potential business partners are not willing to allow their accounts to be reported to the IRS.</p>
<p>That’s a shame because overseas Americans are important business, trade and cultural representatives for the U.S. </p>
<p>Now that Congress has recognized the problems of worldwide taxation for U.S. corporations, I hope lawmakers take this opportunity to address the unintended consequences of U.S. tax policy toward American citizens living abroad as well. The likelihood of positive action appears to be growing with increased <a href="https://www.c-span.org/video/?c4692161/congressman-holdings-comment-rbt">recognition of this problem</a>.</p><img src="https://counter.theconversation.com/content/91710/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Karen Alpert is a founding member of Fix The Tax Treaty. She renounced her U.S. citizenship in 2016.</span></em></p>Congress changed the tax system to benefit companies with overseas operations but failed to help Americans actually living abroad, who still face punitive taxation.Karen Alpert, Lecturer in Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/920312018-02-22T06:18:41Z2018-02-22T06:18:41ZThere isn’t solid research or theory to support cutting corporate taxes to boost wages<p>The argument that cutting the Australian company tax rate will lead to higher investment and wages, more employment and faster GDP growth does not have solid empirical or theoretical backing.</p>
<p>A close look at the economic research in this area shows a lack of consensus. <a href="https://www.cbo.gov/publication/21486">Different studies</a>, looking at different samples of countries, over different periods of time, reach different conclusions. </p>
<p>And the predictions made by <a href="http://www.nber.org/papers/w18473.pdf">theoretical models</a> are sensitive to the underlying assumptions and structures built into the models themselves.</p>
<p>Many of the issues surrounding tax cuts remain unsettled – such as the size or length of the impact, how it affects inequality and the relationship with other government policies. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/qantas-and-other-big-australian-businesses-are-investing-regardless-of-tax-cuts-90536">Qantas and other big Australian businesses are investing regardless of tax cuts</a>
</strong>
</em>
</p>
<hr>
<p>The recent <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018">International Monetary Fund (IMF) forecast</a> for the American economy highlights some of the issues.</p>
<p>In short, the IMF acknowledges that the recent <a href="https://theconversation.com/au/topics/trump-tax-cuts-48632">US tax cuts</a> will have a positive impact on economic growth in 2018-19. However, this is conditional on the US government not cutting expenditure, is likely to be short-lived, and will come at the cost of increased government deficits.</p>
<p>In this light, corporate tax cuts seem to be a long-term pain for a short-term gain, which is probably not what we need in Australia.</p>
<h2>Conflicting information</h2>
<p>Let’s start with the point that is probably least controversial – that a reduction in the corporate tax rate will lead to an increase in wages.</p>
<p>Think of the output produced by a corporation as a pie. This pie is shared among shareholders (in the form of dividends), banks and other lenders (in the form of interest paid on loans), workers (in the form of wages) and the government (in the form of taxes).</p>
<p>If we reduce the government’s share then there is more for everybody else, including workers. And some <a href="https://www.sciencedirect.com/science/article/pii/S0014292112000451">data do suggest</a> that wages increase when corporate tax rates decline. </p>
<p>Yet economists <a href="https://www.cbo.gov/publication/21486">disagree on the extent</a> to which wages would actually increase in response to a tax cut.</p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/geer.12157/full">Some research</a> suggests that this increase might be small, even in a country like Germany, which is often used as an example of the <a href="https://www.econstor.eu/bitstream/10419/127567/1/dp9606.pdf">beneficial impact</a> of tax cuts on wages.</p>
<p>Certain aspects of the German economy and industrial relations system make it more likely that German workers will benefit from corporate tax cuts compared to Australian workers.</p>
<p>In Germany, workers’ representatives <a href="https://theconversation.com/work-councils-could-be-the-future-of-australian-industrial-democracy-in-an-abcc-world-73129">sit on company supervisory boards</a>, which monitor and appoint members of management boards. </p>
<p>This means German workers have a stronger say when it comes to sharing the pie. For any given decrease in the slice of the government, German workers are more likely to get a bigger slice for themselves. This is not necessarily the case in Australia.</p>
<p>It is therefore difficult to draw implications for Australia from studies that look at the experience of Germany or other countries with significantly different institutional arrangements.</p>
<p>Furthermore, the fact that wages should increase in response to a corporate tax cut does not automatically imply that other economic variables will also respond positively. For instance, the more wages increase in response to a corporate tax cut, the smaller the increase in employment is likely to be.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-full-story-on-company-tax-cuts-and-your-hip-pocket-59458">The full story on company tax cuts and your hip pocket</a>
</strong>
</em>
</p>
<hr>
<p>This leads to an even more controversial question: what is the effect of corporate tax cuts on real economic activity, such as employment and GDP growth?</p>
<p>The trickle-down effect of corporate tax cuts rests on the idea that business investment would increase once taxes are cut, which in turn leads to the creation of more jobs and faster economic growth.</p>
<p>However, this line of reasoning neglects the fact that investment decisions in today’s globalised world are <a href="https://theconversation.com/why-australia-doesnt-need-to-match-the-trump-tax-cuts-84903">not necessarily driven by the corporate tax rate</a>.</p>
<p>Many other factors come into corporate investment decisions, such as the <a href="https://web.northeastern.edu/ruthaguilera/wp-content/uploads/2017/02/41.-Kim-Aguilera-2015-IJMR.pdf">quality of institutions</a>, the proximity to important markets, and the <a href="https://www.sciencedirect.com/science/article/pii/S0022199613000925">cost of labour</a> (wages).</p>
<p>Because of these other factors, the impacts of tax cuts on employment and growth can be <a href="http://www.nber.org/papers/w20753">small</a>, <a href="http://www.nber.org/papers/w18473">short-lived</a>, or <a href="http://www.jstor.org/stable/41790405">conditional</a> on other government policy actions, such as managing debt.</p>
<p>In a similar vein, recent <a href="http://www.nber.org/papers/w18473.pdf">theoretical work</a> that incorporates more realistic assumptions about the economy (such as the distribution of entrepreneurial skills in the population) suggests that a tax cut only has a significant impact on economic growth when the tax rate is initially high. </p>
<p>This means that even within a given country, the effect of a corporate tax cut can change depending on initial economic and policy conditions. </p>
<h2>Putting tax cuts in a broader context</h2>
<p>Beyond growth and employment, the effects of corporate tax cuts should also be considered in terms of deficit and inequality.</p>
<p>From the point of view of the public budget, a cut in the tax rate has to be somehow financed. How?</p>
<p>A first possibility is that the tax cut pays for itself. This is essentially the <a href="https://www.investopedia.com/terms/l/laffercurve.asp">idea</a> that as the tax rate goes down, the increase in the tax base (e.g. pre-tax corporate profit) is sufficiently large to ensure that the total tax revenue increases. </p>
<p>However, an increase in the tax base would require a significant and sustained increase in business investment, which, as we have already seen, does not necessarily happen. </p>
<p>The government could increase other taxes, but this means the government would effectively be taking from one group of taxpayers (possibly workers themselves) to give to corporations.</p>
<p>Another option is to reduce some government expenditures. But this could also involve taking from one group to give to another. If the decision is made to cut social welfare and public goods like education and health, then more vulnerable segments of the population will bear the cost of lowering the corporate tax rate. This means more inequality in the economy.</p>
<p>Of course the government could decide to just let the deficit be. This would result in higher debt. But can Prime Minister Turnbull (or President Trump for that matter) accept that?</p>
<p>The central economic challenge for Australia is to promote long-term, inclusive growth. Are we confident that this is what corporate tax cuts will deliver? Based on the economic research that I have read, the answer is no.</p><img src="https://counter.theconversation.com/content/92031/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani has received funding from the Australian Research Council for a project on the estimation of the piecewise continuous linear model and its applications in macroeconomics.</span></em></p>Research on the impact of corporate tax cuts reaches different conclusions, depending on the time and place it looks at.Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/905222018-02-15T11:36:53Z2018-02-15T11:36:53ZCongress failed to fix tax woes for gig workers<figure><img src="https://images.theconversation.com/files/205761/original/file-20180209-51719-wnas1k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Congress missed a chance to make it easier for workers who book gigs through big digital companies to do their taxes.
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tired-business-man-crumpled-paper-on-525102391">I MAKE PHOTO 17/Shutterstock.com</a></span></figcaption></figure><p>The <a href="https://www.congress.gov/115/crpt/hrpt466/CRPT-115hrpt466.pdf">bevy of changes</a> to the tax code will give <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">most taxpayers</a> at least some relief. But because Congress didn’t address a common loophole that creates headaches for people who <a href="https://www.recode.net/2017/5/25/15690106/gig-on-demand-economy-workers-doubling-uber">earn money from gigs</a> booked through companies like Uber, Etsy, TaskRabbit and Airbnb, most of these taxpayers will struggle to figure out their tax bills without receiving any tax information forms. </p>
<p>It didn’t have to be this way.</p>
<p>Congress knew it had a golden opportunity to ease this burden for millions of Americans but lawmakers didn’t bother. I’m certain about that because <a href="http://www.american.edu/kogod/research/upload/shortchanged.pdf">I’ve conducted extensive research</a> and <a href="https://taxpayeradvocate.irs.gov/Media/Default/Documents/PublicForums/Bruckner_statement-1.pdf">testified before IRS</a>
and <a href="https://smallbusiness.house.gov/uploadedfiles/5-24-16_bruckner_testimony_.pdf">congressional committees</a> on gig workers’ tax travails.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/G7sntVKxyAE?wmode=transparent&start=1122" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The author testified about tax challenges during this 2016 hearing on the ‘sharing economy.’</span></figcaption>
</figure>
<h2>Missing paperwork</h2>
<p>To get a sense of how big this problem is I surveyed 518 self-employed taxpayers, 22 percent of whom whom earned money in the gig economy – meaning that they were making a living or supplementing their day jobs through companies that connect customers who need goods and services with people who can provide them via apps. </p>
<p>I found that many if not most of them had trouble dealing with their taxes. Some 43 percent didn’t know what they would owe the IRS for this income and were not setting aside enough money to pay their taxes. About 61 percent didn’t get any IRS reporting forms from the company through which they booked gigs, such as <a href="https://www.irs.gov/forms-pubs/about-form-1099-misc-miscellaneous-income">a 1099</a>. </p>
<p>Many first-time gig workers, being used to having their employers withhold taxes from their paychecks, may not realize they owe any tax on this income at all. Indeed, almost 47 percent of the people who took part in my study and earned money in the gig economy weren’t aware of the deductions or credits they could claim to lower their tax bill.</p>
<p>As a result, workers like these may wind up paying more in taxes than they should, when and if the IRS catches up with them.</p>
<p><iframe id="RRIGT" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/RRIGT/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>High threshold</h2>
<p>Why don’t most of these taxpayers get 1099s?</p>
<p>Like all businesses, the companies, in what is sometimes called the “sharing economy,” must issue these forms to their independent contractors who earn at least US$600 in a single year. But the government doesn’t mandate this paperwork for earnings tied to payments made with credit or debit cards. For that income, <a href="https://smallbiztrends.com/2015/01/1099-contractors-paypal-credit-card.html">the threshold for mandatory 1099s</a> jumps from $600 to $20,000. In addition, these workers must have been paid for at least 200 transactions during the year.</p>
<p>Because most gig workers get paid with credit and debit cards or apps linked to those accounts, they get snared in this loophole. An overwhelming majority – 88 percent – of the ones I surveyed earned <a href="http://www.american.edu/kogod/research/upload/shortchanged.pdf">less than $15,000</a> from this kind of work. Other studies have found that at least 85 percent of gig workers make <a href="https://www.washingtonpost.com/news/business/wp/2017/07/03/side-hustles-are-the-new-norm-heres-how-much-they-really-pay/?utm_term=.f9753d5671f1">less than $500 per month</a>.</p>
<p>To be sure, some platform companies choose to embrace lower thresholds. For example, Lyft now has a policy to send all drivers who earn at least $600 from rides a 1099. </p>
<p>And a few states, including <a href="https://www.mass.gov/service-details/new-massachusetts-reporting-requirements-for-third-party-settlement-organizations">Massachussetts</a> and <a href="http://tax.vermont.gov/news/1099-k-information-reporting">Vermont</a>, have mandated this approach for all platforms. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"961076886825816064"}"></div></p>
<p>But not all companies are moving in the right direction.</p>
<p>Until this year, Uber had always sent every driver a 1099. But the ride-share company recently told its drivers not to expect this paperwork unless they <a href="https://www.uber.com/drive/tax-information/faq-and-resources/">make more than $20,000</a> and have 200 transactions from trips booked through the company’s app. </p>
<p>And while this was always how companies like <a href="https://www.airbnb.com/help/article/414/should-i-expect-to-receive-a-tax-form-from-airbnb">Airbnb</a> and <a href="https://support.taskrabbit.com/hc/en-us/articles/207555983-Am-I-a-TaskRabbit-employee-">TaskRabbit</a> operated, it can create costly hassles for workers who may not be able to afford an accountant and struggle to comply with the IRS’ rules. </p>
<p>Anyone who doesn’t get forms indicating how much taxable income they earned <a href="https://www.cnbc.com/2018/01/17/gig-job-workers-had-better-beware-of-pay-as-you-go-tax-payments.html">risks underpaying</a>. <a href="https://www.irs.gov/newsroom/the-tax-gap">IRS data</a> show that 63 percent of the taxpayers who are not subject to withholding by their employers or don’t get 1099s misreport income, often unintentionally.</p>
<p>When quarterly or annual errors surface, unsuspecting delinquent taxpayers may incur penalties and owe interest. They also miss out on claiming the deductions and credits they may have otherwise been entitled to, which would have cut their tax bill. Often, taxpayers may not realize that they owe taxes on income for work that doesn’t generate any IRS paperwork. </p>
<p>That can prove costly. Although Americans who don’t pay their taxes can avoid punishment if they owe less than $1,000, the IRS charges as much as 4 percent in <a href="https://www.thebalance.com/estimated-taxes-and-the-estimated-tax-penalty-3193117">interest every quarter</a> on the amount others underpay as a penalty.</p>
<p>The gig economy’s growth may help explain why the number of penalties the IRS levied between 2007 and 2016 spiked from 7.5 million to <a href="https://www.usatoday.com/story/money/2017/08/14/irs-penalizes-more-earners-mistakes-underpayment-estimated-tax-filings/565185001/">nearly 10 million</a> without a big crackdown.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204619/original/file-20180202-162093-17wu8gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">When gig workers don’t get a 1099, they run the risk of misunderstanding what they owe the IRS.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/taxes-stock-photo-1099misc-high-quality-406904218?src=jRtgZJ1SD1MeYRNYVKRFnw-1-1">ShutterstockProfessional/Shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Missed opportunity</h2>
<p>After testifying at that 2016 hearing, I worked with congressional staff to address some of these problems. Among other things, a <a href="https://www.congress.gov/bill/115th-congress/house-bill/3717/text">bipartisan bill</a> we developed would require businesses – including platforms like Uber, Airbnb and Etsy – to issue 1099s to all independent contractors who earn at least $1,500 in a calendar year through their apps and websites – regardless of how they are paid.</p>
<p>I initially <a href="https://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=400301">got the impression</a> <a href="https://www.congress.gov/bill/115th-congress/house-bill/3717/text#toc-HA7651D8F55E946CA8F8C950D3E7FD1A9">that Congress would solve</a> this problem with the new tax law. Among other things, Sen. <a href="https://www.congress.gov/bill/115th-congress/senate-bill/1549">John Thune</a>, a South Dakota Republican, pushed for an across-the-board $1,000 reporting threshold for 1099s.</p>
<p>However, Thune’s fix was bundled with other changes that created procedural problems in the Senate. That kept the 1099 reporting changes out of the new tax law. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"930972151976427520"}"></div></p>
<p>To be sure, the new tax law does make some changes that benefit independent contractors. </p>
<p>Along with lower tax rates, the new <a href="https://www.marketplace.org/2017/12/21/your-money/tax-bill-2017/not-everyone-going-get-same-pass-through-benefits-tax-bill">pass-through deduction</a> could help many low-income and middle-class self-employed service providers, including those in the gig economy earning money by driving cars and running errands. They may be able to deduct up to 20 percent of their business income if they earn less than $157,500 (or $315,000 for married couples).</p>
<p>But Congress could have made simple changes that would have eased the compliance burdens for gig workers, something the IRS’ own <a href="https://taxpayeradvocate.irs.gov/Media/Default/Documents/2017-ARC/ARC17_Volume1_MSP_14_SharingEconomy.pdf">taxpayer advocate</a> has said should be a high priority.</p>
<p>By neglecting to do so, lawmakers let this problem fester.</p><img src="https://counter.theconversation.com/content/90522/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Caroline Bruckner received funding from Boston College Center for Retirement Research to study how the tax compliance challenges of the gig economy could impact Social Security. </span></em></p>Companies like Uber and Etsy don’t have to tell most of the people working with them how much they’ve earned. With the federal government so behind the curve, some states are changing their rules.Caroline Bruckner, Executive in Residence, Department of Accounting and Taxation, American University Kogod School of BusinessLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/896822018-02-05T11:41:58Z2018-02-05T11:41:58ZHow rich are the rich? If only you knew<p>“If poor people knew how rich rich people are, there would be riots in the streets.” </p>
<p>Actor and comedian Chris Rock <a href="http://www.vulture.com/2014/11/chris-rock-frank-rich-in-conversation.html">made this astute statement</a> during a 2014 interview with New York magazine, referring to the yawning gap between rich and poor. In so doing, he stumbled upon a key challenge in the study of inequality. </p>
<p>What’s the best way to measure it? </p>
<p>Most inequality studies have focused on income – <a href="https://www.econ.nyu.edu/user/wolffe/WolffWealthTrendsApril2004.pdf">measures of which are widely available</a>. However, being rich is not about a single year of earnings but rather about the accumulation of wealth over time. In the past, <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5145259/">quantifying</a> that has been tricky.</p>
<p>The wealthy would probably prefer we stay in the dark about how rich they are, presumably to avoid the aforementioned riots. People like me who study the topic, however, are always looking for more data and better and more accurate ways to measure the rich-poor gap. And while I’m not one to promote violence in the streets, I do believe it’s important for citizens to be fully aware of the levels of disparity in their society. </p>
<p>The most revealing way to do this, in my view, is by looking at wealth inequality.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204722/original/file-20180204-19952-1dsngfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chris Rock cited the free food, drinks and massages at the Virgin upper-class lounge at Heathrow Airport in his comments about inequality.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/kurafire/1565057331/in/photolist-3oik26-dHng9L-dbSLut-eFhmEK-dnJgh9-eDghmW-7r6TML-dx7VoF-dndh4J-dcbrdY-diZWGv-dnti55-dx8cgX-dhMvF7-dbg3Wv-dntsfn-28KfMa-ditPBv-doQGzD-dbfgVr-dnd4BT-dcr373-avSfV-eE7Shf-dkvG8a-dHhrLK-diukNC-dntsw3-dnJq4Y-db9W3v-7r2Zyg-dbaxWM-ofDw5-dGSxx1-7S8ipJ-eVuCWz-dndeXR-dbvvv7-dCYXbJ-dbvSdu-dbTYk5-5BJ69F-dkdXH4-7nxc5d-dbwum8-dgEcwD-dnJ9h8-a6cRP4-dbvBXv-daTW6v">Faruk Ateş</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<h2>Measuring the rich-poor gap</h2>
<p>There are several ways to measure inequality. </p>
<p>One of the most popular is by income. That’s largely because there’s more data, and it’s a lot easier to measure. But this measure is a snapshot. </p>
<p>Wealth, on the other hand, is an aggregation, affected not only by current income but earnings accumulated in previous years and by previous generations. Only by studying wealth inequality do scholars, policymakers and others get the deepest and broadest measure of the gap between the rich and everyone else. </p>
<p>How much wealth someone has is also a better measure of their quality of life and opportunities. It determines the ability to invest in education, financial assets and the comfort and security of one’s retirement. Wealth also mitigates worries about paycheck variability or unexpected expenses. If you have wealth, the sudden cost of replacing a broken water heater or paying a medical bill doesn’t cause nearly as much stress as if you’re poor. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=422&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=422&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=422&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=531&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=531&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204757/original/file-20180204-19918-1skhpys.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=531&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Most of the gains from the 2018 tax package will accrue to the richest Americans.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<h2>American ‘exceptionalism’</h2>
<p>When we do look at the data on wealth inequality in the U.S., it’s stark and <a href="http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm">dwarfs that of the rest of the developed world</a>. </p>
<p>The conservative Hudson Institute in 2017 <a href="https://www.hudson.org/research/13095-the-distribution-of-wealth-in-america-1983-2013">reported</a> that the wealthiest 5 percent of American households held 62.5 percent of all assets in the U.S. in 2013, up from 54.1 percent 30 years earlier. As a consequence, the wealth of the other 95 percent declined from 45.9 percent to 37.5 percent. </p>
<p>As a result, the median wealth of upper-income families (earning US$639,400 on average) was <a href="http://www.pewresearch.org/fact-tank/2014/12/17/wealth-gap-upper-middle-income/">nearly seven times</a> that of middle-income households ($96,500) in 2013, the widest gap in at least 30 years. </p>
<p>More notably, inequality scholars Emmanuel Saez and Gabriel Zucman <a href="http://www.nber.org/papers/w20625.pdf">found</a> that the top 0.01 percent controlled 22 percent of all wealth in 2012, up from just 7 percent in 1979.</p>
<p>If you only looked at data on income inequality, however, you’d see a different picture. In 2013, for example, the top 5 percent of households <a href="https://www.census.gov/library/publications/2014/demo/p60-249.html">earned just 30 percent</a> of all U.S. income (compared with possessing nearly 63 percent of all wealth). </p>
<p>While the U.S. is not the only developed country that has seen wealth inequality rise over the past three decades, it is an outlier. The <a href="http://www.keepeek.com/Digital-Asset-Management/oecd/employment/in-it-together-why-less-inequality-benefits-all_9789264235120-en#page250">wealthiest 5 percent of households</a> in the U.S. have almost 91 times more wealth than the median American household, the widest gap among 18 of the world’s most developed countries. The next highest is the Netherlands, which has a ratio less than half that. </p>
<h2>Lifting all boats?</h2>
<p>The 2018 <a href="https://www.congress.gov/bill/115th-congress/house-bill/1">Tax Cuts and Jobs Act</a> was expected to make this problem a whole lot worse. </p>
<p>The main features of the law include doubling the standard deduction for individual taxpayers, a temporary reduction in the top marginal tax rate from 39.6 percent to 37 percent, a significant reduction of the number of families subject to the estate tax and slashing the top corporate rate from 35 percent to 21 percent. </p>
<p>The main impact, however, <a href="http://www.taxpolicycenter.org/publications/distributional-analysis-tax-cuts-and-jobs-act-passed-senate/full">is skewed to the wealthy</a>. For example, the bottom 20 percent of households will see a lower tax bill of about $40 on average, compared with $5,420 for those in the top quintile. The richest 0.1 percent, meanwhile, will save $61,920. By 2025, the richest will see their benefit grow to $152,200, while everyone else won’t see much of a change. All the individual cuts are set to expire in 2026. </p>
<p>Wealthier taxpayers will also gain from the other main features of the new law. For example, <a href="https://theconversation.com/hot-potato-shows-why-workers-wont-benefit-from-trumps-corporate-tax-cut-86878">research shows</a> most benefits of lowering business taxes go to the rich, and fewer estates subject to the inheritance tax means more wealth accumulation across generations. </p>
<p><a href="http://thehill.com/opinion/finance/366880-tax-bill-is-the-rising-tide-that-will-lift-all-americans-boats">The tax law’s proponents claim</a> that it won’t increase levels of inequality because the money that the rich will save will “trickle down” to other American households and <a href="https://www.wsj.com/articles/the-tax-reform-promise-1513729511?mg=prod/accounts-wsj">lift their boats</a> too.</p>
<p>Empirical evidence, however, suggests otherwise. Specifically, channeling more money to the rich, via tax cuts, <a href="https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Inequality%20and%20Economic%20Growth.pdf">does not improve economic growth</a>, <a href="https://news.harvard.edu/gazette/story/2016/02/the-costs-of-inequality-increasingly-its-the-rich-and-the-rest/">worsens educational opportunities</a> for poorer Americans and even <a href="http://money.cnn.com/2013/09/25/news/economy/income-inequality/index.html">reduces life expectancy</a>, which <a href="https://www.washingtonpost.com/national/health-science/fueled-by-drug-crisis-us-life-expectancy-declines-for-a-second-straight-year/2017/12/20/2e3f8dea-e596-11e7-ab50-621fe0588340_story.html">declined for a second year in a row</a> in 2017. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204723/original/file-20180204-19921-vln4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">How rich are the rich? Chris Rock knows.</span>
<span class="attribution"><span class="source">mpi04/MediaPunch/IPX</span></span>
</figcaption>
</figure>
<h2>Let’s learn the facts</h2>
<p>So is Chris Rock right that Americans just aren’t aware of the levels of disparity in their society? </p>
<p>Surveys suggest he is. Respondents to a <a href="http://journals.sagepub.com/doi/pdf/10.1177/1745691610393524">2011 national survey</a>, for example, “dramatically underestimated” levels of wealth inequality in the U.S.</p>
<p>The survey, and <a href="https://www.newyorker.com/science/maria-konnikova/americas-surprising-views-on-income-inequality">other research</a>, also partially affirmed the other half of his quote by showing that by and large Americans do care about wealth inequality and would prefer it to be lower. </p>
<p>Whether existing wealth inequality in the U.S. is socially or morally sustainable – or might lead to the riots envisioned by Chris Rock – is an open question. </p>
<p>Whatever happens, first things first, we need to know and understand just how bad wealth inequality in the U.S. has become. What we then choose to do about it is up to all of us.</p><img src="https://counter.theconversation.com/content/89682/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gil B. Manzon Jr. does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Income inequality, the most common way to measure the gap between the rich and the poor, only tells part of the story. Wealth inequality tells the rest.Gil B. Manzon Jr., Associate Professor of Accounting, Boston CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/908032018-01-29T11:30:21Z2018-01-29T11:30:21ZWhy it’s too soon for Davos billionaires to toast Trump’s ‘pro-business’ policies<figure><img src="https://images.theconversation.com/files/203670/original/file-20180128-100929-1dvdiu9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">SAP CEO Bill McDermott and Siemens chief Joe Kaeser flank Trump as they praise him for his tax cut.</span> <span class="attribution"><span class="source">AP Photo/Evan Vucci</span></span></figcaption></figure><p>The moguls of global business, who met recently in Davos for the World Economic Forum, may not like Donald Trump’s style. But, if a <a href="https://www.nytimes.com/2018/01/26/business/trump-davos-speech-response.html">series</a> of <a href="https://www.nytimes.com/2018/01/22/business/davos-world-economic-forum-populism.html">reports</a> by <a href="https://www.nytimes.com/2018/01/23/us/politics/trump-davos-elites.html">The New York Times</a> and <a href="https://www.washingtonpost.com/business/economy/trump-wins-over-global-elites-at-davos-all-it-took-was-a-15-trillion-tax-cut/2018/01/25/3c688624-0201-11e8-8acf-ad2991367d9d_story.html7">other</a> <a href="http://money.cnn.com/2018/01/23/news/economy/ceos-love-us-trump-tax-cut-davos/index.html">outlets</a> are to be believed, Trump’s pro-business policies are making it easier for them to forgive his foibles. </p>
<p>Klaus Schwab, the head of the forum, put it <a href="https://www.nytimes.com/2018/01/26/business/trump-davos-speech-response.html?ribbon-ad-idx=7&rref=homepage&module=Ribbon&version=origin&region=Header&action=click&contentCollection=Home%20Page&pgtype=article">this way</a> as he introduced President Trump before his Jan. 26 speech: “On behalf of the business leaders here in this room, let me particularly congratulate you for the historic tax reform [that is] fostering job creation while providing a tremendous boost to the world economy.”</p>
<p>Many attendees <a href="https://www.nytimes.com/2018/01/26/business/trump-davos-speech-response.html">praised</a> <a href="https://theconversation.com/what-trumps-every-country-for-itself-rhetoric-gets-wrong-about-davos-90792">Trump’s speech itself</a> – bolstered by the impression members of his administration gave at the forum – for pragmatism and a “very constructive mind-set.”</p>
<p>Such wonky gushing is shortsighted, however, and ignores the long-term risks of Trumpism for the economic prosperity of the U.S. and the world. Research into the politics of economic growth – one of my areas of expertise – explains why. </p>
<h2>Don’t pop the champagne corks yet</h2>
<p>Since becoming president, Trump has overseen significant <a href="https://www.csmonitor.com/Business/2018/0105/Trump-s-deregulation-drive-is-epic-in-scale-and-scope.-And-yet">deregulation</a> in several industries, and his signature economic initiative is a <a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trumps-tax-cuts-delivering-hardworking-americans-manufacturers/">major tax cut</a> focused on businesses. The <a href="https://www.cnn.com/2018/01/05/politics/trump-dow-jones-interactive/index.html">strong performance</a> of the U.S. stock market suggests investors, at least, are quite smitten with his policies.</p>
<p>It is true that tax cuts and deregulation can provide a fiscal stimulus and, when done correctly, can even <a href="http://www.france24.com/en/20180123-imf-global-growth-boost-trump-tax-cuts">spur growth</a> by encouraging investment. It is also true that many in the business community are <a href="https://www.nytimes.com/2018/01/24/business/trump-davos-follow-the-money.html">relieved</a> that Trump seems <a href="https://theconversation.com/trumps-brand-of-economic-populism-gets-a-makeover-in-first-100-days-76077">uninterested</a> in following through on his populist rhetoric.</p>
<p>But it is important to remember that the long-term business costs of Trump’s destabilizing influence are likely to be much greater than any short-term policy benefits. This is because businesses must operate within a social and political context, one that influences their success at every step.</p>
<p>Trump’s behavior since taking office – his <a href="https://twitter.com/realDonaldTrump?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor">willingness to ignore</a> the norms of civil discourse, his <a href="http://billmoyers.com/story/trump-russia-timeline/">possible links</a> to the authoritarian regime in Russia, his <a href="http://www.bbc.com/news/world-us-canada-38069298">problematic business interests</a> and, especially, his contempt for the <a href="https://www.brennancenter.org/analysis/his-own-words-presidents-attacks-courts">judiciary</a> and the <a href="https://www.washingtonpost.com/outlook/how-to-work-for-a-president-who-hates-the-civil-service/2018/01/26/34dbe95c-0204-11e8-bb03-722769454f82_story.html">professional civil service</a> – has eroded global <a href="https://www.npr.org/2018/01/17/578422668/heres-just-how-little-confidence-americans-have-in-political-institutions">confidence</a> in American institutions. </p>
<p>This is a serious problem for business. Research has confirmed <a href="http://whynationsfail.com/summary/">over</a> and <a href="http://www.cambridge.org/us/academic/subjects/politics-international-relations/political-economy/institutions-institutional-change-and-economic-performance">over</a> the link between open and stable political institutions and economic growth. We now know that <a href="https://www.sciencedirect.com/science/article/pii/S2340943615000195">entrepreneurship</a>, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2342668">natural resource wealth</a> and even <a href="https://press.princeton.edu/titles/8494.html">the right economic policies</a> are not enough to bring prosperity, when people are unable to trust the integrity of a country’s political and legal system. Instability <a href="https://dash.harvard.edu/bitstream/handle/1/4553024/alesina_instabilitygrowth.pdf?s">deters investment</a>, both foreign and domestic, and raises fears that the benefits of hard work will not be rewarded.</p>
<h2>The China exception?</h2>
<p>At first glance, the phenomenal growth experienced by autocracies such as China and Singapore may seem to be exceptions to this rule. But a comparative view shows that stability is critical for growth even among authoritarian regimes. </p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2478.2012.00753.x/abstract">My own research</a> (co-authored with political scientist Daniel Kuthy) suggests that more institutionalized and stable dictatorships are more inclined to choose economic policies that promote growth. And <a href="https://www.amazon.com/Political-Institutions-Dictatorship-Jennifer-Gandhi/dp/0521155711/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=">research by Emory University’s Jennifer Gandhi</a> has made the link between authoritarian stability and growth even more directly.</p>
<p>Even so, <a href="https://www.amazon.com/Globalizing-Innovation-Institutions-Investment-Economies-ebook/dp/B078X54VRC/ref=sr_1_1?s=books&ie=UTF8&qid=1517192617&sr=1-1&keywords=politics+fdi">stable</a> <a href="https://www.amazon.com/Nation-States-Multinational-Corporation-Political-Investment-ebook/dp/B003NUSAP6/ref=sr_1_4?s=digital-text&ie=UTF8&qid=1517192929&sr=1-4">democracy</a>, with its transparency and its rule of law, is the best sort of government for business. Such countries as <a href="http://natoassociation.ca/exploring-the-effects-of-economic-instability-in-venezuela/">Venezuela</a> and <a href="https://www.chathamhouse.org/expert/comment/turkish-economy-struggling-political-volatility">Turkey</a> have experienced negative economic consequences after backsliding from democracy.</p>
<h2>Business and society</h2>
<p>Economic growth is also <a href="http://www.seh.ox.ac.uk/sites/default/files/DP15.pdf">tightly linked</a> to <a href="https://press.princeton.edu/titles/5105.html">social</a> cooperation and peace. </p>
<p>When there is a high level of antagonism in society, whether by class, race, ethnicity, gender, geography or something else, businesses must operate in a much more complicated environment. There is a greater threat of strikes, reduced public support for liberal markets, and more challenges in the workplace and in product marketing.</p>
<p>It is here that Trump’s statements and behavior, from his <a href="https://newrepublic.com/article/146683/trump-fox-news-mainstreaming-white-nationalism">failure to condemn</a> white nationalists to his well established <a href="http://www.telegraph.co.uk/women/politics/donald-trump-sexism-tracker-every-offensive-comment-in-one-place/">sexism</a>, can be so harmful. The highly <a href="https://mitpress.mit.edu/books/polarized-america">polarized</a> climate of today, quite apart from the <a href="https://www.nytimes.com/2018/01/27/opinion/sunday/democracy-polarization.html">inherent problems</a> it creates, is <a href="http://onlinelibrary.wiley.com/doi/10.1111/ecin.12070/abstract">bad</a> for business.</p>
<p>Moreover, social peace is <a href="http://www.cambridge.org/us/academic/subjects/economics/industrial-economics/inequality-and-industrial-change-global-view?format=PB&isbn=9780521009935#S3Y3gDuBLrcfG1hz.97">connected</a> to levels of economic inequality. This is where even the policies that many businesses support can have seriously <a href="https://www.economist.com/blogs/economist-explains/2014/05/economist-explains">negative repercussions</a> in the long term. Analysts agree that Trump’s tax cuts will have the effect of <a href="http://fortune.com/2017/11/03/trump-gop-tax-plan-cuts-2017/">concentrating wealth</a> even more fully in the hands of the few. For businesses, the short-term benefits of a tax concession should not outweigh the risks posed by increased inequality and polarization.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=443&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=443&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203709/original/file-20180129-100908-ntfxyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=443&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Most of those who attend the meeting in Davos, including CEOs, have a more internationalist bent than Trump. From left to right, Christine Lagarde, managing director of the International Monetary Fund, Erna Solberg, prime minister of Norway, Virginia Rometty, CEO of IBM, Chetna Sinha, president of the Mann Deshi Foundation, Fabiola Gianotti, director of the European Organization for Nuclear Research, Sharan Burrow, general secretary of the International Trade Union Confederation, and Isabelle Kocher, CEO of ENGIE.</span>
<span class="attribution"><span class="source">AP Photo/Markus Schreiber</span></span>
</figcaption>
</figure>
<h2>Trumpism abroad</h2>
<p>Most of the corporate CEOs who gathered in Davos <a href="https://theconversation.com/trump-at-davos-can-america-first-lead-to-shared-prosperity-across-the-world-90792">have a distinctly international orientation</a>. President Trump’s “<a href="https://theconversation.com/us/topics/america-first-34020">America First</a>” policies are likely to harm their interests much more than those of domestic business leaders. </p>
<p>For international businesses to function, a network of global agreements and understandings is necessary. The countries of the world have built this network over decades, largely under the leadership of the United States. </p>
<p>If the primary architect of this system no longer supports it, there is a risk that new impediments to trade and capital flows will make economic interdependence <a href="https://theconversation.com/trumps-america-first-trade-policy-ignores-key-lesson-from-great-depression-87477">harder to sustain</a>. While supporters of globalization are <a href="https://www.nytimes.com/2018/01/24/us/politics/trump-trade-america-first-davos.html">moving forward</a> without the Trump administration, the world should not be sanguine about the future of the liberal economic order without active American support.</p>
<p>Just as seriously, an international conflict could have a severely <a href="http://onlinelibrary.wiley.com/doi/10.1111/1468-2478.00042/full">detrimental</a> impact on <a href="https://www.huffingtonpost.com/michael-shank/economic-consequences-of-_b_1294430.html">economic activity</a>. Loose talk from the Trump administration, to the extent that it <a href="http://thehill.com/homenews/administration/347783-poll-68-percent-think-trump-could-accidentally-get-us-in">increases the risk of war</a>, is a serious threat to business success.</p>
<p>For all of these reasons, the optimism that many seemed to be feeling at Davos is misplaced. Businesses operate within a social and political context, and when that context is destabilized, they cannot escape the consequences.</p><img src="https://counter.theconversation.com/content/90803/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Charles Hankla does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The billionaires, business leaders and other elites who gathered in Davos praised the president’s policies, yet research on the politics of economic growth suggests it’s too soon to celebrate.Charles Hankla, Associate Professor of Political Science, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/905362018-01-24T04:01:17Z2018-01-24T04:01:17ZQantas and other big Australian businesses are investing regardless of tax cuts<p><a href="http://faculty.tuck.dartmouth.edu/images/uploads/faculty/jonathan-lewellen/Investment_and_cashflow.pdf">Research</a> shows that tax cuts lead to increases in corporate investment. But analysis of Australian companies’ financial statements, and what American companies have done since the <a href="https://theconversation.com/gop-tax-plan-doubles-down-on-policies-that-are-crushing-the-middle-class-89047">Trump tax reform</a>, show this increased investment could be rather small.</p>
<p>High-profile Australian CEOs have been <a href="https://www.businessinsider.com.au/corporate-tax-cut-create-more-jobs-2018-1">campaigning</a> for company tax cuts, claiming it would lead to more corporate investment, jobs and even wage rises. </p>
<p>But it is unlikely that a lower tax rate will be a key driver of investment. Especially as companies like Qantas have <a href="https://www.qantasnewsroom.com.au/media-releases/qantas-group-full-year-2017-financial-result/">already announced</a> billions in investments. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-australia-doesnt-need-to-match-the-trump-tax-cuts-84903">Why Australia doesn't need to match the Trump tax cuts</a>
</strong>
</em>
</p>
<hr>
<p>The idea behind tax cuts driving investment is that they create more “<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.1998.tb00564.x/full">free cash flow</a>”. This is the amount of cash a business generates from its day to day operations minus what it spends on capital expenditure (property, equipment and maintenance for example). </p>
<p><a href="http://faculty.tuck.dartmouth.edu/images/uploads/faculty/jonathan-lewellen/Investment_and_cashflow.pdf">Studies</a> show more free cash flow does, on average, lead to increased investment. But the extra cash is also used to pay down debt, pay dividends and increase working capital (cash used for day to day expenses). </p>
<h2>A look at the books</h2>
<p>Qantas CEO Alan Joyce has been <a href="https://www.businessinsider.com.au/corporate-tax-cut-create-more-jobs-2018-1">one of the most vocal</a> proponents of corporate tax cuts, claiming it could lead to new routes and the purchase of new aircraft. </p>
<p>This is plausible, but a 5% tax cut is not likely to lead to huge increases in profitability or cash flows for Qantas. At least in the short term.</p>
<p>Qantas <a href="http://investor.qantas.com/annual-report-2017/">currently has</a> A$951 million of tax losses due to a couple of lean years <a href="http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/full-year-results/mediaReleaseResults14.pdf">before 2014</a>. These can be used to offset any future taxable income.</p>
<p>Qantas will not pay tax until its profits in the years after 2014 exceed the tax losses recorded before 2014. Only once these tax losses have been used up will a lower tax rate lead to an increase in cash flow.</p>
<p><iframe id="ME0TY" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ME0TY/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>But even if Qantas didn’t have tax losses, the impact of the tax cut would be marginal. Analysts are <a href="https://www2.commsec.com.au/Private/MarketPrices/CompanyProfile/Forecasts.aspx?pID=p5aGOCFwhXY_WCJEsJPOYLuamyHpix_e6buhnW95muA1&stockCode=QAN">forecasting</a> earnings growth of 1.2% for Qantas in the 2018 financial year. </p>
<p>Given 1.2% profit growth, a 5% reduction in Qantas’ effective tax rate would mean an additional A$60 million in after tax profit in 2018.</p>
<p>This additional A$60 million for Qantas is relatively small when you compare it to the <a href="https://www.qantasnewsroom.com.au/media-releases/qantas-group-full-year-2017-financial-result/">A$3 billion</a> in capital investment already announced for 2018 and 2019. </p>
<p>This investment was planned, and it’s irrespective of any tax cuts. Qantas generated over A$2.7 billion in cash in 2017, so the A$3 billion capital investment was already plausible without a tax cut.</p>
<p><iframe id="ClIb6" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ClIb6/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>A similar analysis on Wesfarmers’ <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/app-4e---preliminary-final-report-and-2017-full-year-results.pdf?sfvrsn=0">2017 results</a> shows a 2017 pre-tax profit of A$4.1 billion. A 5% reduction in the tax rate would correspond with an approximate saving of just A$206 million in 2017, compared to A$ 1.6 billion <a href="https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4">in capital investment</a>. </p>
<p>For a smaller company like <a href="http://investors.myob.com.au/Investors/?page=financial-reports">MYOB</a>, with a pre-tax profit of A$73.7 million in 2016, the impact is even smaller. A 5% tax saving would result in an increase in after-tax profits of just under A$4 million. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/business-investment-is-weak-but-an-unfunded-company-tax-cut-wont-fix-it-73655">Business investment is weak, but an unfunded company tax cut won't fix it</a>
</strong>
</em>
</p>
<hr>
<p>So, it is plausible that tax cuts could lead to increased investment, more jobs or higher wages. Changes in tax rates can affect both investment decisions and shorter-term operational decisions. </p>
<p>But beyond the circumstances of individual companies, there are other factors that in how tax cuts factor in to company investment. This includes <a href="http://www.businessinsider.com/mark-cuban-trump-tax-rate-has-zero-impact-on-investment-2017-11?IR=T">how competitive</a> an industry is, and whether it is capital or labour intensive. </p>
<p>When corporate taxes are changed, firms <a href="http://www.jstor.org/stable/248269?seq=1#page_scan_tab_contents">will also</a> try to shift their spending and profits, where possible, in order to claim the most profits in periods of lower tax.</p>
<p>One way to do this is to pay bonuses. In the United States, we have seen <a href="https://www.atr.org/list">over 150</a> public companies announce bonuses following the recent tax reform. These bonuses are not a permanent salary increase. They are being paid this year, reducing the firm’s current taxable income, before tax rates change.</p>
<p>While the claims of increased corporate investment and jobs are supported by the research, and even the recent US experience, we should be wary about how large the benefits are.</p><img src="https://counter.theconversation.com/content/90536/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeff Coulton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows there is a link between tax cuts and increased business investment, but the effect is likely smaller than politicians and businesspeople say.Jeff Coulton, Senior Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/899682018-01-16T19:11:49Z2018-01-16T19:11:49ZWhy Apple buying Disney is pure fantasy<figure><img src="https://images.theconversation.com/files/202021/original/file-20180116-53307-1o45mn2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Apple's expertise isn't in operating theme parks.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Acquiring Disney may make Apple’s products more valuable due to exclusive content and streaming rights, but it also goes against what Apple is good at – what does it know about running theme parks?</p>
<p>With US President Donald Trump’s tax reform to be <a href="https://www.vox.com/policy-and-politics/2017/11/29/16709526/tax-reform-republican-plan-take-effect">implemented this month</a>, Apple will be able to repatriate the <a href="https://techcrunch.com/2017/12/16/apple-has-a-history-of-choosing-cash-over-startups/">estimated</a> <a href="https://www.apple.com/newsroom/pdfs/fy17-q4/Q4FY17ConsolidatedFinancialStatements.pdf">US$260 billion</a> it has sitting offshore and <a href="https://www.businessinsider.com.au/apple-potential-merger-acquisition-candidates-aapl-2017-12">many are speculating</a> that it will be looking to bolster its struggling TV and movie offerings. </p>
<p>But buying companies that <a href="https://search.proquest.com/openview/01723f8a607d29ef538d9a0377928f6a/1?pq-origsite=gscholar&cbl=1817083">don’t complement the main business</a> went out of fashion <a href="http://onlinelibrary.wiley.com/doi/10.1002/smj.2480/full">a while ago</a>. In recent years, acquisitions and partnerships have involved companies that reflect and enhance each other’s “core competencies”, adding value to both businesses. </p>
<p>Look at <a href="https://blog.walmart.com/innovation/20170823/walmart-google-partner-to-make-shopping-even-easier-heres-how">Google and Walmart</a> partnering to compete with Amazon, for example. This leverages Google’s online shopping platform and home assistant, and Walmart’s distribution channel.</p>
<p><a href="http://www.sciencedirect.com/science/article/pii/S0024630197000915">Core competencies</a> give a company a competitive advantage over its competitors. Apple has a number of core competencies. These include the design, marketing and customer service that make its customers passionate about its products; and its “platforms” that curate the content of others (for example, music, apps and games). </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">Apple iTax: made in Ireland, designed in the US</a>
</strong>
</em>
</p>
<hr>
<p>Besides possibly <a href="http://money.cnn.com/2017/05/03/investing/apple-acquisitions-cash/index.html">wiping out Apple’s entire cash stash</a>, buying Disney also means buying all of its businesses – media networks, parks and resorts, studios, consumer products (such as toys) and interactive media. </p>
<p>Maybe the theme parks and consumer products could be sold off, leaving Apple with the content-related businesses. But on the whole this acquisition would leave Apple with a lot of assets that don’t fit in with its other businesses and products.</p>
<p>Compare this to Apple’s <a href="https://www.apple.com/au/newsroom/2014/05/28Apple-to-Acquire-Beats-Music-Beats-Electronics/">acquisition of Beats Electronics in 2014</a>. This not only provided a new line of products (headphones) that complement Apple’s devices, but also came with a music-streaming platform that has been folded into Apple’s music platform. In other words, this acquisition fits with what Apple does best. </p>
<h2>Why would Apple buy Disney?</h2>
<p>The <a href="https://www.forbes.com/sites/chuckjones/2017/12/16/could-apple-buy-disney-before-disney-buys-foxs-assets/#12c8c53d1c39">idea</a> is that buying Disney would help Apple compete against other players like Amazon, Google and Comcast. AppleTV’s share of the streaming devices market has <a href="https://www.statista.com/statistics/614740/us-streaming-media-player-sales-share-by-brand/">declined</a> in recent years. </p>
<p>Disney already has a valuable back catalogue of content, as it owns Lucasfirm (which produces <a href="https://thewaltdisneycompany.com/disney-to-acquire-lucasfilm-ltd/">Star Wars</a>), <a href="https://thewaltdisneycompany.com/disney-to-acquire-pixar/">Pixar</a>, <a href="https://thewaltdisneycompany.com/disney-completes-marvel-acquisition/">Marvel</a>, <a href="https://web.archive.org/web/20110921174047/http://amedia.disney.go.com/investorrelations/factbook_2006.pdf">ESPN and US television network ABC</a>. Recently, Disney also <a href="https://thewaltdisneycompany.com/walt-disney-company-acquire-twenty-first-century-fox-inc-spinoff-certain-businesses-52-4-billion-stock/">committed to acquire</a> Rupert Murdoch’s 21st Century Fox and bought out <a href="https://thewaltdisneycompany.com/walt-disney-company-acquire-majority-ownership-bamtech/">BAMtech</a>, the company that operates the streaming service for many sport leagues. </p>
<p>The potential for Apple in this space is huge. With Disney’s assets, AppleTV could become a “lifestyle content” platform for a large swath of services and consumers. These would include television, movies, games, music, photos, smart home applications, augmented reality products, online shopping and who knows what in the future. </p>
<p>This could <a href="https://www.forbes.com/sites/chuckjones/2017/12/16/could-apple-buy-disney-before-disney-buys-foxs-assets/#12c8c53d1c39">provide another revenue stream</a> for Apple, diversifying it from the iPhone release cycles. </p>
<p>But in the end, Disney may not be as valuable to Apple as it is as an independent company. With its content restricted to Apple devices, it would lose a huge portion of its audience. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/rise-of-corporate-divorces-leads-to-fleeting-gains-33455">Rise of corporate divorces leads to fleeting gains</a>
</strong>
</em>
</p>
<hr>
<p><a href="http://www.jstor.org/stable/25146059">Research</a> also shows that, on average, the shareholder value of a firm goes down after it makes an acquisition, and that <a href="http://knowledge.wharton.upenn.edu/article/why-do-so-many-mergers-fail/">over 50% of mergers are seen as failures</a>. </p>
<p>History is littered with failed acquisitions. For example, the merger of Daimler and Chrysler arguably <a href="http://articles.chicagotribune.com/2007-05-15/news/0705141000_1_daimler-benz-cerberus-capital-management-carmakers">destroyed billions of dollars of shareholder value</a>.</p>
<p>This isn’t to say that Apple shouldn’t consider acquisitions in completely different industries. But it is crucial for the company being acquired to fit in with what Apple does best.</p><img src="https://counter.theconversation.com/content/89968/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danielle Logue receives funding from the Australian Research Council and has previously received research funding from InnovationXChange, Department of Foreign Affairs and Trade.</span></em></p><p class="fine-print"><em><span>Charlene Zietsma has previously received funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>Acquiring companies that don’t complement the main business went out of fashion more than a decade ago.Danielle Logue, Associate Professor in Innovation, Entrepreneurship and Strategy, University of Technology SydneyCharlene Zietsma, Associate professor, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/896772018-01-08T03:58:17Z2018-01-08T03:58:17ZWhy states may get away with creative income tax maneuvers<figure><img src="https://images.theconversation.com/files/201026/original/file-20180105-26169-1r17m2k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">New York Gov. Andrew Cuomo vows he will fight to protect his state from fallout from the new tax law.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/State-of-the-State-Cuomo/67246e55677e4081ad9fff951b4d5650/2/0">AP Photo/Hans Pennink</a></span></figcaption></figure><p>Fearing that the new tax law will make it harder for them to raise enough revenue for public schools and other vital services, high-tax states such as <a href="https://www.bloomberg.com/news/articles/2018-01-05/new-jersey-s-murphy-joins-tax-fight-as-cohn-hints-at-pushback">California, New Jersey and New York</a> are wasting no time in <a href="https://taxfoundation.org/state-strategies-preserve-state-and-local-tax-deduction/">fighting back</a>. </p>
<p>Other states are likely to follow suit as the benefits of these actions become clear, setting the stage for a bitter legal dispute over federal and state taxation.</p>
<p>As a tax law professor who researches the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2943713">interactions between federal and state tax systems</a>, I believe these initiatives are likely to succeed in softening the impact of the new tax law on residents of high-tax states. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"948277864767434752"}"></div></p>
<h2>Bypass the SALT</h2>
<p>At issue is a new <a href="http://money.cnn.com/2017/12/20/pf/salt-deductions-new-tax-plan/index.html">US$10,000 cap</a> on the amount of money Americans may deduct on their federal income tax returns for what they pay in state and local taxes.</p>
<p>What’s more, because the new law <a href="https://www.bustle.com/p/does-the-tax-bill-eliminate-the-personal-exemption-the-change-will-hit-families-most-7651167">rolls all personal exemptions</a> into an enlarged standard deduction, millions of households will stop itemizing on their returns. Consequently, the number of taxpayers claiming the “SALT” deduction is likely to fall by <a href="http://www.taxpolicycenter.org/publications/distributional-analysis-tax-cuts-and-jobs-act-passed-senate/full">around two-thirds</a>.</p>
<p><a href="https://theconversation.com/the-gop-tax-plan-state-and-local-taxes-deductions-and-you-88526">This SALT constraint</a> will take the <a href="https://taxfoundation.org/state-and-local-tax-deduction-primer/">biggest toll</a> on residents of states where residents are most reliant on the current deduction. New York, New Jersey, Connecticut and California top that list.</p>
<p>As a result, experts predict that voters in those states will become <a href="https://www.cbpp.org/blog/house-tax-bills-changes-to-state-and-local-tax-deductions-would-hurt-states">more resistant to existing taxes and more apt to oppose future increases</a>. That could be particularly problematic for states – like Illinois and New Jersey – with <a href="https://www.bloomberg.com/graphics/2017-state-pension-funding-ratios/">severely underfunded pension plans</a>. </p>
<p>The new limitations on the SALT deduction may even make it harder for high-tax states to <a href="https://www.nytimes.com/2017/12/04/business/economy/tax-bill-new-york.html">attract talented, high-earning and mobile workers</a>, leading to less dynamic state and local economies. </p>
<h2>Two switcheroos</h2>
<p>Two main strategies to bypass this constraint are taking shape.</p>
<p>First, New York is considering a proposal to shift some of its revenue-raising from personal income taxes to <a href="https://www.fa-mag.com/news/state-governments-are-already-gaming-the-republican-tax-overhaul-36477.html">payroll taxes</a>. The reason it would want to do that is because payroll taxes charged to employers – unlike personal income taxes – remain fully deductible under the new federal tax law.</p>
<p>Second, <a href="http://sd24.senate.ca.gov/news/2018-01-04-senate-leader-de-leon-introduces-legislation-protect-california-taxpayers">California</a> and <a href="http://www.northjersey.com/story/news/new-jersey/2018/01/05/charity-workaround-new-federal-cap-could-save-new-jersey-residents-money-new-federal-cap-tax-deducti/1006589001/">New Jersey</a>, as well as New York, are considering plans to grant tax credits to taxpayers who donate to state-affiliated institutions, such as public schools, hospitals and parks.</p>
<p>These donations would be voluntary, and the resulting credits could be used to offset state and local income and property tax liabilities.</p>
<p>This is feasible because the tax overhaul left the <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">charitable contribution deduction intact</a> and the <a href="https://turbotax.intuit.com/tax-tips/charitable-contributions/are-contributions-to-school-district-programs-tax-deductible/L6YhGgwPA">IRS has already indicated</a> that donations to state charitable credit programs should be treated for federal tax purposes as charitable contributions rather than state and local tax payments.</p>
<p>Anyone who hits the US$10,000 SALT cap could benefit from programs of this sort. Those taxpayers could replace some or all of their nondeductible state tax payments with deductible charitable contributions.</p>
<p>Not only would these initiatives alleviate the added federal burden for some taxpayers, they could make it easier for state and local governments to raise revenue in the future because residents could pay for public schools and other services with tax-deductible dollars. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"949351965665918976"}"></div></p>
<h2>Payroll please</h2>
<p>Here’s how the payroll tax change, which New York Gov. Andrew Cuomo mentioned his <a href="https://www.newsday.com/news/region-state/cuomo-payroll-tax-1.15794578">State of the State speech</a>, would work.</p>
<p>Let’s say your employer pays you $100,000 a year and you pay $5,000 in state personal income taxes, leaving $95,000 before federal taxes and other charges.</p>
<p>What if instead your employer paid you $95,000 in wages and also paid a $5,000 payroll tax to the state? Your employer would be no worse off, with its out-of-pocket cost still totaling $100,000, and the new tax law preserves an employer’s ability to deduct payroll taxes from their own tax bills. </p>
<p>And you generally would be no worse off either, as you would still have $95,000 before dealing with your federal tax bill. </p>
<p>Indeed, you would most likely fare better financially once federal taxes are factored in. The federal government would tax you on $95,000, whereas you would be taxed on the full $100,000 if the state did not adopt the payroll tax workaround and if you could not claim a SALT deduction.</p>
<p>That would be the case if you claim the standard deduction – as <a href="http://thehill.com/opinion/finance/366773-nonprofits-are-the-unintended-victims-of-new-tax-bill">at least nine-tenths of taxpayers</a> will – or if you hit the $10,000 SALT cap based on property taxes alone. Depending on your federal tax bracket, the savings could increase your after-tax income by anywhere from 0.6 percent to 3.1 percent. </p>
<p>States adopting this approach do not need to repeal their personal income taxes entirely. Their income taxes still would apply to earnings from sources other than wages, such as investment or self-employment income. But they would not tax workers on wages that already have been subject to an employer-side payroll tax.</p>
<p>Implementing this change would be relatively straightforward in states like Illinois, Massachusetts and Pennsylvania, which have <a href="https://www.thebalance.com/which-states-have-a-flat-income-tax-rate-3193306">flat personal income tax rates</a>. It would be somewhat more complicated to pull this off in states such as <a href="https://www.tax.ny.gov/pdf/current_forms/it/it201i_tax_rate_schedule.pdf">New York</a> and <a href="https://www.ftb.ca.gov/forms/2017-California-Tax-Rates-and-Exemptions.shtml">California</a>, which have highly progressive rate structures.</p>
<p>But this can almost certainly be done through a <a href="https://medium.com/whatever-source-derived/implementing-a-state-level-payroll-tax-in-response-to-the-rollback-of-salt-9ca712e30cf3">system of refundable credits</a>, and the potential savings for state residents would be dramatic. In New York, for example, an average household might <a href="https://medium.com/whatever-source-derived/implementing-a-state-level-payroll-tax-in-response-to-the-rollback-of-salt-9ca712e30cf3">save around $1,200 per year</a> on its federal taxes.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/201022/original/file-20180105-26157-1xgq3ab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Senate Minority Leader Chuck Schumer of New York and House Minority Leader Nancy Pelosi of California, like every single Democratic lawmaker, opposed the tax law – partly due to its impact on high-tax states.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Congress-Taxes/93f341e8cc7c428fad3b91f069658f7c/14/0">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>Charity begins at home</h2>
<p>And here’s how the charitable credit idea would work: Say your state offers you a 90-cent credit against state taxes for every dollar you give to an in-state university or local community college. The IRS determined in a <a href="https://www.irs.gov/pub/irs-wd/1105010.pdf">memo in 2011</a> addressing a similar program in Missouri that the full $1 donation would be a deductible charitable contribution, notwithstanding the state tax credit you get in return.</p>
<p>For someone in the 37 percent federal income tax bracket, this means their $1 donation would generate 90 cents in state tax benefits and 37 cents in federal tax benefits. That’s a $1.27 after-tax return on a $1 investment.</p>
<p><a href="https://www.edchoice.org/school-choice/school-choice-in-america/">More than a dozen states</a> already have implemented tax credit programs like this to finance <a href="https://theconversation.com/tax-credits-school-choice-and-neovouchers-what-you-need-to-know-74808">private school vouchers</a>. Nothing would stop them from extending these programs to finance state universities, community colleges, K-12 public schools, hospitals, parks and more.</p>
<p>Indeed, California Senate President <a href="http://www.washingtonexaminer.com/california-state-senate-leader-introduces-workaround-for-tax-laws-salt-limit/article/2645026">Kevin de León already has introduced</a> a bill along these lines. New York’s Gov. Cuomo has expressed interest in the idea too, as has New Jersey Gov.-elect <a href="https://www.bloomberg.com/news/articles/2018-01-05/new-jersey-s-murphy-joins-tax-fight-as-cohn-hints-at-pushback">Phil Murphy</a>.</p>
<h2>Lingering questions</h2>
<p>The payroll tax idea would work best for the majority of workers who earn wage income and who will claim the standard deduction under the new federal tax law. The charitable contribution credit, in contrast, would be more likely to benefit higher-income households who continue to itemize deductions for federal purposes.</p>
<p>States can adopt both because the two approaches are not mutually exclusive. </p>
<p>Theoretically, the IRS could challenge either approach. But a well-designed state plan should hold up in court. With respect to the payroll tax workaround, Congress has explicitly said that taxes paid by employers should remain deductible, and nothing requires states to tax the wage income of their residents.</p>
<p><a href="https://www.bankrate.com/finance/taxes/state-with-no-income-tax-better-or-worse-1.aspx">Seven states</a> already have no state income tax, and two more have income taxes that exclude wages. There is <a href="https://medium.com/whatever-source-derived/state-payroll-tax-shift-stands-on-solid-legal-ground-fe769d8ab309">no legal obstacle</a> preventing additional states from reducing their reliance on income tax revenue and shifting toward employer-side payroll taxes.</p>
<p>The IRS of course could revoke its 2011 memo that blessed the charitable arrangements already out there. But decades of judicial precedent, which the agency on its own can’t undo, supported that memo. Moreover, with similar <a href="https://www.usnews.com/news/politics/articles/2017-08-11/school-choice-program-raises-questions-about-accountability">tax credit programs</a> that finance private school vouchers popular among the Republican Party’s base, GOP lawmakers may resist moves to end such credit arrangements.</p>
<p>How many states will ultimately adopt proposals along these lines? It’s too soon to say, but for now, it looks like states that choose to fight back against the SALT rollback will have the upper hand.</p><img src="https://counter.theconversation.com/content/89677/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Hemel has provided advice, on a volunteer basis, to state officials in California, Illinois, Maryland, and New York who have inquired about potential responses to the new tax law.</span></em></p>New York, California and other high-tax states are angling to use the charitable deduction and state payroll taxes as workarounds to shield both their residents and their revenue.Daniel Hemel, Assistant Professor of Law, University of ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/894272017-12-21T11:20:27Z2017-12-21T11:20:27ZWill Americans finally start fighting back against tax cuts for the rich?<p>The <a href="http://maristpoll.marist.edu/1212-majority-views-tax-bill-as-adding-financial-injury-potus-favors-wealthy-say-americans/">60 percent of Americans</a> who believe that the <a href="https://www.bloomberg.com/news/articles/2017-12-20/senate-sends-gop-s-1-5-trillion-tax-cut-to-house-for-final-vote">GOP tax package</a> will mostly <a href="https://apnews.com/c59140758e824054a9c26c1eb5b02e5e/AP-FACT-CHECK:-Trump's-truth-warp-on-taxes;-Dems-drift,-too">help the wealthiest</a> among us are right, according to an analysis by the Tax Policy Center.</p>
<p>But will widespread disapproval translate into political costs or electoral losses for Republicans? Will Americans decide they are finally fed up with over half a century of <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">soaring economic inequality</a> and <a href="https://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf">declining tax rates on the rich</a> as income and wealth for everyone else but the wealthiest stagnate?</p>
<p>My students and I have spent this semester reviewing the history of tax reform. It gives us several reasons to be skeptical that voters will punish politicians for the tax plan.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"942850721774436352"}"></div></p>
<h2>Polling poorly</h2>
<p>The tax bill may cost taxpayers up to <a href="http://www.crfb.org/blogs/final-tax-bill-could-end-costing-22-trillion">US$2.2 trillion</a>, according to the Committee for a Responsible Federal Budget, and the Joint Committee on Taxation estimates it will only <a href="https://www.jct.gov/publications.html?func=startdown&id=5050">modestly enhance</a> economic growth.</p>
<p>So it should be no big surprise that <a href="http://maristpoll.marist.edu/1212-majority-views-tax-bill-as-adding-financial-injury-potus-favors-wealthy-say-americans/">poll</a> after <a href="http://thehill.com/policy/finance/365684-poll-24-percent-of-americans-think-gop-tax-plan-is-a-good-idea">poll</a> has shown that voters strongly disapprove of this Republican initiative. It is even <a href="https://www.cnbc.com/2017/12/18/nearly-half-of-americans-oppose-gop-tax-bill-monmouth-poll-says.html">notably less popular</a> than the last major revision of the tax code – which Congress passed and President Ronald Reagan signed into law three decades ago.</p>
<p>In fact, this is the <a href="https://fivethirtyeight.com/features/will-passing-the-tax-bill-help-the-gop-in-2018-probably-not/">least popular</a> tax cut in at least a generation.</p>
<p>Only 26 percent of Americans approved of the tax overhaul legislation passed by the House and the Senate, according to a <a href="https://www.monmouth.edu/polling-institute/reports/MonmouthPoll_US_121817/">Monmouth University</a> poll taken about a week before both chambers approved a compromise version.</p>
<p>When <a href="http://www.people-press.org/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share/">Pew</a> asked Americans what bothers them the most about taxes, the top two answers were that corporations and the wealthy don’t pay their fair share. Nevertheless, tax rates on the rich keep going down, not up.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"942786886673817600"}"></div></p>
<h2>Homer’s tax cut</h2>
<p>Much of the academic research about why Americans tolerate tax cuts for the rich revolves around versions of the “wishful thinking hypothesis.” </p>
<p>The less charitable version of the hypothesis is that Americans are ignorant. For example, in a paper that references the buffoonish cartoon dad from “The Simpsons” TV show, political scientist Larry Bartels tries to explain widespread public support for the Bush tax cuts of 2001 and 2003, which also primarily benefited higher-income Americans. In “<a href="http://web.mit.edu/berinsky/www/homer.pdf">Homer Gets a Tax Cut</a>,” he finds that Americans were ill-informed and simply did not make connections between tax policy and inequality.</p>
<p>As Bartels argues, “Notwithstanding the vastness of the stakes, public thinking about this issue seems to have been remarkably superficial.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200267/original/file-20171220-4957-1wjsugh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Visitors to the Universal Studios Hollywood amusement park can board The Simpsons virtual-reality roller-coaster ride. Homer is the bald father figure shown here.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/los-angeles-hollywood-usa-july-16-530484742?src=eLr3n5BUnNlxJELulSobWQ-1-30">Pack-Shot/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Sociologist <a href="https://www.nytimes.com/2017/12/18/opinion/republicans-tax-cuts-rich.html?_r=0">Isaac Martin</a> recently wrote in the New York Times op-ed section that American ignorance about tax policy isn’t all our fault. His essay describes a decadeslong grassroots campaign begun by banker and philanthropist Andrew Mellon, who served as treasury secretary after World War I, to convince the public that tax cuts for the rich pay for themselves through economic growth – a claim mainstream economists have <a href="http://www.crfb.org/papers/tax-cuts-dont-pay-themselves">debunked</a>.</p>
<p>Martin argues that the public needs to re-engage in the tax debate and “reclaim their own populist roots.”</p>
<h2>Wishful thinking</h2>
<p>The more charitable version of the wishful thinking hypothesis is that Americans aren’t necessarily ignorant or easily fooled. They are just overly optimistic about their own financial future.</p>
<p>One reason why Americans don’t fight very hard against tax cuts for the rich is that they believe that someday they too might be rich. A <a href="http://thehill.com/polls/237987-the-hill-poll-voters-say-wealth-is-now-an-impossible-dream">2012 poll</a> by The Hill found that 37 percent of voters think they can become wealthy in the course of their lives, and they may not be far off. <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0116370">Longitudinal income data</a> reveal that 36.4 percent of Americans will likely experience at least one year in the top 5 percent of the income distribution between the ages of 25 and 60 – with an 11.1 percent chance of being in the top one percent.</p>
<p>However, their chances of reaching the top percentiles and staying there are much lower. Only 3 percent of Americans reach the top 1 percent and <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0116370">remain that rich</a> for three or more years.</p>
<p><a href="http://journals.sagepub.com/doi/abs/10.1177/1745691614562005">Studies</a> also <a href="http://www.sciencedirect.com/science/article/pii/S0022103115000062">show</a> that Americans overestimate economic upward mobility and underestimate the extent of downward mobility. Psychologists Shai Davidai and Thomas Gilovich, the authors of one of the studies, argue that a belief in the system’s fairness and the rewards of hard work may make it possible to accept inequality as a “side effect of a well-functioning economic system that offers more equality of opportunity than equality of outcome.”</p>
<p>Every version of the “wishful thinking hypothesis” posits that Americans fail to grasp fundamental truths about tax policy, the economy and their own self-interest – whether they are being superficial, misinformed, misled or overly optimistic.</p>
<h2>Equal sacrifice</h2>
<p>Political scientists Kenneth Scheve and David Stasavage offer an alternative hypothesis in their book “<a href="https://press.princeton.edu/titles/10674.html">Taxing the Rich: A History of Fiscal Fairness in the United States and Europe</a>. ”</p>
<p>Surveying the history of U.S. and European taxation, they find that political support for taxing the rich is the strongest when people believe that higher taxes compensate for some other benefit or sacrifice government imposes on others.</p>
<p>For example, several countries raised taxes on the rich during WWI and WWII. This “<a href="https://web.stanford.edu/group/scheve-research/cgi-bin/wordpress/wp-content/uploads/2013/08/ScheveStasavage_IO_2010.pdf">conscription of wealth</a>” compensated for the military conscription of the middle and lower classes to fight the wars and helped offset the benefits of wartime profiteering by the rich.</p>
<p>As Scheve and Stasavage explain, history shows that high inequality isn’t enough to trigger tax increases for the rich. They argue that “the rich are taxed when people believe not just that inequality is high but also that it is fundamentally unfair because the deck is stacked in favor of the rich, and the government did the stacking.”</p>
<p>The military draft is a clear-cut example of mandatory unequal sacrifice on the part of middle and lower-income people. Few of the involuntary recruits who <a href="https://www.uncpress.org/book/9780807855621/rich-mans-war-poor-mans-fight/">fought in World War I</a>, for example, were wealthy. Today’s environment of political favors for the rich and growing income and wealth inequality is far less clear-cut.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"942780329387003904"}"></div></p>
<p>While both the “wishful thinking” and “compensatory” hypotheses may help explain the public’s historical ambivalence about tax cuts for the rich, one point the research underscores is that opinions on taxation are formed not just by self-interest or the distribution of “winners” and “losers” but by moral judgments of fairness and procedural justice.</p>
<p>Most <a href="http://www.cnn.com/2017/12/19/politics/cnn-poll-tax-bill-opposition-grows/index.html">Americans may disapprove</a> of this tax plan now, but the coming years will show whether they acquiesce or decide they’ve finally had enough of tax cuts for the rich.</p><img src="https://counter.theconversation.com/content/89427/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Leiser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Historically, wishful thinking has blunted pushback.Stephanie Leiser, Lecturer in Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/890472017-12-20T11:26:50Z2017-12-20T11:26:50ZGOP tax plan doubles down on policies that are crushing the middle class<figure><img src="https://images.theconversation.com/files/199951/original/file-20171219-4957-1g958w1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A big part of that check is being drawn from middle-class accounts.</span> <span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span></figcaption></figure><p>The U.S. middle class has always had a special mystique.</p>
<p>It is the heart of the American dream. A decent income and home, doing better than one’s parents, and retiring in comfort are all hallmarks of a middle-class lifestyle.</p>
<p>Contrary to what some may think, however, the U.S. has not always had a large middle class. <a href="https://www.kobo.com/us/en/ebook/the-american-middle-class">Only after World War II</a> was being middle class the national norm. Then, starting in the 1980s, it began to decline. </p>
<p>President Donald Trump <a href="https://www.nbcnews.com/politics/politics-news/trump-defends-gop-tax-bill-says-it-will-be-gift-n830441">has portrayed</a> the tax plan Congress is wrapping up as a boon for the middle class. The sad reality, however, is that it is more likely to be its final death knell. </p>
<p>To understand why, you need look no further than the history of the rise and decline of the American middle class, a group that I’ve been studying through the lens of <a href="https://theconversation.com/why-inequality-is-the-most-important-economic-challenge-facing-the-next-president-66806">inequality</a> for decades. </p>
<h2>The middle class rises</h2>
<p>The <a href="http://money.cnn.com/infographic/economy/what-is-middle-class-anyway/index.html">middle class</a>, which <a href="http://www.pewresearch.org/topics/middle-class/">Pew defines</a> as two-thirds to two times the national median income for a given household size, began to grow after World War II due to a surge in economic growth and because President Franklin Delano Roosevelt’s New Deal <a href="http://www2.ucsc.edu/whorulesamerica/power/history_of_labor_unions.html">gave workers more power</a>. Before that, <a href="https://press.princeton.edu/titles/10544.html">most Americans</a> were poor or nearly so.</p>
<p>For example, legislation such as the <a href="https://www.britannica.com/topic/Wagner-Act">Wagner Act</a> established rights for workers, most critically for collective bargaining. The government also began new programs, such as Social Security and unemployment insurance, that helped older Americans avoid dying in poverty and supported families with children through tough times. The <a href="http://rooseveltinstitute.org/home-owners-loan-corporation/">Home Owners’ Loan Corporation</a>, set up in 1933, helped middle-class homeowners pay their mortgages and remain in their homes. </p>
<p>Together, these new policies helped fuel a strong postwar economic boom and ensured the gains were shared by a broad cross-section of society. This greatly expanded the U.S. middle class, which reached a peak of <a href="http://www.paecon.net/PAEReview/issue78/whole78.pdf">nearly 60 percent of the population</a> in the late ‘70s. Americans’ increased optimism about their economic future prompted businesses to invest more, creating a virtuous cycle of growth. </p>
<p>Government spending programs were paid for largely with <a href="https://www.cch.com/WBOT2013/029IncomeTaxRates.asp">individual income tax rates</a> of 70 percent (and more) on wealthy individuals and high taxes on corporate profits. <a href="http://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue-federal-government">Companies paid more than one-quarter</a> of all federal government tax revenues in the 1950s (when the <a href="http://www.taxpolicycenter.org/statistics/corporate-top-tax-rate-and-bracket">top corporate tax</a> was 52 percent). Today they contribute just 5 percent of government tax revenues. </p>
<p>Despite high taxes on the rich and on corporations, median family income (after accounting for inflation) <a href="http://www.russellsage.org/sites/all/files/chartbook/Income%20and%20Earnings.pdf">more than doubled</a> in the three decades after World War II, rising from $27,255 in 1945 to nearly $60,000 in the late 1970s. </p>
<p><iframe id="ReMwV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ReMwV/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>The fall begins</h2>
<p>That’s when things started to change. </p>
<p>Rather than supporting workers – and balancing the interests of large corporations and the interests of average Americans – the federal government began taking the side of business over workers by lowering taxes on corporations and the rich, reducing regulations and allowing firms to grow through mergers and acquisitions. </p>
<p>Since the late 1980s, median household incomes (different from family incomes because members of a household live together but do not need to be related to each other) have increased very little – from $54,000 to $59,039 in 2016 – while inequality has risen sharply. As a result, the size of the middle class has shrunk significantly to 50 percent from nearly 60 percent. </p>
<p>One important reason for this is that starting in the 1980s the role of government changed. A key event in this process was when President Ronald Reagan <a href="http://www.nytimes.com/2011/08/03/opinion/reagan-vs-patco-the-strike-that-busted-unions.html">fired striking air-traffic control workers</a>. It marked the beginning of a <a href="https://theconversation.com/the-rise-and-fall-of-us-labor-unions-and-why-they-still-matter-38263">war against unions</a>.</p>
<p>The share of the <a href="http://dailysignal.com/2013/01/27/chart-of-the-week-union-membership-continues-to-decline/">labor force that is organized</a> has fallen from 35 percent in the mid-1950s to 10.7 percent today, with the <a href="https://www.bls.gov/opub/ted/2017/union-membership-rate-10-point-7-percent-in-2016.htm">largest drop</a> taking place in the 1980s. It is not a coincidence that the share of income <a href="http://junkcharts.typepad.com/.a/6a00d8341e992c53ef015392be7fad970b-pi">going to earners in the middle</a> fell at the same time. </p>
<p>In addition, <a href="http://www.taxpolicycenter.org/sites/default/files/legacy/taxfacts/content/PDF/toprate_historical.pdf">Reagan cut taxes</a> multiple times during his time in office, which led to less spending to support and sustain the poor and middle class, while <a href="https://www.chicagofed.org/publications/economic-perspectives/1985/september-october-evanoff-1">deregulation</a> allowed businesses to cut their wage costs at the expense of workers. This change is one reason workers have <a href="http://www.epi.org/productivity-pay-gap/">received only a small fraction</a> of their greater productivity in the form of higher wages since the 1980s. </p>
<p>Meanwhile, the real buying power of the minimum wage <a href="http://www.freeby50.com/2014/01/minimum-wage-history-adjusted-for.html">has been allowed to erode</a> since the 1980s due to inflation. </p>
<p>While the middle class got squeezed, the very rich have done very well. <a href="https://www.nytimes.com/interactive/2017/08/07/opinion/leonhardt-income-inequality.html">They have received nearly all income gains</a> since the 1980s.</p>
<p>In contrast, household median income in 2016 was only slightly above its level just before the Great Repression began in 2008. But according to new unpublished research I conducted with Monmouth University economist Robert Scott, the actual living standard for the median household fell as much as 7 percent due to greater interest payments on past debt and the fact that households are larger, so the same income does not go as far. </p>
<p>As a result, the middle class is actually closer to 45 percent of U.S. households. This is in <a href="http://www.paecon.net/PAEReview/issue78/Pressman78.pdf">stark contrast</a> to other developed countries such as France and Norway, where the middle class approaches nearly 70 percent of households and has held steady over several decades. </p>
<h2>The Republican tax plan</h2>
<p>So how will the tax plan change the picture? </p>
<p>France, Norway and other European countries have maintained policies, such as progressive taxes and generous government spending programs, that help the middle class. The Republican tax package doubles down on the policies that have caused its decline in the U.S.</p>
<p>Specifically, the plan will significantly reduce taxes on the wealthy and large <a href="https://theconversation.com/hot-potato-shows-why-workers-wont-benefit-from-trumps-corporate-tax-cut-86878">companies</a>, which will have to be paid for with large spending cuts in everything from children’s health and education to unemployment insurance and <a href="https://www.washingtonpost.com/news/wonk/wp/2017/12/01/gop-eyes-post-tax-cut-changes-to-welfare-medicare-and-social-security/">Social Security</a>. Tax cuts will require the government to borrow more money, which will push up interest rates and require middle-income households to pay more in interest on their credit cards or to buy a car or home.</p>
<p>The benefits of the Republican tax bill <a href="http://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act">go primarily</a> to the very wealthy, who will get 83 percent of the gains by 2027, according to the Tax Policy Center, a nonpartisan think tank. </p>
<p>Meanwhile, more than half of poor and middle-income households will see their taxes rise over the next 10 years; the rest will receive only a small fraction of the total tax benefits.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200018/original/file-20171219-4951-bgvxr2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump touts the GOP tax plan with a group of ‘middle-class families.’</span>
<span class="attribution"><span class="source">Reuters/Kevin Lamarque</span></span>
</figcaption>
</figure>
<h2>From virtuous to vicious</h2>
<p>While Republicans justify their tax plan by claiming corporations will <a href="https://theconversation.com/why-the-republican-tax-plan-can-help-put-american-youths-back-to-work-88845">invest more</a> and hire more workers, thereby raising wages, <a href="https://www.nytimes.com/2017/12/08/business/dealbook/focus-on-shareholders-holds-back-us-wage-growth.html">companies have already indicated</a> that they will mainly use their savings to buy back stock and pay more dividends, benefiting the wealthy owners of corporate stock. </p>
<p>So with most of the gains of the $1.5 trillion in net tax cuts going to the rich, the end result, in my view, is that most Americans will face falling living standards as government spending goes down, <a href="http://www.crfb.org/blogs/official-dynamic-score-shows-senate-tax-bill-will-still-cost-over-1-trillion">borrowing costs</a> go up, and their tax bill rises.</p>
<p>This will lead to less economic growth and a declining middle class. And unlike the virtuous circle the U.S. experienced in the ‘50s and '60s, Americans can expect a vicious cycle of decline instead.</p><img src="https://counter.theconversation.com/content/89047/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The American middle class has been on a rocky ride during the 20th century, surging after World War II but falling since the 1980s. The Republican tax plan may be its death knell.Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/888452017-12-18T01:22:07Z2017-12-18T01:22:07ZWhy the Republican tax plan can help put American youths back to work<figure><img src="https://images.theconversation.com/files/199530/original/file-20171216-17854-1y0hwye.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Paul Ryan talks about the GOP tax plan.</span> <span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span></figcaption></figure><p>Republican lawmakers <a href="https://www.nytimes.com/2017/12/15/us/politics/republican-tax-bill.html?_r=0">are set to vote</a> this week on their tax plan after reconciling differences between the Senate and House versions and appear likely to meet their Christmas deadline of turning it into law.</p>
<p>During the ongoing debate over its merits, <a href="http://www.cnn.com/2017/12/13/politics/calculate-americans-taxes-senate-reform-bill/index.html">many have focused</a> on the <a href="http://thehill.com/business-a-lobbying/business-a-lobbying/358542-winners-and-losers-in-the-gop-tax-bill">“winners” and “losers”</a> in terms of who will have to pay more or less in taxes. I believe that is the wrong question. </p>
<p>The one that Americans should be asking is whether the bill will improve labor market opportunities for workers, especially the nation’s youth, whose careers have suffered since the turn of the century. </p>
<p>Here’s why I believe it will.</p>
<h2>A tough recovery for U.S. youth</h2>
<p>For several decades, I <a href="https://www.bls.gov/cps/data.htm">have helped collect data</a> for the Bureau of Labor Statistics’ <a href="https://stats.bls.gov/nls/home.htm">National Longitudinal Surveys</a> on the careers of tens of thousands of workers as well as examining programs aimed at improving the school-to-work transition, especially for disadvantaged youths. </p>
<p>The Great Recession hit young people particularly hard. And they haven’t quite recovered. The share of youth aged 16 to 24 who were working dropped from 59 percent in 2006 to under 43 percent in 2010, the lowest level since at least 1949. Unfortunately, seven years later, this age group’s employment rate is still only about 50 percent. While that number may not seem low given young workers don’t have the same responsibilities as older ones, it’s still well below the norm for much of the 20th century. </p>
<p>Other age groups didn’t suffer nearly as much during the recession and have since recovered most of their losses. The employment rate for “prime-age” adults 25 to 54 years old didn’t decline as much, slipping from about 81 percent in 2006 to a low of under 75 percent in 2011. Currently it’s about 78 percent, better, yet not fully recovered either.</p>
<p><iframe id="7Z9iC" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/7Z9iC/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>This loss of opportunity for U.S. youth and their inability to find a job delays the start of their careers, reduces the <a href="http://www.journals.uchicago.edu/doi/pdfplus/10.1086/209960">strong wage growth young workers typically experience</a> in their early work years and postpones family formation. </p>
<p>The returns on <a href="https://www.ssa.gov/retirementpolicy/research/education-earnings.html">every year of work experience</a> increase workers’ wages for their entire careers – at <a href="https://eml.berkeley.edu/%7Ecle/wp/wp62.pdf">about the same rate</a> as a year of additional education – so young people who miss out on employment opportunities will feel these effects for the rest of their lives. </p>
<p>To my mind, solving this challenge of getting these young people back to work is the most important goal of tax policy. And the key to doing that is by encouraging companies to boost investment, thereby spurring more growth and creating more jobs.</p>
<h2>What we can learn from the past</h2>
<p>So back to our main question: Is the tax plan likely to accomplish this?</p>
<p>In my view, its ability to improve the economy lies in one of its most contentious features: the <a href="http://www.cnn.com/2017/12/15/politics/republican-tax-bill/index.html">reduction in the top corporate income tax rate</a>, from 35 percent to 21 percent. </p>
<p>The current rate – <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">among the highest in the world</a> – encourages owners of capital to move, or keep, money overseas to maximize their after-tax income. One example of this is the <a href="https://www.bloomberg.com/graphics/2017-overseas-profits/">hundreds of billions of dollars</a> in profits U.S. companies have left parked offshore in recent years. Another is the recent trend in “<a href="https://www.stlouisfed.org/publications/regional-economist/first_quarter_2017/a-look-at-corporate-inversions-inside-and-out">corporate inversions</a>,” in which U.S. corporations purchase companies overseas to shift their tax liability. The result is less investment in the U.S. and a shift in economic activity overseas.</p>
<p>So what evidence is there that a lower corporate tax rate will actually encourage investment and lead to more jobs? </p>
<p>The support for this proposition comes from two sources: economic theory and the experience in both the U.S. and other countries at different times in history. In classical economic theory, a lower tax rate on capital reduces the cost of capital, making more investments profitable. An <a href="http://www.economicsonline.co.uk/Managing_the_economy/Investment.html">uncontroversial implication</a> of this is higher national income, production and employment.</p>
<p>There are several historical examples that illustrate the impact of raising or lowering corporate taxes on investment and growth. </p>
<p>Starting in 1929, <a href="https://www.irs.gov/pub/irs-soi/02corate.pdf">Congress gradually raised</a> the top corporate rate to 15 percent in 1936 from 11 percent in 1929. <a href="https://minneapolisfed.org/research/wp/wp670.pdf">Some have blamed</a> President Franklin D. Roosevelt’s late 1930s tax increase for <a href="http://dailysignal.com/2010/10/20/hoover-fdr-and-clinton-tax-increases-a-brief-historical-lesson/">stopping the recovery</a> and sending the <a href="https://www.thebalance.com/us-gdp-by-year-3305543">U.S. back into recession</a>.</p>
<p>While there was many factors at work at the time – including the <a href="https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act">Smoot-Hawley Tariff Act</a> that raised duties on hundreds of imports and a <a href="https://press.princeton.edu/titles/746.html">large decline in the money supply</a> – higher taxes and the attendant anti-business climate they created are plausible explanations for <a href="https://fee.org/articles/americas-depression-within-a-depression-193739/">why the Great Depression lasted as long as it did</a>.</p>
<p>A more recent example came in the late ‘80s, when Congress cut the top corporate rate from 46 percent in 1984 to 34 percent in 1992, in two installments. Following these changes investment as a share of GDP <a href="https://fred.stlouisfed.org/series/A006RE1Q156NBEA">grew strongly</a> beginning in the early '90s, as did <a href="https://fred.stlouisfed.org/series/A191RL1Q225SBEA">economic growth</a>. </p>
<h2>What we can learn from other countries</h2>
<p>Ireland, renowned for having a <a href="https://tradingeconomics.com/ireland/corporate-tax-rate">low corporate income tax</a> of just 12.5 percent, also boasts the <a href="https://data.oecd.org/emp/employment-rate.htm">highest level of working-age employment</a> in the developed world, at just shy of 87 percent. The U.S., by contrast, is 16th with 70 percent of its working-age population employed.</p>
<p>Other countries at various points in their history, such as the <a href="https://www.forbes.com/sites/nathanlewis/2017/09/26/britains-path-to-a-19-corporate-tax-rate/#144c3b2f772e">U.K. in the 1970s</a> and <a href="https://taxfoundation.org/economic-growth-corporate-tax-rate/">Canada in the past decade</a>, bolstered their economies at least in part by lowering corporate tax rates. </p>
<p>Another thing to consider is the international reaction to the tax plan. China, for example, <a href="https://www.wsj.com/articles/beijing-develops-plan-to-counter-trump-tax-overhaul-1513012363">is sufficiently concerned</a> that lower U.S. corporate tax rates would be effective in luring business investment that its leaders are considering a range of new policies to prevent a loss of capital. Ireland <a href="https://www.irishtimes.com/business/economy/trump-s-us-tax-reform-a-significant-challenge-for-ireland-1.3310866">also sees the bill</a> as a potential challenge to its strength in luring investment, while Germany is <a href="https://global.handelsblatt.com/finance/joining-the-race-to-the-bottom-835641">contemplating</a> lower business taxes. </p>
<h2>Getting back to work</h2>
<p>While other economists may disagree, lighter taxation and less regulation have arguably generated more growth and prosperity than the opposite, whether we look at the U.S. over time or low-tax countries internationally. And that is what creates enough jobs to ensure young Americans can begin their careers promptly after finishing their education.</p>
<p>A few weeks ago, I was skeptical that the tax bill would pass. That’s because, in my view, all too often the political calculus focuses on whose tax bills will go up or down rather than what the nation needs to secure its long-term prosperity. I figured this would jeopardize the plan’s odds of success. </p>
<p>Our long-term prosperity depends on young people getting educated, finding jobs and accumulating the work experience needed to establish remunerative careers. While we are still some distance from a labor market that offers opportunities for disadvantaged and low-skill workers, I believe the tax bill offers the nation the best chance of restoring opportunity to those who need it most.</p><img src="https://counter.theconversation.com/content/88845/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Randall Olsen receives funding from Bureau of Labor Statistics, Ohio Department of Job and Family Services, Ohio Department of Education and the Organization for Economic Cooperation and Development.</span></em></p>Unlike other age groups, 16- to 24-year-olds haven’t recovered the job losses they suffered during the Great Recession. Spurring investment and growth are key to getting them back to work.Randall Olsen, Director of the Center for Human Resource Research, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/887612017-12-14T03:56:14Z2017-12-14T03:56:14ZTrump’s right about one thing: The US Senate should end its 60-vote majority<p>As the <a href="https://uk.reuters.com/article/uk-global-poy-trump/trumps-first-year-in-office-marked-by-controversy-protests-idUKKBN1E01W5">dramatic and traumatic first year</a> of the Trump presidency nears the finish line, with major legislative struggles over <a href="https://www.washingtonpost.com/business/economy/johnson-to-back-senate-tax-bill-putting-gop-leaders-close-to-securing-passage/2017/12/01/0226ff98-d6a2-11e7-b62d-d9345ced896d_story.html">tax legislation</a> and the <a href="https://www.washingtonpost.com/news/the-fix/wp/2017/11/28/5-very-real-scenarios-that-could-lead-to-a-government-shutdown/">budget</a>, it is easy to overlook other important political events.</p>
<p>One such development is essential to both the tax reform package, which would be Trump’s only significant legislative achievement to date, and the less noted but spectacular success the president has had with <a href="https://www.nytimes.com/2017/11/11/us/politics/trump-judiciary-appeals-courts-conservatives.html">judicial nominations</a>.</p>
<p>In both cases success has depended on procedures created to negate the Senate filibuster, which is better thought of as minority obstruction.</p>
<p>The question now is, should the Senate move even further toward being a legislative body characterized by majority rule rather than minority obstruction?</p>
<p>Many Democrats, including me, might resist anything that helps President Donald Trump and his GOP congressional majority. Yet as a <a href="https://jhupbooks.press.jhu.edu/content/invention-united-states-senate">scholar of the Senate</a> and advocate of responsible government, I believe the end of the 60-vote Senate would nonetheless be a good thing for the country – and conform to what the founders intended.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=495&fit=crop&dpr=1 754w, https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=495&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/198582/original/file-20171211-27683-hb0m6a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=495&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sen. Charles Schumer and former Senate Majority Leader Harry Reid defend their vote to weaken the filibuster.</span>
<span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span>
</figcaption>
</figure>
<h2>Limited nuclear warfare in the Senate</h2>
<p>On Nov. 21, 2013 the Senate, under Democratic control, <a href="https://www.washingtonpost.com/politics/senate-poised-to-limit-filibusters-in-party-line-vote-that-would-alter-centuries-of-precedent/2013/11/21/d065cfe8-52b6-11e3-9fe0-fd2ca728e67c_story.html?utm_term=.3b953842dea7">decided by a 52-48 vote</a> that the “vote on cloture under Rule XXII for all nominations other than for the Supreme Court of the United States is by majority vote.” </p>
<p>These few and perhaps obscure words embodied the most important change in Senate standing rules – or, to be precise, in their interpretation – since at least 1975.</p>
<p>Rule XXII is the Senate rule that defines <a href="https://www.senate.gov/reference/reference_index_subjects/Cloture_vrd.htm">cloture</a> – a motion to bring debate to a close – and requires a supermajority of at least 60 votes on most matters under consideration. The 60-vote threshold is what empowers filibusters or minority obstruction and can prevent a final vote on legislation. The 2013 decision eliminated that barrier for nearly all nominations to the executive and judicial branches. This allowed Democrats to confirm a <a href="https://www.degruyter.com/downloadpdf/j/for.2015.13.issue-4/for-2015-0042/for-2015-0042.pdf">significant number of nominations</a> after cloture was invoked with a simple majority vote.</p>
<p>Just over three years later, on April 6, 2017, the Senate, under GOP control and with exclusively Republican support, <a href="http://thehill.com/homenews/senate/327591-gop-triggers-nuclear-option-gutting-filibuster-in-gorsuch-fight">voted by the same margin</a> to apply the same interpretation to nominations to the Supreme Court. The immediate result, of course, was the <a href="https://www.nytimes.com/interactive/2017/04/07/us/politics/gorsuch-confirmation-vote.html">easy confirmation</a> of Neil Gorsuch. </p>
<h2>What this means</h2>
<p>These decisions are significant for four reasons.</p>
<p>First, an entire category of Senate business, its constitutional duty to give “advice and consent” on presidential nominations, was protected from obstruction by the minority.</p>
<p>Second, only a few years apart, a majority from each party voted to categorically restrict the filibuster.</p>
<p>Third, in each case the Democratic or Republican majority employed the same controversial method – often referred to as the <a href="https://www.senate.gov/CRSpubs/cc582238-01e2-41b2-b955-5fdb2ed7b778.pdf">“nuclear option”</a> or <a href="http://www.law.harvard.edu/students/orgs/jlpp/Gold_Gupta_JLPP_article.pdf">“constitutional option”</a> – to make these significant changes in a standing rule of the Senate.</p>
<p>Instead of amending the wording of the standing rule, the majority called for a parliamentary interpretation and ruling, which requires only a simple majority vote to sustain or overturn. </p>
<p>Finally, this change will likely endure now that it has been sustained by majorities of both Republicans and Democrats.</p>
<h2>Fast-tracking past the filibuster</h2>
<p>Use of the so-called nuclear option was spectacular, controversial and did bring significant change to the Senate. Yet these moves have also been complemented by a different type of limitation on minority obstruction. </p>
<p>Over several decades, Congress has forged and used dozens of legislative “carve-outs” or – to use congressional scholar <a href="https://www.brookings.edu/book/exceptions-to-the-rule/">Molly Reynold’s term</a> – “majoritarian exceptions” that protect specific categories of legislation from minority obstruction in the Senate.</p>
<p>Every legislative carve-out features a time limit on consideration that applies to both chambers. This quashes minority obstruction in the Senate because a simple majority vote will be held at the end of the time restriction. The term <a href="https://www.senate.gov/CRSpubs/445f5bac-e33d-403b-b78e-ab7d2610c421.pdf">“fast-track”</a> is often associated with these provisions that expedite congressional consideration. These include such specifics as approval of <a href="https://fas.org/sgp/crs/misc/R43491.pdf">trade agreements</a> and the <a href="https://fas.org/sgp/crs/natsec/R43102.pdf">military base closure process</a>. In each case, lawmakers used a “fast-track” procedure to prevent obstruction.</p>
<p>Looming large in this category is the increased use of <a href="https://www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation">budget reconciliation</a> for <a href="https://www.politico.com/magazine/story/2017/10/15/how-budget-reconciliation-broke-congress-215706">major legislation</a>, such as the final work on passage of the Affordable Care Act, the 2017 attempt to repeal that law and the current Republican tax legislation. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=477&fit=crop&dpr=1 600w, https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=477&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=477&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=599&fit=crop&dpr=1 754w, https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=599&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/198591/original/file-20171211-27714-d6eb9k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=599&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Sen. Strom Thurmond exits the Senate after he held a 24-hour filibuster – the longest ever – in hopes of stopping the Civil Rights Act of 1957. The bill easily passed two hours later.</span>
<span class="attribution"><span class="source">AP Photo</span></span>
</figcaption>
</figure>
<h2>Restoring the Senate’s important but limited role</h2>
<p>The 60-vote Senate remains powerful but circumscribed. This threshold for ending debate still applies to most legislation. This includes appropriations bills and most laws in areas such as military policy, the environment or civil rights.</p>
<p>Still, the combination of the legislative carve-outs with the entire category of nominations nevertheless constitutes a serious diminution of supermajority politics. </p>
<p>Following the second nuclear option in 2017, many senators and observers asked whether the Senate might be heading toward the elimination of supermajority cloture entirely. “Let us go no further on this path,” <a href="https://www.nytimes.com/2017/04/06/us/politics/filibuster-senate-republicans.html?_r=0">said</a> Minority Leader Chuck Schumer. </p>
<p><a href="http://www.politico.com/story/2017/04/senators-urge-save-filibuster-237014">A letter</a> signed by a bipartisan group of 61 Senators implored the majority and minority leaders to help them preserve 60 votes for most legislation. Sen. Lindsay Graham, who voted for the 2017 nuclear option, <a href="http://www.weeklystandard.com/read-lindsey-grahams-speech-on-the-court-filibuster-and-future-of-the-senate/article/2007549">warned</a> that if the Senate does away with the requirement, “that will be the end of the Senate.”</p>
<p>While most senators showed little appetite for further curtailment of supermajority cloture, President Donald Trump was ready to go all the way. Trump has more than once tweeted, with characteristic imprecision, his support for an end to all 60-vote thresholds in the Senate, the first time a president has taken such a stance. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"890931465885798400"}"></div></p>
<h2>Finish what it started</h2>
<p>In this rare instance, I agree with the president.</p>
<p>By creating these restrictions, the Senate has repeatedly recognized that the 60-vote threshold is often dysfunctional and that the costs to effective governance are too high. </p>
<p>The norms that support the supermajority Senate are eroding. And from a constitutional perspective, that’s just fine. Contrary to Graham’s all too common sentiment, a supermajority threshold is not what defines the Senate.</p>
<p>As <a href="https://www.brookings.edu/book/politics-or-principle/">political scientists</a> and historians have noted over and over again, supermajority cloture is not part of and cannot be derived from the Constitution or any original understanding of the Senate. Elements such as equal representation by the states, six-year terms and a higher age requirement <a href="https://jhupbooks.press.jhu.edu/content/invention-united-states-senate">are what distinguish</a> the Senate’s style of deliberation and decision-making from the House.</p>
<p>In fact, although it may seem like the 60-vote filibuster has been with us forever, <a href="https://www.senate.gov/reference/reference_index_subjects/Cloture_vrd.htm">it’s actually only been around</a> since 1917.</p>
<p>Moreover, the protection of minority interests, often cited as a justification for the filibuster, is a product of the system as a whole – the separate branches, the checks, federalism – not the self-appointed duty of the Senate.</p>
<p>To finish what it started, the Senate could change its rules to allow a simple majority to close debate on any bill, nomination or other matter, while also guaranteeing a minimum period of debate, which would allow the minority position to be voiced and debated. </p>
<p>In so doing the Senate would end its undemocratic pretensions and resume its prescribed and limited role in the system of checks and balances. That would be a good thing no matter which party controls the Senate and regardless of who is, or will be, president.</p><img src="https://counter.theconversation.com/content/88761/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Wirls does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Republicans were able to push through a tax plan and a flurry of judicial nominees after the Senate curtailed use of the filibuster. It’s time to go all the way.Daniel Wirls, Professor of Politics, University of California, Santa CruzLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/890482017-12-13T11:22:37Z2017-12-13T11:22:37Z3 myths about the poor that Republicans are using to support slashing US safety net<figure><img src="https://images.theconversation.com/files/198817/original/file-20171212-9451-1baw0sz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sen. Chuck Grassley recently seemed to suggest some poor people spend all their money on "booze or women or movies."</span> <span class="attribution"><span class="source">AP Photo/Charlie Neibergall</span></span></figcaption></figure><p>Republicans continue to use long-debunked myths about the poor as they defend <a href="https://www.forbes.com/sites/johntharvey/2017/12/02/economists-say-the-trump-tax-plan-will-have-disastrous-consequences/#207ea56c4209">lower taxes for the rich</a> and <a href="http://thehill.com/homenews/house/363642-ryan-pledges-entitlement-reform-in-2018">deep cuts to the social safety net</a> to pay for them. In so doing, they are essentially <a href="https://www.washingtonpost.com/blogs/plum-line/wp/2017/12/04/two-ugly-quotes-from-republicans-reveal-the-truth-about-their-tax-plan/?utm_term=.07ba3f41345c">expressing scorn</a> for working class and low-income Americans. </p>
<p>Sen. Chuck Grassley, for example, recently <a href="https://www.washingtonpost.com/news/morning-mix/wp/2017/12/04/grassley-explains-why-people-dont-invest-booze-or-women-or-movies/">justified</a> reducing the number of wealthy families exposed to the estate tax as a way to recognize “the people that are investing, as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.”</p>
<p>Similarly, Sen. Orrin Hatch <a href="http://www.politifact.com/truth-o-meter/article/2017/dec/05/context-orrin-hatchs-comments-about-chip-people-wh/">raised concerns</a> about funding certain entitlement programs. “I have a rough time wanting to spend billions and billions and trillions of dollars to help people who won’t help themselves, won’t lift a finger and expect the federal government to do everything,” he said.</p>
<p>These statements, the likes of which I expect we’ll all hear more of in coming months, reinforce three harmful narratives about low-income Americans: People who receive benefits don’t work, they don’t deserve help and the money spent on the social safety net is a waste of money. </p>
<p>Based on my <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423540">research</a> and 20 years of experience as a clinical law professor representing low-income clients, I know that these statements are false and only serve to reinforce misconceptions about working class and poor Americans.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=404&fit=crop&dpr=1 600w, https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=404&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=404&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/198811/original/file-20171212-9451-1gx6e1w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Food participants get an average of $125 a month, hardly enough to feed a family without earning money as well.</span>
<span class="attribution"><span class="source">AP Photo/Robert F. Bukaty</span></span>
</figcaption>
</figure>
<h2>Most welfare recipients are makers not takers</h2>
<p>The first myth, that people who receive public benefits are “takers” rather than “makers,” is flatly untrue for the vast majority of working-age recipients.</p>
<p>Consider Supplemental Nutrition Assistance Program benefits, formerly known as food stamps, which currently serve about <a href="http://www.newsweek.com/people-food-stamps-snap-decline-participation-640500">42 million Americans</a>. At least one adult in more than half of SNAP-recipient households <a href="https://www.cbpp.org/research/policy-basics-introduction-to-the-supplemental-nutrition-assistance-program-snap">are working</a>. And the average SNAP subsidy is $125 per month, or $1.40 per meal – hardly enough to justify quitting a job.</p>
<p>As for Medicaid, nearly <a href="https://www.kff.org/medicaid/issue-brief/understanding-the-intersection-of-medicaid-and-work/">80 percent of adults</a> receiving Medicaid live in families where someone works, and more than half are working themselves.</p>
<p>In early December, House Speaker <a href="http://edition.cnn.com/2017/12/06/politics/paul-ryan-entitlement-reform/index.html">Paul Ryan said</a>, “We have a welfare system that’s trapping people in poverty and effectively paying people not to work.” </p>
<p>Not true. Welfare – officially called Temporary Assistance to Needy Families – has <a href="http://www.aphsa.org/content/dam/NASTA/PDF/CRS-RPT_R44751_2017-02-01.pdf">required work</a> as a condition of eligibility since then-President Bill Clinton signed welfare reform into law in 1996. And the <a href="https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/do-i-qualify-for-earned-income-tax-credit-eitc">earned income tax credit</a>, a tax credit for low- and moderate-income workers, by definition, supports only people who work.</p>
<p>Workers apply for public benefits because they need assistance to make ends meet. American workers are among <a href="http://time.com/4621185/worker-productivity-countries/">the most productive in the world</a>, but over the last 40 years the bottom half of income earners have seen <a href="http://equitablegrowth.org/research-analysis/republican-tax-plan-slams-workers-and-job-creators-in-favor-of-the-rich-and-inherited-wealth/">no income growth</a>. As a result, since 1973, worker productivity has <a href="http://www.epi.org/productivity-pay-gap/">grown almost six times</a> faster than wages. </p>
<p>In addition to wage stagnation, most Americans are spending more than <a href="https://www.bls.gov/news.release/cesan.nr0.htm">one-third of their income</a> on housing, which is increasingly unaffordable. There are 11 million renter households paying more than <a href="http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/harvard_jchs_state_of_the_nations_housing_2017_chap1.pdf.">half their income</a> on housing. And there is <a href="http://nlihc.org/oor">no county</a> in America where a minimum wage worker can afford a two-bedroom home. Still, only <a href="http://nlihc.org/sites/default/files/oor/OOR_2017.pdf">1 in 4</a> eligible households receive any form of government housing assistance.</p>
<p>To be sure, there are recipients of public benefits who do not work. They are primarily children, the disabled and the elderly – in other words, <a href="https://www.thoughtco.com/who-really-receives-welfare-4126592">people who cannot or should not work.</a> These groups constitute the majority of public benefits recipients.</p>
<p>Society should support these people out of basic decency, but there are self-interested reasons as well. To begin with, all working adults have been children, will someday be old and, at any time, might face calamities that take them out of the workforce. The safety net exists to rescue people during these vulnerable periods. Indeed, most people who receive public benefits leave the programs within <a href="https://www.census.gov/newsroom/press-releases/2015/cb15-97.html">three years</a>.</p>
<p>Moreover, many public benefits pay for themselves over time, as healthier and financially secure people are more productive and contribute to the overall economy. For example, <a href="https://www.cbpp.org/research/policy-basics-introduction-to-the-supplemental-nutrition-assistance-program-snap">every dollar in SNAP spending</a> is estimated to generate more than $1.70 in economic activity. </p>
<p>Similarly, Medicaid benefits are associated with enhancing <a href="https://www.kff.org/medicaid/issue-brief/understanding-the-intersection-of-medicaid-and-work/">work</a> opportunities. The <a href="https://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens">earned income tax credit</a> contributes to work rates, improves the health of recipient families and has long-term educational and earnings benefits for children. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=517&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=517&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199016/original/file-20171213-27588-15tfh1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=517&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The current federal minimum wage is hardly enough to feed a family.</span>
<span class="attribution"><span class="source">AP Photo/Kiichiro Sato</span></span>
</figcaption>
</figure>
<h2>What the needy deserve</h2>
<p>The second myth is that low-income Americans do not deserve a helping hand. </p>
<p>This idea derives from our belief that the U.S. is a meritocracy where the most deserving rise to the top. Yet where a person ends up on the income ladder is tied to where they started out. </p>
<p>Indeed, America is not nearly as socially mobile as we like to think. Forty percent of Americans born into the bottom-income quintile – the poorest 20 percent – will stay there. And the same “<a href="https://www.washingtonpost.com/news/wonk/wp/2016/10/06/striking-new-research-on-inequality-whatever-you-thought-its-worse/?utm_term=.074d818b5336">stickiness</a>” exists in the top quintile. </p>
<p>As for people born into the middle class, only 20 percent will ascend to the top <a href="https://www.newyorker.com/magazine/2014/03/03/the-mobility-myth">quintile</a> in their lifetimes.</p>
<p>The third myth is that government assistance is a waste of money and doesn’t accomplish its goals. </p>
<p>In fact, poverty rates would <a href="https://www.cbpp.org/blog/safety-net-cut-poverty-nearly-in-half-last-year;">double</a> without the safety net, to say nothing of human suffering. Last year, the safety net lifted <a href="https://www.cbpp.org/research/poverty-and-inequality/chart-book-accomplishments-of-the-safety-net">38 million</a> people, including 8 million children, out of poverty.</p>
<h2>The facts of welfare</h2>
<p>In trotting out these myths, Republican lawmakers are also tapping into long-standing <a href="https://www.washingtonpost.com/news/posteverything/wp/2017/12/08/republicans-are-bringing-welfare-queen-politics-to-the-tax-cut-fight/?utm_term=.8d360a5ce417">racist stereotypes</a> about who receives support. For instance, the “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423540">welfare queen</a>” – a code word for an African-American woman with too many children who refuses to work – is a fiction.</p>
<p>The facts of welfare are that most recipients are white, families that receive aid are smaller on average than other families and the program requires recipients to work and is tiny in relation to the overall federal budget – <a href="http://econofact.org/welfare-and-the-federal-budget">about half a percent</a>. Yet, the welfare queen is an archetype invoked to generate public antagonism against the safety net. Expect her to make frequent appearances in the months to come.</p>
<p>Americans should demand fact-based justifications for tax and entitlement reforms. It is time to retire the welfare queen and related tropes that paint needy Americans as undeserving.</p><img src="https://counter.theconversation.com/content/89048/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michele Gilman is affiliated with the American Civil Liberties Union of Maryland and the Women's Law Center of Maryland.
</span></em></p>As the GOP prepares to slash spending to pay for tax cuts, lawmakers have been bringing up claims about the poor that don’t stand up to scrutiny.Michele Gilman, Venable Professor of Law, University of BaltimoreLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/885262017-12-07T11:09:40Z2017-12-07T11:09:40ZThe GOP tax plan, state and local taxes deductions – and you<figure><img src="https://images.theconversation.com/files/198062/original/file-20171207-31555-1awiuek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Capitol is lit up at dawn on Nov. 30, 2017 as Senate Republicans work to pass their sweeping tax bill.</span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p>While Washington is claiming victory, states are crying foul. </p>
<p>Late last week, the U.S. Senate passed its version of the tax reform package that cleared the House a few weeks earlier. Within the hundreds of pages of legislative language in each bill lay a number of provisions that have significant impact on state governments, including modifications to the state and local tax deduction.</p>
<p>Under <a href="https://www.cbo.gov/budget-options/2016/52253">current tax law</a>, individuals who choose to itemize and deduct eligible expenses on their federal tax return are able to deduct state and local income, sales and property taxes. <a href="https://www.forbes.com/sites/kellyphillipserb/2017/12/03/from-tax-rates-to-deductions-comparing-the-house-senate-bills-to-current-law/#365af6b373b0">Both the House and Senate bills</a> eliminate the so-called “SALT deduction” for state and local taxes while capping the property tax deduction at US$10,000. </p>
<p>As a former Ohio state senator, I served on the Senate Ways and Means Committee for a number of years. I also went through five state budget cycles over 10 years. Because of that experience, I believe the federal changes to the SALT deductions will be detrimental to American families and have long-term negative impacts on balancing state budgets. </p>
<h2>An uncertain future</h2>
<p>I am not alone in my concern. </p>
<p>The bipartisan National Conference of State Legislators issued a <a href="http://www.ncsl.org/press-room/ncsl-statement-on-tax-plan-and-modification-of-salt.aspx">scathing statement</a> on the proposed changes to the SALT deduction. The organization’s president, South Dakota State Senator Deb Peters, a Republican, expressed her opposition by saying, “SALT is one of the six original federal tax deductions and has been a staple of the federal tax code and the state-federal fiscal relationship for over 100 years. We will continue to fight for the more than 43 million Americans who claim this deduction every year.” </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=366&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=366&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197854/original/file-20171205-22962-j6hs5j.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=366&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Page 3 of the 1913 1040 form, showing a deduction for state and local taxes.</span>
</figcaption>
</figure>
<p>State lawmakers have reason to be worried, as most state budgets rely on state income and sales tax as primary revenue streams for their operating budgets. According to the center left think tank <a href="https://www.cbpp.org/blog/house-tax-bills-changes-to-state-and-local-tax-deductions-would-hurt-states">Center for Budget and Policy Priorities</a>, eliminating the SALT deduction could place strain on funding needed for critical programs and services provided at the state level such as education and infrastructure. Cities and towns usually benefit from property taxes. So the fact that the tax plan caps – rather than eliminates – the property tax deduction could help insulate local governments for now. </p>
<p>However, it has been my experience in Ohio that when the state cuts funds for essential services, the funding burden gets dropped to the local communities. During my time in the Ohio Senate, state government cut allocations to local governments. This caused local communities across my home state to cut safety forces and scale back infrastructure repairs. This is why the SALT deduction is so important. It essentially <a href="https://www.cbo.gov/budget-options/2016/52253">protects against double taxation and serves a bit like a subsidy</a> to the state and local governments. If the SALT deduction goes away, state and local governments may try to lower taxes to offset the cost of higher federal taxes. What does this mean in real terms? According to modeling done by the <a href="http://www.gfoa.org/sites/default/files/RCC%20Report%20on%20SALT%20Deduction-092017_Final.pdf">Government Finance Officers Association</a>, budget cuts caused by revenue shortfalls could result in cities and towns losing five police officers, 10 teachers and five public works employees. </p>
<p>The changes to the SALT deduction could hit Americans in two significant ways. First, citizens often carry the burden when states scale back their services. For example, when police and fire forces get cut, response time gets longer and community safety is jeopardized. </p>
<p>Second, individual Americans would also shoulder increased tax burdens should the proposed SALT deduction changes be signed into law. Elimination of the state and local income and sales tax deductions would result in a tax increase for those who itemize their deductions and deduct SALT. A <a href="http://www.gfoa.org/sites/default/files/RCC%20Report%20on%20SALT%20Deduction-092017_Final.pdf">report</a> recently issued by the Government Finance Officers Association in partnership with seven other nonpartisan state and local government associations stated 30 percent of all taxpayers across all income levels use the SALT deductions, and 50 percent of those choosing to use SALT make under $200,000 per year. This means the SALT deduction is widely used by middle-income Americans. While the amount would vary by income, the <a href="https://www.urban.org/research/data-methods/data-analysis/quantitative-data-analysis/microsimulation/tax-policy-center-microsimulation-model">Urban-Brookings Microsimulation Model </a> estimates a roughly $2,000 increase in taxes on those taking the deduction. </p>
<p>Capping the property tax deduction at $10,000, while better than a full elimination, still <a href="https://www.cbpp.org/blog/house-tax-bills-changes-to-state-and-local-tax-deductions-would-hurt-states">falls short for a number of communities</a>. California, Illinois, Texas, New York, New Jersey and most of the Northeast have the majority of property owners nationally that would exceed the $10,000 threshold. For example, in <a href="https://www.cbpp.org/blog/house-tax-bills-changes-to-state-and-local-tax-deductions-would-hurt-states">New Jersey the average property tax deduction</a> is $9,500, meaning a fair number of property owners in the Garden State would fall above the $10,000 cap. In states with high numbers of properties that are above the $10,000 deduction, the cap threshold is not sufficient to offset the costs associated with the SALT deduction change. </p>
<p>The data suggest that changes to the SALT deduction would result in higher taxes and fewer local services for a large number of middle-income Americans. Changes to SALT have passed both the House and the Senate. The bills must now come together in conference where the differences between the two versions are negotiated. While it is possible that changes could still be made, <a href="http://abcnews.go.com/Politics/senate-tax-plan/story?id=51522631">both versions of the bill have the same language.</a> That makes it less likely to be modified. States and individuals alike will need to start planning for the changes on the horizon.</p><img src="https://counter.theconversation.com/content/88526/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Capri Cafaro is affiliated with the Democratic Party as a registered Democrat in Ohio and was elected to the Ohio Senate as a Democrat for 10 years. </span></em></p>If you own property and make less than US$200,000, the Republican tax overhaul is likely going to eliminate a tax deduction you use.Capri Cafaro, Executive in Residence, American University School of Public AffairsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/885132017-12-06T11:20:12Z2017-12-06T11:20:12ZHow the tax package could sap the flow of charitable giving<figure><img src="https://images.theconversation.com/files/197856/original/file-20171205-23009-zkysmc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Paul Ryan, left, leads a round of applause after his colleagues took a step toward changing the tax code.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Congress-Taxes/2f6deeb69c144709a30fb0d188b8f55b/1/0">AP Photo/Jacquelyn Martin</a></span></figcaption></figure><p>The tax bills currently making their way through Congress could end up making Americans less charitable. </p>
<p>The bills that recently cleared the House and the Senate, which <a href="http://www.cnn.com/2017/12/04/politics/gop-tax-plan-conference-committee-house-vote/index.html">need to be reconciled</a>, would have different consequences for <a href="http://www.taxpolicycenter.org/model-estimates/charitable-contributions-and-tcja-nov-2017/t17-0265-effective-marginal-tax-benefit">charitable giving</a>. But both would raise the price of donating for millions of Americans, thereby reducing how much the nation gives to charity overall. </p>
<p>The precise impact of this tax code overhaul, however, would depend on which provisions wind up on the books. </p>
<p>As an economist and a scholar of philanthropy who researches how public policies shape charitable giving, I have been following the pending tax proposals closely and examining their potential impact. My research suggests that the proposed changes could lead Americans and U.S. companies to donate roughly US$20 billion less per year to charity.</p>
<p><iframe id="2mQFI" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/2mQFI/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Standard deduction and tax rates</h2>
<p>One of the primary ways giving could be reduced is through two of the tax plan’s key features – significantly boosting the standard deduction and cutting the top marginal tax rate. </p>
<p>Research I co-led showed that such changes, based on an earlier version of the tax plan, would reduce household charitable giving by <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">$13.1 billion</a> per year. That would mark a 4.6 percent decline from the <a href="https://theconversation.com/what-influences-american-giving-78800">$282 billion</a> American households gave in 2016. </p>
<p>We also determined that the share of households that itemize their tax returns would fall to approximately 5 percent from the current 30 percent. </p>
<p>While we based our estimates on a reduction in the top rate from 39.6 percent to 35 percent and a 75 percent increase in the standard deduction, the current House and Senate bills differ slightly from that baseline and each other, both in terms of top marginal tax rates and where they kick in for different income levels. For example, both bills would increase the standard deduction by 90.5 percent. </p>
<p>These ongoing differences make it hard to discern what the precise differences would be. But if the changes in the latest versions become codified, the share of filers who get a tax break – a built-in incentive – for their charitable gifts would fall even further than my team had estimated.</p>
<p>In short, I now anticipate the loss to charitable giving from the tax code changes to top our estimate of $13.1 billion.</p>
<h2>Estate tax</h2>
<p>Both bills would also reduce the incentive to give after a wealthy taxpayer dies.</p>
<p>The <a href="https://theconversation.com/how-closing-the-door-on-the-estate-tax-could-reduce-american-giving-85166">estate tax</a> encourages giving with a dollar-for-dollar deduction from estate and gift tax liabilities matching any amount of money bequeathed to charities after death. In other words, if you owe a tax of $5 million on your estate, you could give $100,000 to charity and lower your IRS bill to $4.9 million.</p>
<p>The number of families this actually applies to is tiny, after growing smaller in recent years. Only one in 500 estates belonging to the people who die in any given year owe anything, after Congress sharply increased the threshold under which estates are exempt from the tax. And rich families rely on loopholes to get out of it or <a href="https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax">reduce the tax’s impact</a>.</p>
<p>Currently, <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">estates under $5.5 million</a> are exempt for taxpayers filing as individuals and estates twice that size for couples.</p>
<p>The Senate bill calls for doubling current exemption levels to $11 million for an individual and $22 million for couples. The House plan would double exemption levels and then end the estate tax altogether in 2024. </p>
<p>Estimates regarding the effects of repeal range widely. However, there is complete consensus that doing away with this levy would reduce charitable bequests and donations wealthy Americans make during their lifetimes.</p>
<p>Based on my analysis, I anticipate that doing away with the estate tax altogether would cut giving by approximately $7 billion per year. </p>
<p>Levying it on the extremely small share of the very wealthiest households would surely reduce how much money is left to charities from current levels. But it is hard to extrapolate the approximate impact of this change because no researchers have modeled estimates with these levels of exemptions and tax rates.</p>
<p><iframe id="FZvnN" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/FZvnN/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Corporate giving</h2>
<p>Companies and corporate foundations donated $18.6 billion in both cash and in-kind goods and services to U.S. charities in 2016, according to the <a href="https://theconversation.com/what-influences-american-giving-78800">Giving USA report</a>, which the Indiana University Lilly Family School of Philanthropy researches and writes in partnership with the Giving USA Foundation. </p>
<p>My colleagues and I have not yet thoroughly studied how the pending reductions in corporate marginal tax rates might affect how much money businesses give to charity. But our models do show that the proposed reductions in the top corporate tax rate from 35 percent to 20 percent would reduce the incentives for corporations to give. </p>
<p>Businesses give for many reasons. However, it is reasonable to expect that dramatically cutting the top corporate tax rate would reduce corporate donations by an estimated $1.4 billion – a 7.6 decline from the amount business gave in 2016. </p>
<h2>Johnson Amendment</h2>
<p>The House bill includes a provision that would leave churches and other nonprofits, which by law must be nonpartisan, far more free to engage in political speech than they are today.</p>
<p><a href="http://thehill.com/opinion/finance/359330-theres-a-wolf-in-sheeps-clothing-hiding-in-the-gop-tax-bill">Nonprofit leaders</a> warn that this measure, left out of the Senate version, could have major consequences.</p>
<p>Watering down this restriction – known as the <a href="https://theconversation.com/how-the-tax-package-could-blur-the-separation-of-church-and-politics-87285">Johnson Amendment</a> – is <a href="http://www.publicconsultation.org/wp-content/uploads/2017/11/Johnson_Amendment_Quaire1117.pdf">wildly unpopular</a> with the vast majority of American voters, according to surveys. I suspect that it would be even less popular if more people understood the potential effects of this change on charities.</p>
<p>If churches and all other charities were to become largely able to endorse and support political candidates and retain their tax-exempt status, as the House’s tax bill would do, it would suddenly change the longstanding differences between giving to charities instead of explicitly political organizations and lobbying groups. </p>
<p>Currently, taxpayers may deduct their gifts to charities but not the money they donate to lobbying outfits and political parties.</p>
<p>If donations that are essentially political became tax-deductible, some donors would be likely to reallocate donations to charities, including new supposedly charitable entities created expressly to raise money to lobby for political causes. </p>
<p>Following such rejiggering, the consequences of this shift would reduce federal revenue by an estimated <a href="https://www.usatoday.com/story/news/politics/2017/11/10/tax-bills-repeal-johnson-amendment-could-cost-taxpayers-more-than-1-billion/852554001/">$2.1 billion</a> over 10 years, the nonpartisan Joint Committee on Taxation calculates. </p>
<p>While this change might create the appearance of an increase in charitable giving, it would be misleading to see the reallocation of giving from political parties and causes to politically charged charities as an authentic improvement for the charitable sector as a whole.</p>
<h2>Dynamic scoring</h2>
<p>Economic growth, of course, is good for philanthropy.</p>
<p>People tend to give less to charity during economic recessions and give more when times are better. After adjusting for differences in inflation, total giving fell an average of 0.5 percent annually during years when the U.S. economy was in recession since 1957. </p>
<p>On the flip side, the sum total of donations grew an average of 4.5 percent per year during boom times, <a href="http://www.givingusa.org">according to</a> <a href="https://store.givingusa.org/products/giving-usa-2017-report-highlights?variant=37727126089">Giving USA</a> data. </p>
<p>For multiple reasons, most research regarding the effects of tax policy on philanthropy does not use “dynamic scoring,” however. That is, it does not account for the potential economic growth effects tax policies are expected to have (or not) on growth.</p>
<h2>Universal charitable tax deduction</h2>
<p>So what could lawmakers do if they wanted to avert this outcome?</p>
<p>The most straightforward way to prevent the tax code overhaul from reducing charitable giving would be to let <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">all taxpayers deduct</a> donations from their taxable income. </p>
<p>My team and I have modeled the effects of this approach, which many <a href="https://www.councilofnonprofits.org/article/national-council-of-nonprofits-statement-the-universal-charitable-giving-act-hr-3988">nonprofit leaders</a> are urging Congress to adopt.</p>
<p>New bills that would do that are pending in both the <a href="https://www.congress.gov/bill/115th-congress/house-bill/3988">House</a> and the <a href="https://www.lankford.senate.gov/imo/media/doc/UniversalCharitableGiving_Lankford.pdf">Senate</a>. Both would create a universal deduction for non-itemizers, and both of them would cap this tax break at gifts equal to one-third of the standard deduction. </p>
<p>While the proposed caps would offer no incentive to give above the limit, and, therefore, it would be better without caps, those thresholds are high enough that they are unlikely to affect many otherwise ineligible taxpayers’ giving patterns.</p>
<p>So far, however, provisions along these lines are not on the table as part of the broader package.</p><img src="https://counter.theconversation.com/content/88513/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney and the Indiana University Lilly Family School of Philanthropy have received millions of dollars of grants to fund research that benefits the philanthropic sector generally and many charities specifically. Rooney has consulted with and been affiliated with the advisory committees and legal boards for numerous charities and foundations over the years. None have funded this essay or have provided feedback on it in advance of its release. </span></em></p>More than US$20 billion per year in giving is potentially at stake.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/885152017-12-04T18:55:19Z2017-12-04T18:55:19ZTwo little-known ways GOP tax bill would make chasm between rich and poor even wider<figure><img src="https://images.theconversation.com/files/197648/original/file-20171204-22989-w8y3g4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A Democratic aide carries a chart past the Senate chamber.</span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p>The tax bill passed by the Senate in the wee hours of Dec. 2 will – if it becomes law – widen the gap between the rich and the poor at a time when income inequality is already <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">approaching</a> historic heights. </p>
<p>Initially, most U.S. households are <a href="https://www.jct.gov/publications.html?func=startdown&id=5044">likely</a> to experience a modest tax cut under the Senate plan. However by 2027, the average family earning less than US$50,000 would pay about $250 more in taxes under the Senate plan, while the average family earning more than $1 million would experience a tax cut topping $8,000 a year, <a href="https://docs.google.com/spreadsheets/d/11a5klmHGwjiRWli14wMOMyg4QPy5xBtr_ps9ly41Vi0/edit?usp=sharing">according to estimates</a> from Congress’s own Joint Committee on Taxation. </p>
<p>Yet even those stark statistics understate the full impact of the Senate bill on long-term inequality in the United States. </p>
<p>In my own research, I examine the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2828970">relationship</a> between the tax system and inequality. In my view, there are two significant reasons why the bill’s impact will be even more dramatic – and even more regressive – than the Joint Committee on Taxation’s estimates suggest.</p>
<h2>Painful triggers</h2>
<p>First, under a 2010 law known as the <a href="https://obamawhitehouse.archives.gov/omb/paygo_description/">Statutory Pay-As-You-Go Act</a>, or PAYGO, the revenue losses resulting from the Senate bill would trigger automatic cuts in federal spending. </p>
<p>The program that would be most affected by the automatic cuts is Medicare, whose budget would be <a href="https://www.nytimes.com/interactive/2017/11/29/upshot/paygo-medicare-cuts-tax-bill.html">slashed</a> by more than $25 billion a year. Other programs that would experience deep cuts <a href="https://www.americanprogress.org/issues/economy/news/2017/11/21/443207/senate-tax-bill-eliminate-programs-farmers-crime-victims-elderly-children/">include</a> vocational training for individuals with disabilities, block grants for foster care and Meals on Wheels and federal funding for historically black colleges and universities. </p>
<p><iframe id="repR6" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/repR6/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Because lower- and middle-income families rely more heavily on these programs than wealthier Americans, these spending cuts would amplify the regressive consequences of the tax-side changes.</p>
<p>In theory, Congress could forestall these cuts by passing legislation that <a href="https://www.vox.com/policy-and-politics/2017/12/1/16726452/republican-leaders-paygo-medicare-tax">waives</a> the PAYGO law. But such legislation would require 60 votes to overcome a Senate filibuster, and it is far from clear that the votes in favor of waiver are there. </p>
<p>And in any event, a PAYGO waiver would not change the fact that the tax bill increases the federal deficit by more than $1.4 trillion over the next decade. Spending cuts to social safety net programs would likely have to come at some point, and when they do, lower- and middle-income families are likely to bear the brunt.</p>
<p>Broadly similar legislation passed by the House last month would trigger automatic cuts as well. Because the House bill <a href="https://www.forbes.com/sites/anthonynitti/2017/12/02/winners-and-losers-of-the-senate-tax-bill/#285a0cc2254d">violates</a> Senate procedural rules, the final legislation is likely to resemble the Senate’s package more closely than the House’s version.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197649/original/file-20171204-22989-s0j8v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Apples can help explain how tax bill would worsen inequality.</span>
<span class="attribution"><span class="source">Magnus Binnerstam/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>A long-term impact</h2>
<p>The second reason why the Joint Committee on Taxation’s estimates understate the full impact of the tax bill on inequality is a subtle but significant change made by the Senate bill that would hit lower- and middle-income families hard over the coming decades. Much of the impact would be felt after 2027, while the committee’s forecasts look only 10 years out. </p>
<p>The rather technical change is a shift in the inflation measure that would be used to determine certain deductions and tax bracket thresholds going forward.</p>
<p>Historically, the federal tax code has used a measure known as the fixed-weight consumer price index to calculate inflation. Fixed-weight CPI measures the change in the price of a fixed basket of goods over time. The Senate bill switches to a measure known as <a href="https://www.cbo.gov/publication/44088">chained CPI</a>, which accounts for the fact that as the prices of some goods rise, consumers shift toward cheaper substitutes. </p>
<p>One example often used to <a href="http://www.slate.com/articles/business/moneybox/2012/12/chained_cpi_a_sneaky_plan_to_cut_social_security_and_raise_taxes_by_changing.html">illustrate</a> the difference between fixed-weight and chained CPI involves Granny Smith and Red Delicious apples: If the price of Granny Smith apples rises, consumers will buy fewer of those and more of the Red Delicious variety. Fixed-weight CPI would continue to measure inflation based on Granny Smiths; chained CPI accounts for the fact that consumption patterns have changed.</p>
<p>From a practical perspective, the primary difference between fixed-weight CPI and chained CPI is that the former rises faster than the latter. According to the fixed-weight measure currently used by the federal government, prices have <a href="https://www.bloomberg.com/news/articles/2017-11-20/why-chained-cpi-has-links-to-u-s-tax-debate-quicktake-q-a">increased</a> by 45.7 percent since 2000. According to chained CPI, the increase was 39.7 percent. </p>
<p>The bottom line: For lower- and middle-income families, switching to chained CPI means that the standard deduction and the value of the <a href="https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit">earned income tax credit</a>, both of which are indexed to inflation, would be smaller than if the fixed-weight measure had been retained. This effect will become more dramatic with each succeeding decade.</p>
<p>To be sure, switching from fixed-weight to chained CPI saves the federal government money. The Senate bill uses this money to offset the long-term costs of corporate tax cuts. But because the change is so subtle, many Americans will not realize that they are – in effect – being asked to pay from their own pockets to pad corporate profits.</p>
<p>Rather than addressing the problem of rising income inequality, the Senate bill manages to speed up that trend while covering its own tracks.</p><img src="https://counter.theconversation.com/content/88515/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The author is affected by the Senate tax bill as a taxpayer, a participant in a 401(k) plan that owns shares of corporate stock, and an employee of a university that would face an excise tax on investment income under the Senate plan. The author previously served as visiting counsel at the Joint Committee on Taxation in 2013. The views expressed here are those of the author and do not reflect the opinions of the University of Chicago, the Joint Committee on Taxation, or any other entity.</span></em></p>While much has been written about why the GOP’s tax plan would exacerbate income inequality, there are two reasons it’s even worse than you think.Daniel Hemel, Assistant Professor of Law, University of ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/884282017-12-02T07:37:34Z2017-12-02T07:37:34ZTax bill’s attack on higher education undermines America’s economic vitality<p>With the <a href="https://mobile.nytimes.com/2017/12/01/us/politics/senate-tax-bill.html?action=click&module=Top%20Stories&pgtype=Homepage">Senate’s passage</a> of the “<a href="https://www.congress.gov/bill/115th-congress/house-bill/1">Tax Cuts and Jobs Act</a>,” President Donald Trump seems close to notching his first legislative victory – a huge tax cut for the 1 percent. All that remains is the need to reconcile the Senate bill with the <a href="https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf">version passed earlier</a> by the House of Representatives. </p>
<p>The bill is a travesty. Never have so many been forced to give up so much to benefit so few. The <a href="http://abcnews.go.com/Politics/wireStory/white-house-open-striking-health-provision-tax-bill-51270294">president’s claims to the contrary</a> notwithstanding, this is no wonderful Christmas present for the American people. It’s more like a grimy lump of coal – many lumps, in fact.</p>
<p>In a pair of bills that each runs to more than 400 pages, it is not hard to find objectionable provisions. As a long-time academic, I am particularly appalled by the <a href="https://theconversation.com/how-the-tax-package-would-slam-higher-ed-86913">treatment</a> of America’s colleges and universities, the widespread network of institutions charged with training America’s talent pool of the future. </p>
<p>The Republican plan undermines <a href="https://www.cnbc.com/video/2017/10/27/white-house-says-tax-plan-would-boost-long-term-economic-growth.html">what its backers claim</a> is their goal: boosting America’s economic vitality. Here’s why. </p>
<h2>Targeting higher ed</h2>
<p>For instance, as part of its effort to pay for <a href="http://www.businessinsider.com/trump-tax-plan-rich-people-benefits-2017-11">the generous tax cuts</a> for corporations and the wealthy, Republicans aim to impose a <a href="https://theconversation.com/gop-plan-to-tax-college-endowments-like-yales-and-harvards-would-be-neither-fair-nor-effective-86912">1.4 percent tax on investment income</a> at private schools with endowments worth at least US$250,000 per full-time student. This would affect as many as 70 schools and cost them an estimated $2.5 billion over a decade. </p>
<p>Not only will that shrink the resources available to support research, much of which <a href="https://theconversation.com/how-universities-boost-economic-growth-65017">helps to fuel</a> the nation’s economic growth. It will also make it more difficult to hold down rising tuition expenses, thus closing off educational opportunities for many students from lower- and middle-income families. </p>
<p>Public universities in states like New York and California can also expect to be hard hit by the bill’s elimination of the federal deduction for state and local taxes. Since this change <a href="https://www.vox.com/policy-and-politics/2017/10/30/16557554/the-state-and-local-tax-deduction-explained">will actually add</a> to residents’ overall tax bills, state governments are bound to come under voter pressure to offset them with tax cuts closer to home, which in turn will require corresponding expenditure reductions. Public universities, by definition, tend to be <a href="https://www.cbpp.org/research/state-budget-and-tax/funding-down-tuition-up">highly dependent</a> on the public purse for their revenues. That makes them particularly vulnerable targets when budgets are slashed at the state level.</p>
<p>Those of us who teach in the University of California system, for instance, still remember the pay cuts we all had to endure when Sacramento’s budget was hit by the Great Recession of 2008-2009. <a href="http://www.dof.ca.gov/budget/historical_budget_Publications/2009-10/FullBudgetSummary.pdf">Funding</a> for the system as a whole was cut by 40 percent, leading to an exodus of faculty, tight limits on new hires and severe limits on financial aid for students. It took years for support of instruction and research to return to pre-crisis levels.</p>
<p>And even more egregious are some “reforms” in the House version that might yet make it into law depending on how negotiations with the Senate turn out. The House bill is far stingier than the Senate’s when it comes to higher education. For example, House Republicans <a href="https://www.nytimes.com/interactive/2017/11/11/your-money/tax-student-debt.html">propose eliminating</a> a benefit that lets some taxpayers deduct student loan interest. That too will close off opportunities for many poorer students.</p>
<p>The House bill also takes aim at a break that presently makes graduate school more affordable by allowing students to work as research or teaching assistants for tuition waivers that don’t count as taxable income. Counting these waivers as income <a href="https://www.insidehighered.com/news/2017/11/07/grad-students-and-policy-experts-say-taxing-graduate-students-tuition-waivers-would">would make graduate school unaffordable</a> for tens of thousands of current and would-be students. </p>
<p>All in all, the House bill alone <a href="http://www.taxpolicycenter.org/taxvox/house-tax-bill-would-simplify-higher-ed-subsidies-price-would-be-higher-costs-many">would reduce tax incentives for higher education</a> by an estimated $64 billion over 10 years. </p>
<h2>Higher ed’s economic impact</h2>
<p>Whatever the final shape of the Tax Cuts and Jobs Act, the provisions targeting higher education will have adverse economic effects that will be both substantial and long-lasting. </p>
<p>Numerous studies have shown that a college education adds substantially to an individual’s lifetime earning potential. <a href="https://trends.collegeboard.org/sites/default/files/education-pays-2013-full-report.pdf">Research by the College Board</a>, a nonprofit that helps students prepare for college, shows that the median income of bachelor’s degree recipients with no advanced degree and working full time in 2011 was $56,500, some $21,100 more than median earnings of high school graduates. Put another way, the benefits of a four-year college degree <a href="https://www.brookings.edu/research/where-is-the-best-place-to-invest-102000-in-stocks-bonds-or-a-college-degree/">are equivalent to an investment</a> that returns 15.2 percent per year – over a lifetime. And the earnings premium grows even wider for additional years of study. </p>
<p>Furthermore, over time individual earnings tend to rise more rapidly for those with higher levels of education, and unemployment levels are significantly lower. The evidence is strong that these benefits bolster the overall economy as well. </p>
<p>Zvi Griliches, a Harvard economist who died in 1999 and was a specialist on the topic, <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674003439">found</a> that the historical growth of years devoted to higher education and other advanced training accounted for about a third of productivity growth in the U.S. economy over the 50-year period he examined.</p>
<p>These productivity gains, in turn, translated into higher output and incomes for the economy as a whole, adding substantially to America’s wealth. </p>
<p><a href="https://www.asu.edu/president/p3/Reports/EdValue.pdf">Evidence also suggests</a> that regions with a higher proportion of college graduates tend to have lower crime rates, higher levels of civic participation and improved performance across a number of other socioeconomic measures.</p>
<h2>Shattered dreams, stunted economy</h2>
<p>In its essence, the Tax Cuts and Jobs Act embodies a contemptuous disregard for intellectualism and expertise that over time can only erode the quality of the U.S. work force. </p>
<p>Many schools will see their budgets cut; faced with higher fees and tuition, many students will be forced to drop out – their dreams shattered, their earning potential stunted, their contribution to the American economy significantly curtailed. </p>
<p>America will not be made great again by attacking its system of higher education in such a mindless manner.</p><img src="https://counter.theconversation.com/content/88428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin J. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Universities play a vital role in promoting economic growth, something the writers of the Republican tax plan have apparently forgotten.Benjamin J. Cohen, Professor of International Political Economy, University of California, Santa BarbaraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/882812017-11-29T02:27:07Z2017-11-29T02:27:07ZTaxpayers want more fairness. GOP plan to ‘reform’ the tax code doesn’t deliver<figure><img src="https://images.theconversation.com/files/197381/original/file-20171202-5399-1vb15w5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Protesters voice their disapproval of the Republican tax bill on Capitol Hill.</span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p>Republicans seem to be operating under the assumption that if the details of their tax “reform” plan are aired for too long, the whole thing might fall apart.</p>
<p>The <a href="https://www.nytimes.com/2017/11/16/us/politics/house-tax-overhaul-bill.html?_r=0">House passed its version</a> of the most sweeping overhaul of the tax code in a generation on Nov. 16, barely seven weeks since Republicans disclosed their “<a href="https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf">unified framework</a>.” The last major rewrite, passed in 1986, <a href="http://www.nytimes.com/1986/10/23/business/tax-reform-act-1986-measure-came-together-tax-bill-for-textbooks.html?pagewanted=all">took two years</a>. </p>
<p>The Senate hopes to follow with similar lightning speed, but with constant tweaking <a href="https://www.nytimes.com/2017/11/27/us/politics/senate-tax-bills-potential-hurdle-republicans.html">intended to appease</a> wavering lawmakers, <a href="http://www.taxpolicycenter.org/taxvox/retracting-and-correcting-estimates">groups</a> trying to analyze its impact are <a href="https://taxfoundation.org/response-center-equitable-growth-tax-model-critique/">struggling to keep up</a>. In other words, senators are scheduled to vote on a bill this week without knowing exactly how it’ll affect their constituents.</p>
<p>Amid this chaos, it’s easy to forget why regular Americans want tax reform in the first place. <a href="http://www.people-press.org/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share/">Research</a> has shown that their most important gripe about taxes is the demoralizing feeling that the system is hopelessly complex and that other people are getting away with not paying their fair share. To use the president’s words, people think the “<a href="http://www.businessinsider.com/trump-tax-plan-details-corporate-rate-individual-brackets-deductions-cuts-2017-9">system is rigged</a>.” </p>
<p>I’ve been researching and teaching tax policy for a dozen years, and I believe the Republican tax plan will only exacerbate that feeling. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=378&fit=crop&dpr=1 600w, https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=378&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=378&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=475&fit=crop&dpr=1 754w, https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=475&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/196851/original/file-20171129-28892-l8qtp7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=475&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Trump, escorted by Sen. John Barrasso and Senate Majority Leader Mitch McConnell, popped by Congress to twist some arms.</span>
<span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span>
</figcaption>
</figure>
<h2>More than math</h2>
<p>Politicians and the media frequently talk about current efforts at tax reform as if this were a <a href="https://www.npr.org/2017/11/14/562884070/charts-heres-how-gop-s-tax-breaks-would-shift-money-to-rich-poor-americans">math problem</a>. </p>
<p>Cut taxes for some groups, raise them on others and in the end hit a preordained target – in this case, <a href="https://www.nytimes.com/2017/10/26/us/politics/house-budget-blueprint-tax-cut.html">US$1.5 trillion over 10 years</a>. This framing assumes the only thing Americans care about is minimizing their own taxes – though, as it stands, <a href="https://nyti.ms/2icXs4P">many Americans</a> may be surprised to find their <a href="https://www.washingtonpost.com/news/wonk/wp/2017/11/26/senate-gop-tax-bill-hurts-the-poor-more-than-originally-thought-cbo-finds/?utm_term=.ddf63f2593ae">taxes will go up</a> under the GOP plan. </p>
<p>However, <a href="https://press.princeton.edu/titles/10977.html">research</a> by Brookings Fellow Vanessa Williamson reveals that Americans do not reflexively hate taxes. In fact, her research shows that most Americans view paying taxes as a moral responsibility and a fundamental act of citizenship. </p>
<p>What frustrates them, Williamson finds, is the tax system’s “deeply disempowering” complexity, the feeling that it was designed “with someone else in mind.” This resentful and defensive disposition is regularly reinforced when policy experts lament the public’s lack of knowledge about taxes, smugly reminding us, for example, that <a href="https://www.forbes.com/sites/timworstall/2011/09/22/corporations-do-not-pay-taxes-they-cant-theyre-not-people/#4819f9016222">corporations don’t pay taxes, people do</a>.</p>
<p>Tulane University economist Steven M. Sheffrin’s <a href="https://www.cambridge.org/core/books/tax-fairness-and-folk-justice/FBCF5566A41C9E345FFB0FEF5D0CECC3#.Wh2yMDEzmyk.google">research</a> sheds additional light on taxpayer anger. He focuses on the process of taxpaying, not just its outcomes. Taxpayers want to be treated with dignity and respect and have a voice in decision-making. They want to be able to look at various provisions of the tax code and decipher the underlying logic and justifications. They want to see the coherent and consistent application of a principle that defines one’s “fair share.” </p>
<p>Only 27 percent of <a href="http://www.people-press.org/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share/">those polled by Pew</a> earlier this year were bothered “a lot” by how much they personally pay. Rather, they were bothered most by the feeling that particular groups such as corporations and the rich were not paying their fair share.</p>
<p>Republicans have sold their plan as a simplification of the tax code, eliminating loopholes and collapsing brackets, qualifying it as a “tax reform” not just a “tax cut.” But as Howard Gleckman of the Tax Policy Center has pointed out, the plan would “<a href="http://www.taxpolicycenter.org/taxvox/dont-confuse-trumps-tax-cuts-tax-reform">firmly maintain the basic structure of today’s tax code</a>” and really is “a giant tax cut designed to benefit mostly businesses and high-income households.” </p>
<p>These proposed reforms address none of the taxpayers’ concerns about fairness. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=414&fit=crop&dpr=1 600w, https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=414&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=414&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=520&fit=crop&dpr=1 754w, https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=520&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/196855/original/file-20171129-28862-1d8q0ip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=520&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Speaker of the House Paul Ryan holds a proposed ‘postcard tax filing form.’</span>
<span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span>
</figcaption>
</figure>
<h2>Real tax reform</h2>
<p>If Congress and President Donald Trump were serious about reforming the system so that taxpayers could actually feel good about it, they would do a number of things differently:</p>
<ol>
<li><p><strong>Eliminate complexity, not just replace old complexity with new.</strong> The <a href="https://www.npr.org/2017/11/03/561712483/gops-dream-postcard-size-tax-return">postcard-size tax return prop</a> has been making the rounds, but no one is falling for it. While the current proposals would rightly eliminate some layers of complexity such as the alternative minimum tax and <a href="https://itep.org/the-domestic-production-activities-deduction-costly-complex-and-ineffective/">widely abused corporate loopholes</a>, most of the existing complexity would remain (loopholes for <a href="https://psmag.com/economics/carried-interest-remains-unaddressed-by-republican-legislation">hedge fund managers</a>, <a href="http://nymag.com/daily/intelligencer/2017/11/gop-plan-retains-tax-break-for-owners-of-golf-courses.html?platform=hootsuite">golf course owners</a> and <a href="https://www.washingtonpost.com/news/fact-checker/wp/2017/11/07/two-words-in-the-gop-tax-bill-means-tens-of-billions-for-the-super-wealthy/?utm_term=.67215f077dc4">wealthy heirs</a> among the most egregious). And new layers of complexity, such as special rules for <a href="https://theconversation.com/how-trumps-tax-proposal-could-weaken-faith-in-the-systems-fairness-76830">pass-through businesses</a> and <a href="https://www.nytimes.com/2017/11/13/business/economy/corporate-tax.html?mtrref=www.google.com">offshore profits</a>, would be created.</p></li>
<li><p><strong>Acknowledge that we are using the tax system for a lot more than just raising revenue.</strong> Much of the complexity that people object to is a result of using tax breaks to fund non-tax-related policy goals. Political scientist Christopher Howard’s research about the “<a href="https://press.princeton.edu/titles/6220.html">hidden welfare state</a>” has shown how tax breaks are increasingly used to direct benefits to housing, education and a multitude of other policy areas. True tax reform would take stock of all of these provisions, determine whether they are achieving their <a href="https://www.nytimes.com/roomfordebate/2015/04/14/the-worst-tax-breaks/retirement-break-for-the-rich-but-not-the-poor">intended goals</a> and decide whether they should remain in the tax code. The GOP tax plan <a href="https://www.forbes.com/sites/beltway/2017/11/27/what-happened-to-those-special-interest-loopholes-congress-was-going-to-close/">leaves most of these loopholes</a> untouched. </p></li>
<li><p><strong>Ensuring businesses pay their fair share.</strong> When it comes to politics, corporations insist that they are “<a href="https://www.npr.org/2014/07/28/335288388/when-did-companies-become-people-excavating-the-legal-evolution">people</a>” with the right to speak or donate money as they wish. However, when it comes to taxes, corporations claim they <a href="https://www.forbes.com/sites/timworstall/2011/09/22/corporations-do-not-pay-taxes-they-cant-theyre-not-people/#4819f9016222">aren’t people at all</a> and therefore their taxes should be reduced as much as possible. Republicans made lowering the corporate tax rate a centerpiece of their plan. But companies can’t have it both ways. Given the benefits they receive – from political speech to legal protections and infrastructure – it’s only fair that companies share the burden like everyone else. True tax reform is about finding the right balance between helping businesses compete in the global economy and living up to their obligations to be good citizens and pay their fair share. The Republican plan addresses the first point and ignores the second.</p></li>
</ol>
<h2>Winners and losers</h2>
<p>Instead of having an honest discussion about fixing a profoundly broken system, Republicans are pitting us against each other: <a href="https://www.nytimes.com/2017/11/13/opinion/republican-taxes-next-generation.html">rich versus middle class</a>, <a href="https://www.bloomberg.com/news/features/2017-09-12/why-american-workers-pay-twice-as-much-in-taxes-as-wealthy-investors">capital versus labor</a>, <a href="http://thehill.com/policy/healthcare/359669-red-state-lawmakers-find-blue-state-piggy-bank">red states versus blue states</a>, <a href="http://time.com/4993389/tax-cuts-your-children/">current Americans versus future generations</a>.</p>
<p>And while we are distracted, fighting each other to be in the winners instead of losers column, they hope to pass exactly the bill they want: a $1.5 trillion gift to the wealthiest Americans. </p>
<p>Tax reform should be more than just a math problem. As long as we waste our energy fighting each other, we will never be able to create a system that makes us proud to pay our fair share.</p>
<p>And regular Americans will be left wondering: “Wasn’t this supposed to be about making the system simpler?”</p><img src="https://counter.theconversation.com/content/88281/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Leiser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Far from dispelling the notion among Americans that the system is ‘rigged’ against them, Republican tax plans are more likely to make matters worse.Stephanie Leiser, Lecturer in Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/868782017-11-17T17:04:37Z2017-11-17T17:04:37Z‘Hot potato’ shows why workers won’t benefit from Trump’s corporate tax cut<figure><img src="https://images.theconversation.com/files/195236/original/file-20171117-19250-19mgss2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who will be left holding the potato? </span> <span class="attribution"><span class="source">Nobuhiro Asada/Shutterstock.com</span></span></figcaption></figure><p>Many children have played hot potato, a game in which they pass a spud to other children quickly so they don’t get stuck with it when the music stops. </p>
<p>Taxes are like that potato. No one likes paying them; everyone tries to pass them to others. The game of hot potato sheds some light on the debate over Republican tax cutting plans, particularly when it comes to companies. </p>
<p>The <a href="https://www.nytimes.com/2017/11/16/us/politics/tax-bill-house-vote.html?_r=0">House just passed</a> its tax cut bill. It would give about <a href="https://www.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html">two-thirds</a> of roughly US$1.5 trillion in net tax cuts over the next decade to businesses, mainly by lowering the corporate income tax rate to 20 percent from 35 percent. That puts a lot of money on the table. About $100 billion in U.S. corporate profits would be retained by companies rather than paid to the government each year. </p>
<p><a href="http://money.cnn.com/2017/06/29/news/economy/corporate-tax-cut-middle-class/index.html">Treasury Secretary Steve Mnuchin has claimed</a> that most of this tax savings would go to workers, in the form of higher wages, in line with the president’s argument that the plan would benefit the middle class. </p>
<p>With the help of hot potatoes, let me explain why he’s wrong. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Treasury Secretary Steven Mnuchin holds up a sheet of $1 bills, the first bearing his name, as his wife Louise Linton looks on.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<h2>Why workers won’t gain</h2>
<p>There are two ways a corporate income tax cut can trickle down to workers’ pockets: directly through higher wages or indirectly via lower prices at stores selling the things they buy. </p>
<p>Mnuchin contends that workers currently bear 70 percent of the corporate tax burden – or get stuck with 70 percent of the corporate tax hot potato. So, a tax cut would mean that companies pass much of their tax benefits to their employees by paying them more or by cutting prices and increasing the buying power of current workers. </p>
<p>Yet, based on past tax cuts, <a href="http://www.taxpolicycenter.org/taxvox/who-pays-corporate-income-tax-0">economists have estimated</a> that only 20 percent of the corporate income tax is borne by workers, suggesting that they would get just a small fraction of any corporate tax reduction. </p>
<p>Furthermore, when asked how they’d spend the gains from a tax holiday on the $2.5 trillion that they currently have parked overseas – which is also part of the corporate tax cut plan – <a href="https://www.cnbc.com/2017/07/13/companies-have-big-plans-foroverseas-cash--if-tax-reform-ever-happens.html">most companies indicated</a> they’d pay back debt, repurchase shares or invest in mergers and acquisitions. Wage hikes were not high on the corporate agenda. </p>
<p>Nor have they been part of the corporate agenda for the past several decades. Since the 1970s worker productivity has increased 74 percent, while <a href="http://www.epi.org/productivity-pay-gap/">average wages have risen</a> only 12 percent. There is no reason to believe that tax cuts would all of a sudden generate greater corporate generosity for workers. </p>
<p>As for lower prices, if the U.S. economy were dominated by small businesses, intense competition would force these companies to lower prices rather than give it to shareholders in the form of dividends. Reduced prices for goods would translate into improved living standards for workers the same way that a wage hike would. </p>
<p>But our economy today <a href="https://finance.eller.arizona.edu/sites/finance/files/grullon_11.4.16.pdf">is dominated</a> by large multinational corporations facing little pressure to reduce prices. So, the gains from a corporate tax cut will remain with the owners of the business – shareholders.</p>
<p>Furthermore, corporate CEOs have large incentives to avoid passing the gains from a tax cut to workers: Executive pay is tied to the company’s share price. If they pass the extra money on to shareholders in the form of dividends or stock buybacks, share prices will rise – <a href="https://hbr.org/2014/09/profits-without-prosperity">as will executive pay packages</a>.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"930477112808628226"}"></div></p>
<h2>Paying for tax cuts</h2>
<p>So back to our game. When there’s a tax cut, someone still is stuck with a potato. That is, someone has to pay for it. There are two ways this can be done: increased borrowing or lower government spending. </p>
<p>When economies are near full employment, as the U.S. is today, additional government borrowing will increase borrowing costs or interest rates. So if the U.S. were to borrow more money to finance the tax cuts, the losers would be middle-income households borrowing to start a business, go to college or buy a home. Around 80 percent of Americans are currently in debt, with a <a href="http://www.pewtrusts.org/%7E/media/assets/2015/07/reach-of-debt-report_artfinal.pdf">median debt of $70,000</a>. Homeowners would be big losers because higher mortgage rates would also lower the value of their home (they’d also get hammered by changes to the tax code that would make the <a href="https://theconversation.com/mortgage-interest-deduction-is-a-terrible-way-to-help-middle-class-homeowners-87066">mortgage interest deduction useless</a> for most people). </p>
<p>Whether or not the U.S. borrows more and increases the national debt, some spending cuts would also be required. </p>
<p>These would likely come from Social Security, Medicare and other social programs that benefit average citizens and the poor. That’s because lawmakers <a href="https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/">won’t find much savings</a> anywhere else, apart from the military budget, which they almost certainly wouldn’t touch.</p>
<p>Already this appears to be in the cards. The Congressional Budget Office warned that if the Republican tax plan adds to the deficit, it <a href="https://www.nytimes.com/2017/11/15/us/politics/republicans-entitlement-programs-deficit.html?_r=0">could set off</a> a 2010 budget rule that would lead to half a trillion in automatic cuts to Medicare over the next decade. And the Senate tax plan calls for repealing the requirement in the ACA that everyone buy insurance, which <a href="https://fivethirtyeight.com/features/taking-on-obamacare-with-tax-reform-may-backfire-for-republicans/">would lead to 13 million Americans</a> losing health insurance – all to save $338 billion over 10 years. </p>
<h2>The big winners</h2>
<p>The consequence of the $1.5 trillion tax cut then would be continuing stagnant wages, cuts in government programs, higher interest rates and rising inequality. Translation: The rich get richer and average Americans get stuck holding some very big potatoes. </p>
<p>Adding further injury, average workers <a href="https://www.npr.org/2017/11/14/562884070/charts-heres-how-gop-s-tax-breaks-would-shift-money-to-rich-poor-americans">wouldn’t benefit</a> very much from the proposed individual income tax cuts either. Only 8.3 percent of those in the House plan would go to taxpayers making $50,000 or less (which about half of all taxpayers). In contrast, millionaires, the richest 0.3 percent of the population, receive more than a fifth of the cuts. </p>
<p>Even worse, unlike for companies, all the tax cuts for the working class <a href="https://www.forbes.com/sites/anthonynitti/2017/11/10/the-house-tax-bill-middle-class-cut-or-big-bait-and-switch/#4af094211d13">disappear after 10 years</a>.</p><img src="https://counter.theconversation.com/content/86878/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The House just passed its version of the tax plan, which includes about US$1 trillion in cuts for corporations. The question, who will be left holding the potato?Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/870662017-11-14T02:43:41Z2017-11-14T02:43:41ZMortgage interest deduction is a terrible way to help middle-class homeowners<figure><img src="https://images.theconversation.com/files/194439/original/file-20171113-27616-160kcch.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Middle-class homeowners need credits, not deductions.</span> <span class="attribution"><span class="source">Konstantin L/Shutterstock.com</span></span></figcaption></figure><p>Republican lawmakers’ plans to rewrite the tax code <a href="https://www.washingtonpost.com/realestate/gop-tax-proposal-contains-major-headaches-for-homeowners/2017/11/07/31a62c40-c328-11e7-afe9-4f60b5a6c4a0_story.html?utm_term=.3e745caf9a68">would make it harder</a> for most Americans to take advantage of the mortgage interest deduction, which <a href="https://www.housingwire.com/articles/41796-nar-breaks-down-cost-of-house-tax-plan-to-homeowners">has angered many</a> who claim <a href="https://www.huffingtonpost.com/entry/the-tax-bill-placing-a-dagger-in-the-american-dream_us_5a06edcae4b0ee8ec36941b9">it’ll push homeownership</a> out of reach for millions of middle-class Americans. </p>
<p>Actually, evidence shows the deduction already <a href="http://www.nber.org/papers/w9284.pdf">disproportionately benefits</a> the highest-income homeowners while doing <a href="https://www.mercatus.org/system/files/Fichtner-Reforming-Mortgage-.pdf">little to promote homeownership</a> for middle- and low-income taxpayers. </p>
<p>I’ve been researching, writing and teaching on the effects of tax policies and their economic effects for almost three decades. Based on this work and my understanding of progressive taxation, I recommend something bolder than merely tinkering with the existing mortgage interest deduction. </p>
<p>Republicans should repeal it entirely and replace it with something that may sound the same but is in fact very different and would be much more effective in promoting homeownership. </p>
<h2>Importance of homeownership</h2>
<p>It makes lot of sense for government tax policy to favor homeownership. <a href="http://www.nber.org/papers/w9284.pdf">Research shows</a> neighborhoods with more residents who own their own homes offer many <a href="https://www.sciencedirect.com/science/article/pii/S0094119096920100">societal benefits</a> and lead to <a href="https://www.mercatus.org/system/files/Fichtner-Reforming-Mortgage-.pdf">stronger and better-cared-for communities</a>. </p>
<p>For example, a <a href="http://www.nber.org/papers/w9284.pdf">2002 paper</a> by economists Edward Glaeser and Jesse Shapiro found that homeowners tend to work harder at making their communities more pleasant, take better care of their properties and get more involved politically. </p>
<p>And a <a href="http://econweb.ucsd.edu/%7Emiwhite/gw-jue-reprint.pdf">1997 study</a> by economists Richard Green and Michelle White showed that children of homeowners were 9 percent more likely to stay in school than the children of renters.</p>
<h2>How the mortgage interest deduction works</h2>
<p>So naturally, the federal tax system <a href="https://economix.blogs.nytimes.com/2013/08/06/the-sacrosanct-mortgage-interest-deduction/">offers a number of ways</a> to promote homeownership, including the mortgage interest deduction, perhaps the most prominent among them. Here’s how it works and who benefits. </p>
<p>First off, only taxpayers who itemize their deductions can take it, so long as they tally more than the standard deduction, currently US$12,600 for a married couple. If you’ve met that threshold, then your benefit from the interest deduction will depend on how much greater it is than the standard deduction and what your marginal tax rate is. A higher rate will lead to greater tax savings. </p>
<p>For example, let’s imagine three couples filing jointly in 2016. Couple A has a modest income of $50,000 and pays $7,300 a year in interest but has only $4,000 in other expenses that can be itemized. This couple would have chosen the standard deduction and received no benefit from the mortgage interest it paid. </p>
<p>Couple B has the same mortgage but earns a lot more with a taxable income of $80,000. As a result, the couple paid $7,300 in state and local taxes the previous year, which can be itemized on its federal tax return. That gives the couple $14,600 in itemized deductions or $2,000 more than the standard. At a marginal tax rate of 25 percent, that means the couple would get a tax benefit from the mortgage interest deduction of $500. </p>
<p>Lastly, consider Couple C, with the same mortgage but a taxable income of $200,000, which puts it in the 28 percent tax bracket. The higher earnings mean it paid $12,600 in state and local taxes the previous year, which gives the couple $19,900 in itemized deductions. Since that’s $7,300 more than the standard deduction, it would be able to take advantage of all the interest it paid, reducing its tax liability by $2,044 (28 percent x $7,300). </p>
<p>From the above, it is clear that the higher a homeowner’s itemized deductions and marginal tax rates, the higher the benefit from the mortgage interest deduction will be. </p>
<p><a href="https://govinfo.library.unt.edu/taxreformpanel/final-report/TaxPanel_5-7.pdf">Abundant evidence</a> shows that the tax benefits from this deduction, which <a href="https://www.cbo.gov/publication/43768">cost $70 billion</a> in 2013, are highly skewed to high-income homeowners. <a href="https://fivethirtyeight.com/features/the-tax-deductions-economists-hate/">Just under three-quarters</a> of that went to the wealthiest 20 percent of earners, while the poorest 20 percent got nothing. </p>
<h2>Further favoring the rich</h2>
<p>So how would the latest versions of the plans working their way through Congress change this? </p>
<p>Under current law, <a href="https://www.zillow.com/research/mortgage-interest-deduction-taxes-17195/">44 percent of homes</a> are valuable enough to make itemizing and taking the deduction worthwhile, according to Zillow, which operates several real estate listing portals including Trulia and StreetEasy. This would fall to 12 percent under the House plan and to 7 percent under the Senate proposal.</p>
<p>Both plans would double the standard deduction, thereby increasing the threshold before the interest deduction becomes useful, while eliminating the ability to deduct state and local income or sales taxes, thus making it harder to reach that much higher bar. </p>
<p>There are two key differences between the plans: The House bill would lower the cap on which mortgages are eligible from $1 million to $500,000, while the Senate plan would eliminate the deduction of state and local property taxes. </p>
<p>Under either plan, however, the mortgage interest deduction would become essentially worthless to middle-income taxpayers.</p>
<h2>A better way to promote homeownership</h2>
<p>Replacing the deduction with a tax credit would be a much better way to promote homeownership in the U.S., particularly among lower- and middle-income Americans. And <a href="https://govinfo.library.unt.edu/taxreformpanel">bipartisan commissions</a> formed by the <a href="http://momentoftruthproject.org/sites/default/files/TheMomentofTruth12_1_2010.pdf">last two presidents</a> have supported doing just that. </p>
<p>Generally, while a tax deduction reduces only your taxable income and its value is a function of your marginal tax bracket, a credit offers a dollar-for-dollar reduction in your tax liability. That doesn’t mean a homeowner who pays $7,300 a year in mortgage interest would get that much back but rather that she would get a fixed percentage of it back as a credit. </p>
<p>So unlike the mortgage interest deduction, whose value depends on whether a taxpayer itemizes her deductions and what her marginal tax rate is, a tax credit would reduce any homeowner’s liability, regardless of income level. </p>
<p>For example, let’s say the tax credit is set at 10 percent. Our three couples who received as little as nothing or as much as $2,044 from the deduction would instead all receive a $730 credit, which would reduce how much they owe in taxes by that amount. </p>
<p>Thus, a mortgage interest credit would offer all taxpayers with mortgage interest some tax relief. Millions of lower-income borrowers would benefit, most of whom do not currently use the mortgage interest deduction. The tax credit would make the tax code simpler (a <a href="https://www.forbes.com/sites/taxanalysts/2017/09/11/trump-wants-a-simple-tax-system-history-says-he-wont-get-it/#696c00187c1c">stated objective</a> of President Trump) and would end the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2038638">disproportionate benefit</a> enjoyed by higher-income taxpayers. </p>
<p>A credit would also be easier to tailor to reflect the <a href="https://www.nar.realtor/research-and-statistics/housing-statistics/metropolitan-median-area-prices-and-affordability">wide disparities in housing costs</a> across the U.S., for example, by using average housing prices to adjust the maximum credit in a given region or urban area. </p>
<p>President Trump <a href="http://www.cnn.com/2017/09/27/politics/donald-trump-tax-reform-indianapolis/index.html">argues</a> we have a “once-in-a-generation opportunity” to get tax reform done right. This may be a rare chance to get tax incentives for homeownership right as well.</p><img src="https://counter.theconversation.com/content/87066/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gil B. Manzon Jr. does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than tinkering with the deduction, Republicans should get rid of it altogether and replace it with something that would actually help more Americans afford a home.Gil B. Manzon Jr., Associate Professor of Accounting, Boston CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/869122017-11-08T11:16:25Z2017-11-08T11:16:25ZGOP plan to tax college endowments like Yale’s and Harvard’s would be neither fair nor effective<figure><img src="https://images.theconversation.com/files/193647/original/file-20171107-6766-1k9z6zs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Harvard, located along the Charles River in Cambridge, boasts the largest endowment at $37.6 billion.
</span> <span class="attribution"><span class="source">Jorge Salcedo/Shutterstock.com</span></span></figcaption></figure><p>Tucked away in the recently <a href="https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf">announced GOP tax bill</a> is a small item you may have missed: a new tax on university endowments. As I have spent decades working in higher education, the proposal immediately piqued my interest.</p>
<p><a href="http://www.investopedia.com/ask/answers/06/universityendowment.asp">Colleges create endowments</a> by raising funds from alumni, companies and other donors, invest the money in stocks, bonds and other assets, and use the returns to fund student aid programs, professors’ salaries and any other expenses needed to run a college. Republicans want to slap a 1.4 percent tax on certain endowments’ investment income, also known as their returns.</p>
<p>Some college leaders are already <a href="http://www.acenet.edu/news-room/Pages/Statement-by-ACE-President-Ted-Mitchell-on-the-House-Tax-Reform-Proposal.aspx">howling</a> at the proposal – and at <a href="http://www.cnn.com/2017/11/04/opinions/tax-plan-student-loans-dancy-opinion/index.html">several others</a> in the tax bill targeting higher education – arguing it would threaten their autonomy and reduce support for poorer students. </p>
<p>Since tax revenue to run the government has to come from somewhere, I believe colleges and universities are fair game. To me, the questions that matter are simple: Is the tax itself fair? And would it be effective?</p>
<h2>Endowments swell in size</h2>
<p>Republicans have <a href="https://www.bloomberg.com/news/articles/2017-04-18/universities-seek-to-defend-endowments-from-republican-tax-plan">expressed concern about the tax-exempt status</a> of college endowments for several years, arguing the largest ones aren’t spending enough on tuition assistance and questioning how the funds are managed. </p>
<p>Such endowments have grown dramatically recently, presenting a juicy target for GOP lawmakers looking for revenue to offset <a href="https://www.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html?_r=0">nearly $1.5 trillion</a> in tax cuts for companies and individuals. </p>
<p>Post-secondary institutions <a href="https://nces.ed.gov/programs/digest/d16/tables/dt16_333.90.asp">reported a total of $547 billion</a> in endowment assets as of 2016, up 54 percent from five years earlier, shortly after they got whacked by the financial crisis. And in the preceding academic year, from 2014 to 2015, schools earned a total of $26 billion off their endowment assets.</p>
<p></p><hr><p></p>
<p><iframe id="Zi1Gw" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Zi1Gw/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p></p><hr><p></p>
<p>Currently, <a href="https://nces.ed.gov/programs/digest/d16/tables/dt16_333.90.asp">Harvard University boasts the largest</a> endowment, at $37.6 billion – more than neighboring state <a href="https://www.bea.gov/newsreleases/regional/gdp_state/qgsp_newsrelease.htm">Vermont’s entire annual GDP</a>.</p>
<p>Harvard, however, is not alone in having a hefty endowment. Fellow private universities Yale, Stanford and Princeton all have <a href="https://nces.ed.gov/programs/digest/d16/tables/dt16_333.90.asp">more than $20 billion each</a>, as does the public University of Texas. The 10 biggest endowments combined were worth more than $183 billion in 2016, about a third of the total. </p>
<p></p><hr><p></p>
<p><iframe id="hqzvD" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/hqzvD/7/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p></p><hr><p></p>
<h2>How the tax would work</h2>
<p>Republicans aren’t targeting all schools with an endowment, however, or even only large ones. </p>
<p>Their plan has <a href="https://www.cnbc.com/2017/11/03/tax-reform-hits-college-endowments-and-maybe-tuition-and-scholarships.html">three criteria</a>: To be taxed, a school must be private, enroll at least 500 students and have an endowment that amounts to at least $250,000 per student – up from an earlier proposal of $100,000. This means all public colleges are exempt, as are private schools with an endowment smaller than $125 million or a disproportionately large or small student body.</p>
<p>One other requirement is that an endowment must actually earn a return on its investments to be taxed. Many do not in any given year.</p>
<p>Some of the largest endowments generate quite a bit of money. During the 2014 to 2015 academic year, Yale earned the most of any university, returning $2.55 billion – or more than $200,000 for every one of its 12,385 students. Princeton came second at $2.51 billion, while Harvard’s endowment returned $2.23 billion. </p>
<p></p><hr><p></p>
<p><iframe id="P8Vqm" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/P8Vqm/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p></p><hr><p></p>
<h2>How much it would raise</h2>
<p>The earlier proposal, which was detailed only last week, would have affected about 150 of the <a href="https://nces.ed.gov/ipeds/Home/AboutIPEDS">3,922 colleges that have an endowment</a>, yielding what I estimated would have amounted to just under $270 million based on the 2014-15 academic year. Republicans said the tax would reap $3 billion over a decade. </p>
<p>The latest version, with the much higher threshold, <a href="https://www.washingtonpost.com/news/grade-point/wp/2017/11/07/house-gop-trims-total-of-colleges-targeted-for-new-endowment-tax/?utm_term=.e6373aff8e0a">would affect fewer than half that</a>, or roughly 60 to 70 schools. That would probably not lower the amount raised that much since only a handful of primarily elite schools will pay almost all of the tax. </p>
<p>Most colleges, on the other hand, would not pay very much. For example, Carleton College in Minnesota, which ranks in the middle of the tax list, would owe about $250,000. Some colleges, such as Emory in Atlanta, whose endowment lost almost $160 million in the period, most likely would receive a tax credit, useful for deferring this tax in the future.</p>
<h2>Is the tax fair?</h2>
<p>Fair <a href="http://businessmacroeconomics.com/">tax systems</a> do not punish select groups. The bill as currently written fails this criterion. </p>
<p>The bill primarily punishes the Ivy League and a small number of other elite private universities like Stanford, MIT, Notre Dame and Duke. These four schools, along with seven of the eight Ivy League colleges, would have paid about $200 million of the total tax, according to my calculations. </p>
<p>While lawmakers have expressed concern over large endowments, the tax does not punish universities just for amassing a huge amount of money. I work for <a href="https://www.osu.edu/">The Ohio State University</a>, which has a $3.6 billion endowment, but it is exempt since it’s a public college. </p>
<p>Regional rival the University of Michigan, with an endowment of almost $10 billion, is similarly exempt, as is the University of Texas system, which has the third-largest endowment, at $22.5 billion. </p>
<p>The tax is also unfair even among private universities, since those with large endowments but very small or large student bodies would not be taxed. </p>
<p>For example, Rockefeller University in New York City has a $2 billion endowment, which returned $111 million in 2014-2015. But it does not have enough students to be taxed under the present plan. On the other end, Brigham Young University in Utah has a $1.58 billion endowment and earned $202 million in investment income during that period, yet its large student body means it wouldn’t pay a tax either. </p>
<p>If the goal is to raise revenue from colleges that collect large amounts of tax-free donations, limiting the tax to just a few private institutions is simply punitive.</p>
<h2>Who’s a student?</h2>
<p>Another problem is that the proposal uses the number of students to determine whether to apply the tax.</p>
<p>The bill states the count of students “shall be based on the daily average number of full-time students attending such intuitions (with part-time students taken into account on a full-time student equivalent basis).”</p>
<p>I believe this would allow schools to find creative ways to avoid paying the tax, just as <a href="https://itep.org/3-percent-and-dropping-state-corporate-tax-avoidance-in-the-fortune-500-2008-to-2015/">Fortune 500 companies do</a>. The student body figures reported to the Department of Education count part-time students the same as those matriculating full-time. So schools would have to compute a new number based on the “full-time equivalent” calculation, which creates ample room for creative accounting. </p>
<p>For example, many schools provide executive education and extension programs for individuals who are generally not considered students. But you can expect many schools to turn them into students, and the same goes for people enrolled in <a href="https://library.educause.edu/topics/teaching-and-learning/massive-open-online-course-mooc">massive open online courses</a>, or MOOCs. Given that <a href="https://www.onlinestudies.com/news/How-Many-Students-Enrolled-in-MOOCs-in-2016/-1390/">58 million people signed up for MOOCs</a> in 2016, this would not be a particularly high hurdle.</p>
<p>An effective tax is one that is not easy to evade. The proposed bill is not very effective because it is easy to evade.</p>
<h2>A fairer approach</h2>
<p>Republicans presented their plan as a method of <a href="https://www.politico.com/agenda/story/2017/11/02/trump-republican-tax-plan-not-simple-000569">simplifying the tax code</a>. The tax on private colleges’ investment income does not accomplish this but rather makes things even more complicated.</p>
<p>If endowment earnings are going to be taxed, a fair approach would be to keep things simple. Just institute a tax on endowment income from all colleges and universities, regardless of number of students or whether it’s public or private. This would have raised about $359 billion – not a lot more, but it would do it a lot more simply, fairly and effectively.</p>
<p>In general, I am not against taxing university endowments or investments. However, if we are going to do it, the tax needs to be fair and not have giant loopholes. The current bill is a punitive mess that is extremely suspect in its long-term ability to raise money.</p><img src="https://counter.theconversation.com/content/86912/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Colleges and universities boast US$547 billion in endowment assets, yet only a handful of elite schools would be taxed under the proposal.Jay L. Zagorsky, Senior Lecturer, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.