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Tax Cuts Are for Winners

Donald Trump, as we all know, loves winners and hates losers. So it’s only fitting that the tax plan he now seems likely to sign by Christmas will mostly help the same people and companies who have been winning the U.S. economy for decades.

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It’s not just that the Republican bill that the Senate passed early Saturday morning disproportionately benefits the rich—though it does. The issue is more specific. The tale of America’s increasingly polarized economy is complicated. But you can trace its most recent chapter with a very simple line. Since the turn of the century, the share of our national output going to workers in the form of wages has been falling while the share benefitting investors and business owners as profit has risen. Economists are still trying to understand the forces behind this trend, which is happening worldwide. But one thing is clear: Labor is the loser, and capital is the winner.

Now consider the giant corporate tax cut that anchors the entire Republican plan. Both the House and Senate bills would lower the corporate rate from 35 percent to 20 percent. (Though Trump himself now says that number could change slightly once the two chambers merge their legislation before a final vote.) This is supposedly meant to encourage investment in the United States by making it more profitable to do business here, eventually leading to more growth and higher wages for workers as companies plunk more money into their operations. If that were to happen, some economists believe it could help labor reclaim more of the economic pie, as talented employees would be in higher demand. But it’s hard to put much faith that story given that we’ve been stuck in an investment drought, even though corporate profits have been going gangbusters for years.

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What have companies done with their money rather than invest? They’ve lavished it on their shareholders via dividends and share buybacks.

Again, it’s possible that corporate cuts will inspire some companies to spend more on factories or high-tech warehouses and end up paying their workers more as a result. AT&T, for instance, has said it would invest an additional $1 billion in its U.S. operations if the tax bill passed. (I’d take that with an appropriate pinch of salt.) But generally, that’s not the message executives are sending to shareholders. When one Bank of America strategist surveyed 300 companies about what they planned to do with their tax savings, only 35 percent said they intended to use some of it for expenditures like new equipment. Instead, CEOs at companies like Pfizer and Coca-Cola have, as usual, been promising to keep the cash flowing to shareholders, aka winners.

Corporations aren’t just getting a rate cut, though. They also stand to benefit from new international tax rules that could leave them paying less on their foreign profits. Of course, multinationals have long been lowering their tax bills by using creative accounting to stash profits overseas. This is one reason why, despite the U.S. having a high corporate tax rate on paper, the real rate American corporations actually pay on their earnings has been declining for years. And some of the GOP’s changes are designed to stop or at least limit that kind of behavior. But tweaks to the international tax rules will likely be a boon to industries like pharmaceuticals, which, after years of expertly gaming the global tax system to its advantage, will be able to more easily bring cash home for their investors. There will be lots of winners.

If you’re worried about rising income inequality, though, the corporate tax cuts might not be the worst part of the Republican plan. The cuts targeted at pass-through businesses are. Pass-throughs, which aren’t subject to the corporate rate and include everything from law firms and hedge funds to car dealerships and real estate developers, have been the quiet engines of economic inequality for decades. During the period from 1980–2013, when the share of income going to America’s top 1 percent roughly doubled, 41 percent of that increase was due to rising income from ever-more-profitable pass-throughs. Since 2000, this kind of business income is responsible for all of the increase in income going to the top 1 percent.

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The House and Senate bills take different approaches to cutting taxes on these businesses, but the gist is the same: The very people who have been running away with the American economy for at least 20 years will be poised to sprint a bit faster. New York University law professor Daniel Shaviro has argued that it “might end up being the single worst structural change in the history of the U.S. federal income tax.”

But there are more winners here! The Republican bills treat Americans well, if they happened to win the birth lottery, by curbing the estate tax. Under the House plan, which eventually eliminates the tax entirely, the country’s richest families could realistically pass their assets on from generation to generation without ever paying a tax on their appreciated value. It’s a gift for lucky trust funders.*

There are some wealthy and successful individuals who do lose out in the Republican plan. Well-paid professionals in blue states could end up paying more to the IRS, thanks to the loss of the valuable state and local income tax deduction. Homeowners—particularly in those liberal high-tax states—may see their home values drop if property tax deductions or the mortgage interest deduction are significantly curtailed. It’s possible some industries could take a hit or be forced to rework their business models a bit: Private equity firms, which make profits by buying companies and loading them up with debt, are warily eying changes that would limit the deductibility of interest.

But New York City co-op owners will be able to live paying a couple extra thousand dollars in taxes each year. The more important victims of the Republican bills tend to be people who are already struggling to get by: the graduate students who could see their tuition waivers taxed for the first time, making it harder to pursue a Ph.D. unless you have a financial cushion; the families dealing with chronic illness who might lose the ability to deduct their medical expenses. The House bill is worse about stripping tax breaks from these kinds of vulnerable groups, because Republicans in that chamber tried to pay for their corporate cuts by eliminating a long list of individual deductions. But the Senate’s legislation could upend the health insurance markets and leave working-class families priced out of their coverage by repealing Obamacare’s individual mandate, which would likely lead premiums to rise.

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Ordinary Americans have reasons to fear both these bills. But if you’ve got a bulging stock portfolio or are a billionaire real estate developer? Well, I just hope you don’t get sick and tired of winning.

*Correction, Dec. 11, 2017: This post originally understated the financial windfall that America’s richest households will enjoy if the estate tax is repealed the way House Republicans have planned. It originally claimed that families will be able to pass their wealth from one generation to the next tax free, so long as they never actually sell the assets. As I explained in November, however, the House GOP bill would will allow heirs to sell their inherited assets tax free. My apologies for memory lapse.