The Mundane Crazy Is Still There, Hiding Behind the Aberrant Crazy

Happy MLK Day!  This is the day each year when Americans solemnly celebrate the once-and-for-all-time end to racism in our country, proudly recall the nation's victory over the horrors of the Jim Crow era, and remind ourselves of the permanence of the voting rights gains won in the 1960's.  We celebrate how even Barack Obama's detractors accepted his presidency as proof that the country had truly become greater than it had ever been, and we smile while thinking how Republicans quickly shut down their bigoted base by nominating enlightened leaders who would offer a compassionately conservative alternative to the Democrats' centrist/progressive dissociative identity disorder.

Obviously, one of the ways that I am going to cope with the new political reality in the US is by leaning even more heavily into sarcasm -- which might have seemed impossible, but I can make it happen.  By the time this column is published, Donald Trump's next term in office will have begun; and even though the weather in DC indicates that Hell is indeed freezing over, the world will now stumble forward as we wait to see what new insanity awaits us on a moment-by-moment basis.

Although I will surely write many columns about the new craziness that will be produced in bulk over the coming months and years, it might be better for my mental health to talk today about the kinds of nonsense that have been with us all along.  Mundane crazy is not necessarily less damaging than aberrant crazy, and it can be even worse because people often fail to notice what seems perversely familiar.

Because I am a tax policy scholar, I am all too familiar with the world of the mundane.  Even so, there will be one or more major pieces of tax legislation on tap this year, all of which will be bad....  Shall we discuss?

Although it is tempting to think that perhaps tax law changes will go the way of Trump's promises to deport millions of people today or to impose heavy tariffs today -- to say nothing of his quickly-abandoned claim that he could easily lower grocery prices -- taxes are different for two reasons.  First, hyper-regressive tax cuts are the one and only thing that all Republicans support wholeheartedly.  They disagree about various types of government spending, Ukraine, and even how completely to repeal women's rights, but they all agree on big tax cuts for businesses and the rich.

Second, no matter who became President today, there was going to be a tax battle royal by the end of 2025.  The one and only piece of substantial legislation that the Republicans passed during their last government trifecta was the 2017 legislation that included sunset provisions for most of the changes in personal income taxes.  (Changes in business taxation were, to no one's surprise, made permanent by that law.)  Specifically, that 2017 law stipulated that many of those tax changes will expire on December 31, 2025.

For the second year in a row, I am a visiting professor at the University of Toronto, teaching a course called "International Taxation: US Tax Law for Canadian Lawyers."  At our first meeting last week, I began by making a deliberately unfunny joke about how the residents of the possible 51st state might soon be calling US tax law simply "tax law," with no international component.

But even if the poutine-eating, syrup-loving, polite folks with whom I now live and work are able to remain an independent and sovereign nation, I pointed out to my students that it is extremely difficult to predict what the new Republican trifecta will inflict on its citizens in the tax arena.  Granted, teaching US tax law always presents this challenge to some degree, because one of the only bipartisan instincts in American politics is to run as many policies as possible through the tax code.  Even when gridlock is the order of the day, messing with the tax code is surprisingly possible.

To be clear, I make no claim to being able to predict what the Republicans will do, and anyone who purports to know is clearly a huckster or a fool.  Some Republicans have talked over the years about simply removing the sunset dates and making everything permanent.  Although that would be the least legislatively challenging approach, there will be irresistible pressures to add "just this one extra thing." one obvious candidate being to get rid of the $10,000 limit on the federal deduction for state-and-local taxes (the so-called SALT deduction), which was included in 2017 to punish blue states but did so by taking away tax benefits from wealthier people.

Even no-state-income-tax places like Florida have rich Republicans who would benefit from dropping the SALT limitation, and there are plenty of well-off Republicans in blue states as well.  There will thus be influential Republicans who will not want a "clean" extension of the 2017 bill.  Perhaps Republicans in Congress will figure out a clever legislative strategy to move tax proposals on multiple tracks, but suffice it to say that the current leadership in Congress -- especially the House -- does not show any signs of being able to do anything with a deft or strategic touch.

Once one gift is placed under the Christmas tree, we can expect plenty more to follow.  Will capital gains be entirely exempted from taxation?  Will the corporate tax rate be cut yet again?  Will new tax shelters be inserted into whatever bills are passed?  The basic answer to all such questions is: "If it gives to the rich, no matter what it does for anyone else (good or bad), it now stands a very good chance of becoming law."

All of which forces us back to the fundamental debate about taxes.  Why do Republicans love regressive tax laws?  The obvious answer is that Republicans were always carrying water for their donor class, and now Republican donors are running the show even more explicitly than before.  What Republicans will say, however, is that tax cuts for the rich are good for everyone -- in other words, they will triple-down on trickle-down.  (As an aside, many will also claim that "tax cuts pay for themselves," which has always been nonsense, but that is too far afield to discuss here.)

In an article last week about tax policy under Trump, a New York Times reporter explored whether the 2017 tax cuts did what Republicans promised by increasing economic growth, which is the most respectable version of the trickle-down argument.  The conclusion was that the economic convulsions caused by Covid-19 were so extreme that economists of all stripes are unable to run decent statistical analyses to determine what happened.  Fair enough, and the article is in fact a good example of journalistic neutrality, ending with this fair-minded assessment from a center-left economist:

There are two things we know it did: It increased the deficit, and it redistributed resources toward the wealthy.  The things that are harder to pin down are whether and how much it raised investment and whether and how much it affected wages.

In the absence of professional consensus among economists about the 2017 law, what should we do?  The Times article adds this nugget: "Textbook economic theory states that lower taxes cause companies to invest more in their businesses, which in turn helps make workers more productive, lifting wages and the prospects of the entire economy."

Well yes, textbook economic theory does say that.  The problem is that textbook economic theory has never been backed up by, you know, reality.  In fact, there has been extensive study of trickle-down tax policies for decades, and the evidence stacks up strongly and all but unanimously against the theory. One important recent study looked at "all instances of major tax reductions on the rich in 18 Organisation for Economic Co-operation and Development (OECD) countries between 1965 and 2015" and concluded:

[T]ax cuts for the rich lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment. Our results therefore provide strong evidence against the influential political–economic idea that tax cuts for the rich ‘trickle down’ to boost the wider economy.

Again, this is not merely one additional study but rather a study of every tax cut over a fifty-year period that was sold as a trickle-down elixir.  And the authors' anti-trickle-down conclusion is in fact widely supported.  Again and again, politicians push the "textbook economic theory," ignoring the theory's decades-long losing streak.

Expect that to happen again this year.  We cannot know the exact forms that they will take, but upcoming tax changes will be extremely regressive and sold as trickle-down magic.  That will not be as dramatic as mass deportations or trade wars, but as part of a strategy for oligarchical plunder of the US economy, it will be devastatingly effective.