Our Economy.



Our Economy.

It’s been profoundly depressing to even consider the next two to four years under President elect Trump unless of course you voted for him, which most did not. I am still trying to absorb it all and think about the future. With a few rare exceptions, it gets ever worse with each appointment and every new disclosure (the latest about the Russians). I fear the next four years will be a horror show in this country and around the world.

I have been trying to conjure some good things that can be achieved for the economy: the major one could be infrastructure development. This could become a bi-partisan effort; construction jobs pay reasonably well and good infrastructure has a strong multiplier effect on economic growth (e.g. one hell of a lot better than invading Iraq). We could get more efficient transportation, and better cleaner energy development and transmission for example with thoughtful well targeted investments for our economic future.

Progress on child care and parental leave might be possible, but the Trump’s starting points (tax deductibility) simply don’t understand the realities of low and moderate income working families who need refundable tax credits to make any assistance meaningful.

A Paul Krugman article in the New York Times describes how Trump’s infrastructure proposals would actually work. In essence it works as follows “the developer puts up a little money, the government puts up a lot of money and then the developer owns the whole thing once it’s successfully completed”. Those of you in the low-income housing world know exactly how this works, so imagine these concepts imported into infrastructure. Trump Inc. (and their ilk) builds with government funding and a small private investment and then owns the highway system, the locks and bridges on the Mississippi, the harbors, the dams and water resources, and the rest of us pay tolls and fees. http://www.salon.com/2016/11/21/paul-krugman-donald-trumps-infrastructure-plan-is-one-big-scam_partner/

This is the way the railway systems and land development across the West were built in the 19th century. You should read or re-read Frank Norris’ “Octopus” just to refresh your memory how that eventually worked out. https://en.wikipedia.org/wiki/The_Octopus:_A_Story_of_California As a crony capitalist boondoggle, it’s genius. We may well see a lot more crony capitalist deals like Carrier than a thoughtful restructuring of economic incentives. 

Tax reform for individuals is badly needed. Tax cuts are not because we are not in a recession in fact the economy, wages, incomes and GDP are growing reasonably well and we need it to grow just a bit faster. Our tax problem is too many deductions and favorable tax treatment for the upper income and too complex a tax system. The Trump and Romney tax returns are ample evidence of the need for tax reforms. Despite their wealth and large incomes, they paid at low rates (Romney) or possibly not at all (Trump). Unfortunately Trump’s proposed concepts of tax reform are to give disproportionately huge tax breaks for the wealthiest Americans – 50% of the savings go to the top 1%. The right prescription would be tax reform for the upper income – i.e. a cost neutral reform that eliminates/reduces deductions and favorable tax breaks and re-targets the tax savings into reduced rates for the middle class and earned income tax credits for the working poor. This would reduce tax complexity, boost disposable incomes and reduce economic inequality that has been on the steady rise since the late ‘70s.

There is a good case to be made for corporate tax reforms as well. Trump would cut the corporate tax rate from 35% to 15%, which is far too low. The top US tax rate for many corporations is 35%, but their effective tax rates are closer 20-25%. http://taxfoundation.org/blog/effective-corporate-income-tax-rates-and-corporate-tax-yield and https://www.cbo.gov/publication/24725 Some hugely profitable corporations pay next to nothing while others pay at very high rates; some offshore their profits, and others locate their headquarters in tax havens to avoid taxes. http://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-corporate-tax-rates/ It’s time to simplify the system and tax all corporations at roughly comparable rates and eliminate all the loopholes and gaming of the tax system. This will be incredibly difficult to do, but worth doing, if done right.

Small businesses are typically 500 employees or less and come in five forms: sole proprietorships, partnerships, LLCs, Chapter C corporations and Chapter S corporations. The sole proprietorships and partnerships are concentrated among the small employers with low gross receipts ($1 million of less). The Chapter C and Chapter S corporations are more common among the small employers with $5 million of more in gross receipts.  Sub-chapter S corporations allow the owner(s) to avoid double taxation (i.e. both corporate income and personal income taxes) by opting to be taxed as individuals.  https://www.sba.gov/sites/default/files/advocacy/rs343tot.pdf  Trump’s proposal would turn this option on its head and apply the new, lower corporate tax rate to individually owned businesses (such as himself and his children) while exempting them from the personal income tax system. See Trump’s Tax Plan Explained in Four Charts (Fortune, December 12, 2016) This will be quite a scam if Congress goes along.

Thus the impacts of the Trump tax proposal are huuuuge: huge reductions in taxes for the highest income (13.5%) and the corporations, huge increases in the federal deficit and huge benefits for himself and his children. Middle and lower income workers will get little relief (1-2%) and in some cases an increase in their taxes.  http://www.abosy.com/trumps-tax-plan-explained-in-4-charts.t132206/

This is a recipe for stock market speculation, for stock bubbles that burst, for renewed inflation and potentially for stagflation. What the economy needs instead is improved productivity, a far broader distribution of the benefits of economic growth, and a focus on building products on Main Street, not enhancing speculation on Wall Street.

Lucien Wulsin

December 12, 2016

With so much appreciation for the ITUP Staff

Thanksgiving 2016 in appreciation of Daphne Radfar