Combatting defeatism may be our single most important psychological objective in the wake of the election. We need to revive the spirit embodied in Barack Obama’s vague but hopeful campaign slogan in 2008, “Yes We Can.” At the federal level this is a time to expose, to educate and to resist. But at the state and local level we can act proactively to fashion strategies that both embrace progressive values and directly benefit those who mistakenly voted for Donald Trump as an economic savior. This is the first in a series of pieces focusing on what can be done.
Over the next 6-12 months Congress will almost certainly give the richest 1 percent of the population an income tax gift totaling some $75-150 billion. The 1 percent, with annual incomes averaging $1.3 million, will capture 47 percent of the tax cuts for an average annual tax saving of $214,000 each, the non-partisan Tax Policy Center estimates based on Trump’s proposal, which does not differ dramatically from that of the House Republicans.
The top 0.1 percent, a population comprised of only 117,000 taxpayers who earn, on average, $37 million a year, will see their tax bill slashed by $1.3 million. The top .001 percent of taxpayers, fewer than 1,400 individuals, who earn a dizzying $160 million annually, may see their bank accounts swell by some $10 million.
Profligacy is reserved for the few. For the many this administration and Congress will be downright tightfisted. The bottom 20 percent of the population, some 80 million low-income and working-class people, will receive on average a $100 income tax reduction. By one estimate, given the whole package of proposed changes, almost 9 million families could actually see their taxes increase.
Adding insult to injury, the Trump tax plan would not only give the wealthy far larger dollar benefits, but it actually reduces taxes on the wealthy by a greater percentage.
It will be virtually impossible to stop this unprecedented giveaway. But states can fight back. They can raise state income taxes on the rich in proportion to the reductions at the federal level, diverting as much of the massive federal tax gift as possible from the pockets of the 1 percent into public investments, public services and support for the 99 percent.
State-based campaigns that focus on progressive income taxes will illuminate the dangers of the increasing concentration of private wealth and its relationship to the increasing impoverishment of public services, wage stagnation and widespread privation. They can address fundamental questions. How are we connected? Do we have a responsibility to one another and to future generations?
Those who now run Washington insist the “me” should take precedence over the “we”—that the private is superior to the public. Michigan Republican State House Speaker Tom Leonard, who proposes eliminating the state’s income tax, already the lowest in the country, justified his stance by invoking a common meme, “This is the people’s money, not ours.” We need to make clear that, given the current distribution of tax breaks and the unprecedented concentration of wealth, the attitude of the 1 percent might more accurately be summarized as, “This is our money, not the people’s.”
Despite the election of Donald Trump, a clear message of this election was that the American people believe that class matters. They are outraged that the top 1 percent have captured 99 percent of all new income generated since 2009 and amassed more wealth than 95 percent of the population. They understand the inherent unfairness and danger when 400 individuals have more wealth than 150 million Americans.
Bernie Sanders emphasized this unfairness and promoted a steep increase in taxes on millionaires and came within a whisker of being the Democrats’ nominee. Hillary Clinton favored raising taxes on the rich and won nationally by almost 3 million votes. And at least one pre-election survey by the Rand Corporation found that over half of those intending to vote for Trump supported increasing taxes on the wealthy.
The tax gift to the rich will demand real sacrifice from the poor and the middle class—more closed state parks, fewer health services, overcrowded classrooms, more prison unrest. The House tax plan will reduce federal revenues by $3 trillion in the first 10 years; Trump’s plan will reduce them by $9.5 trillion according to the Tax Policy Center. The administration appears to agree with the higher estimate given that Trump’s staff proposes federal spending cuts of $10.5 trillion over the next decade.
The brunt of these cuts will occur in the non-defense part of the discretionary budget. Spending on Medicaid, science, veterans’ benefits, food stamps, job training, health research, disaster assistance, housing assistance, national parks, roads and transit will suffer disproportionately. Indeed, Trump proposed during the campaign an increase in military aid to be “fully offset” by reduced spending on social insurance and public works.
These reductions will put even more pressure on already strapped state and municipal budgets. Federal government spending comprises, on average, 30 percent of state revenues. This varies from a high of 43 percent in Mississippi to a low of 21 percent in Hawaii. Red states, where politicians rail against federal spending, are more dependent on Washington than blue states. A recent Associated Press survey found that 33 states are currently dealing with a budget shortfall or expect to confront one in the coming fiscal year.
Why Raise State Income Taxes?
The premise of state-based campaigns focusing on fairness and the obligations of citizenship is that the major problem is not a stagnating economy. The economy is growing. The problem is that all the benefits of that growth are going to a tiny portion of the population while the rest of us experience stagnating wages, declining benefits, and dwindling public services.
Within states the income dynamic mirrors that of the nation as a whole. According to the Center for Budget and Policy Priorities (CBPP) in Arizona, the top 1 percent increased their incomes by 73 percent while the bottom 99 percent saw their incomes drop by 6 percent. In Washington the difference was 142 percent to 1 percent; in Wisconsin it was 120 percent to 4 percent and in Indiana 76 percent to zero.
Raising state income taxes and thereby diverting federal tax breaks to the wealth into state spending will arguably benefit not only that state, but also the nation. The majority of federal discretionary spending goes to the military, and in the future its proportion will likely increase. Meanwhile all state spending goes to health, education, welfare and transportation. The economic impact of military spending is far less than that of non-defense spending. Each military dollar grows the economy by 60-70 cents, according to research by Robert Barro and Charles Redlick. On the other hand, each federal dollar spent on food stamps grows the economy by $1.74 and by $1.36 if spent on general aid to state governments, according to Moody’s Mark Zandi.
State campaigns can also make a strong case that giving money to the rich is an ineffective and inefficient way to boost the economy.
Giving money to the rich has a similar low-yielding dynamic to spending it on the military. Since the rich spend much less of a tax cut than those of lower incomes tax cuts for high earners boost employment less than those for low earners. An analysis of the 2008 Bush stimulus cuts found that for every $1 in cuts, high income households spent 77 cents while low income spent $1.28. (The authors explain that a stimulus can increase average total spending by more than its own value, if it tips the balance for enough people to make large purchases like computers, cars that are purchased on credit.)
Taxing Labor and Capital
Congress wants to cut the tax on capital, which because of past tax cuts, already is taxed at about half the rate as income from labor. Most of us earn our income by working. The rich are different. They earn most of their money from capital, not labor. In 2007, wages and salaries accounted for only 40 percent of the income of the richest 1 percent, according to Professor Alexander Hicks. Sixty percent came from profits, dividends, interest, rent and capital gains. For the richest 0.1 percent, the figure is almost 70 percent.
Those who favor even further cuts in taxes on capital argue this will increase private savings, which will increase investment. The evidence is that it will do neither. Indeed, the Congressional Research Service has examined the issue from the opposite direction addressing the question, “What would be the impact of increasing capital gains tax rates?” It concludes that doing so “appear(s) to increase public saving and may have little or no effect on private saving. Consequently, capital gains tax increases likely have a positive overall impact on national saving and investment.”
Most states tax income from capital at the same rate as income from labor. Thus raising the state income tax will raise the state tax on capital gains. In a state like California, the top tax rate on income from capital, at 13.3 percent, nearly that of the federal rate, if Republican tax proposals become law.
The False Benefit of State Tax Cuts
State tax cuts do not stimulate economic growth. They generate deficits, which because of the states’ constitutional requirement to balance their budgets, results in reduced public spending, which itself reduces economic growth. According to economist Robert Lynch, “there is little evidence that state and local tax cuts—when paid for by reducing public services—stimulate economic activity or create jobs…”
Researchers at the Urban Institute and Brookings Institution conclude, “We find that states have no good reasons to believe that cuts in income tax rates will bring the desired benefits. Yet, states continue to erode their tax bases in the name of economic growth during a time when few states can afford to cut services, such as education and infrastructure repair that are critical for both businesses and households.”