Michael Hudson on Trump’s Tax Sleight of Hand

Yves here. To add to this Real News Network interview: a colleague who is a top tax expert and gets paid to get what happens in DC correct says Trump won’t get much if anything done in terms of net tax cuts. The Republicans have lots of deficit hawks and there aren’t enough spending cuts to be had to “pay” for meaningful tax reduction.

On the individual side, what you are likely to see is so small as to be optical. The action if any will be on the corporate side. On the one hand, there’s a lot of sentiment for a reduction in the headline tax rate, particularly since small companies are less able to evade it than the big boys. However, every loophole has its constituency and many are very powerful. So even something Republicans very much want (and almost need to do give the promises they’ve made to their base) is going to produce a lot of hard-pitched fights.

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

And in our studios today, we have Michael Hudson, who’s written a new book called, “J is for Junk Economics: A Guide to Reality in the Age of Deception.” Here we go.

All right, Michael, in this book — and we’re now in segment three — and we are going to talk about Trump’s plan to lower taxes. He has said that he would reduce corporate taxes from 35% to 15%. The 35% itself is a bit of a myth, because I don’t think there are too many corporations out there who do pay the 35%. But he’s going to reduce the number of tax brackets as well, he says, from seven to three.

And your myth number 11, which is progressive income taxes should be abolished in favor of flat tax, is a myth, just one tax rate for everyone. Does this make any sense to you?

MICHAEL HUDSON: It certainly makes sense, if you’re a member of the 1%, and you want to avoid paying taxes, and you want the taxes to be paid by the 99%, makes perfect sense for them. That’s their dream. And if you want to see where Trump is moving, you want to look at what the United States neo-liberals did in advising Russia after 1991, when it said we’re going to create an ideal economy. Russia was under the impression that the neo-liberal advisors were going to make Russia as rich as the United States, but what they really did was create a kleptocracy that was virtually tax-free.

On the flat tax, where you… the more you compress the tax rates, the more you untax where the income’s really made, at the top of the pyramid, most of the income is made by the top 5%, or 10%. And if you compress the tax rates, then basically, you shift the tax burden much more onto the lower tax brackets.

SHARMINI PERIES: How does that happen?

MICHAEL HUDSON: Well, because the vast majority of taxes are paid by the 10 per… I’ll give an example. Since… between 2008 and 2016, all of the growth in the American economy, all of the growth in income, was earned just by the wealthiest 5% of the population. So, they got all the growth. And 95% of the population didn’t grow. Well, if you can get a flat tax or a lower tax, what Trump is suggesting, then this rich 5% that already got all the growth, will be able to make even more money, and the 95% will be even poorer than they were before, relative to the very top.

Now, Trump’s idea is, well, if we cut the taxes on the wealthiest brackets, it’ll all trickle down. But it doesn’t trickle down, because what do the 5%, or the 1% use their money for? They lend more money to the economy at large, they load it down with debt. They make their money by lending to the bottom 95%, or the bottom 99%. And when you give them more money, it enables them to buy even more control of government, even more control of the election campaigns. They’re not going to spend this money back into the economy.

They’re going to spend the money, basically, on buying more corporate shares, buying more bonds, spending the money abroad, buying foreign bonds in foreign companies. They’re not going to spend it on the domestic economy. So, you’re going to have just the income that the average wage earner gets, sucked up.

They’ll get a little more of the lower taxes, but the plan to finance all of these tax cuts is, you’re going to cut back the social services, or you’re going to privatize the economy, so the workers and the wage-earners, are going to have to spend much more of the income that they get a little bit of a tax break on. Much more on the cost of public services, education, healthcare, and everything else, while the economy basically is deregulated, they’ll pay more money for the monopolies; pay more money to the banks. And it’s going to be a redistribution of wealth upward, not downward.

SHARMINI PERIES: Now, the seven categories of tax brackets we have now, hasn’t really been progressive in any sense, in the sense of… it might be more than what Trump is proposing, but it really has not taxed the wealthy enough. Even the Warren Buffetts of the world are saying, “You know, I pay less taxes than my secretary.” How does that figure in in terms of your book, and mythologies that we are… forced to buy into?

MICHAEL HUDSON: Well, one… the main mythology people think of is, the rich people get wealthy by earning money. But that’s not how rich people get money. Almost all of the gains of the rich people since 1945 have been capital gains. They’ve been the increased value of real estate; the stock market has gone up 10%, just since Trump was elected, huge capital gain. Nobody’s earned any more.

But the stock market has gone up. Since 2008, you’ve had the largest bond market rally in history, as the Federal Reserve flooded the economy with, essentially quantitative easing, to drive down bond rates… interest rates. When you drive down the interest rates, there’s a huge boom in the stock market. So, capital gains, is how the wealthy are really making the money. They’re not treated as income. That’s treated as something else. And in real estate, you never have to pay a capital gains tax. It’s a zero, decade after decade, century after century.

Because if you sell a property, and you make a capital gain, but you buy a new property, it’s not taxed. If you’re a wealthy person with a trust fund, and you sell stocks, and you make your 10% gains, since Donald Trump, but then you buy other stocks, you can avoid taxation. And if you decide to hold your wealth offshore, in a Panamanian fund, like the Russian kleptocrats do, and more and more Americans do, you don’t have to pay any tax at all, because it’s not American income, it’s unearned income.

That’s why Apple Computer and Microsoft… that’s why the big information technology companies have so much money abroad. They make it in Ireland. They have one office, that could be a postal drop box in Ireland, and they say that they make all their money there, don’t make a penny in America.

The oil industry, the biggest industry, next to real estate is oil, gas, natural resources. Doesn’t make a penny. They don’t have an income tax. Rich people actually don’t earn anything at all, because if you earn a profit, you have to pay a tax on it. So, it’s all about what accountants declare as profit, and this is something that’s not taught in academic schools.

In the textbooks that people who are in economics, they’re not taught how do you avoid paying any income tax at all. But that’s what an army of tax lawyers, of corporate tax accountants do. And Trump’s idea, basically, is to claim that he’s shifting the taxes, and making them more democratic for the people, but it actually is a vast sucking of income and wealth upward.

SHARMINI PERIES: And let’s talk about loopholes in the context of taxes. I mean, when I earlier said that the 35% that is currently in place, is hardly paid by the corporations, and you are making reference to that. But give us some examples of these loopholes, and of course, the issue is also how to address these loopholes, and if you have any solutions for that.

MICHAEL HUDSON: The very worst loophole, is what Donald Trump has talked about, and he said it’s the tax deductibility of interest. He said if you let building owners, or if you let corporate raiders, borrow the money to buy a company, and then instead of paying dividends to the stockholders, you’ll load the company you take over, with so much debt, you’re going to pay bondholders. But you don’t have to pay… you can deduct the interest from your tax liability.

So, if you pay interest to bondholders, and let’s say the corporate interest rate is, what it was when the process began in the 1980s, 50%, you can pay twice as much of your corporate cash flow to bondholders, as you could pay to stockholders, but in the process you load down corporations with debt. That’s what’s happened today, is debt leveraging. Now, Trump has said he wants to remove the tax deductibility of interest. That’s the single most important loophole there is, and if he could do that, that’s fine.

But I suspect that Trump knows that it’s not the President that decides the tax policy. It’s Congress. And he knows that the Republicans who he helped bring into power, in Congress, and in the Senate, the last thing they’re going to do, is close the very biggest tax loophole in the United States. That is the whole basis for the corporate raider movement, for the corporate takeover movement, for the financialization of industry, for the real estate sector, for the oil and gas sector. The last… you’re going to have every lobbyist in the country watering down this loophole.

So, Trump is making a promise that sounds absolutely great. It’s a promise that cannot be done politically, under Congress as it’s now set up. Yet he knows it won’t be done. It’s an easy promise to make, and he can then go to the people and say, “Oh, I wanted to help you folks. Congress wouldn’t let me.”

SHARMINI PERIES: I’m speaking with Michael Hudson about, “J is for Junk Economics,” right here, “A Guide to Reality in the Age of Deception.” Please join us for Part 3 with Michael Hudson.

MICHAEL HUDSON: I thought this was Part 3.

SHARMINI PERIES: Oh, is it Part 3?

MICHAEL HUDSON: Yes, it’s Part 4. It goes on and on.

SHARMINI PERIES: All right. Here we go. Sorry. Let me do that again.

MICHAEL HUDSON: N plus 1.

SHARMINI PERIES: Yeah. So make sure we have this edit. I’m speaking with Michael Hudson about, “J is for Junk Economics,” his new book out, “A Guide to Reality in the Age of Deception.” Join us for Part 4.