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.
“I wanted to help you folks. Congress wouldn’t let me.”
Looks like Trump and Obama will have to draw lots for that particular epitaph when their time comes.
The real tragedy here is that most people simply aren’t aware, let alone able or willing to understand the supposed ‘complexities’, of this enduring social and economic crime being perpetrated at their expense in front of their very eyes on a daily basis.
Neoliberalism’s evil genius is that it never lets the truth get in the way of the plausible, but patently false Darwinian narrative it propagates to keep this iniquity going.
In fact it’s even worse than that given how close to how this whole Ponzi scheme came to self-induced, inevitable collapse in 2008 and the frankly egregious means ie even more extreme neoliberal policies, that were employed to delay what should have been long overdue welcome demise of an economic system that has amounted to little better than a kleptocrats’ charter.
I don’t mean to get banished to purgatory … but … if you have a flat tax on all income at say 20% then it will indeed hit the 1% … 5% … 10% with higher taxes paid.
Only peons pay the actual tax bracket tax rate. Tax Table rates and real adjusted tax rates are not the same.
Warren B doesn’t pay 20%. A 1% increase on Warren B is a big number and a way to get some of the socialized bailout funds back.
And … to make the flat tax not hit lower incomes? Well … exempt the first $30,000 from taxes. Heck … let Warren B not include his first $30,000
And … as far as being politically impossible … well … let’s vote on it All those who make $30,000 or less versus everybody else. The numbers are with the $30,000 or less “block”.
The real reason it is politically impossible is the income composition of our elected officials and their main contributors.
Hey Bernie … why should anybody who makes $30,000 or less pay any taxes at all? Why should someone who makes $60,000 pay a higher adjusted rate on income than Warren B?
I’ll never understand why you would want to tax someone just to cycle the payment through the government first. Paternalistic know-it-alls.
Footnote … the point at where actual taxes paid actually increase is north of $60,000
And … you would put H and R Block out of business.
“And … as far as being politically impossible … well … let’s vote on it All those who make $30,000 or less versus everybody else. The numbers are with the $30,000 or less “block”.”
Aww you think we are living in a Democracy! How cute.
You don[t have to have a flat tax to make the first $30,000 tax free. Money is power and the more power the rich have the more they can skew he system in their favor. A flat tax is designed to give them more money. Changing the tax tables does not make a simpler tax system. The problem is legal tax evasion.which a flat tax does not solve, it just has the rich start their evasion from.an even lower starting point.
One of the more innovative ways of handling the corporate tax problem ,(I think this was a Mark Blyth idea, but I’m not sure) was to have corporations pay taxes in non-voting stock. There would be less of an incentive to move headquarters to tax havens, since they wouldn’t have to pay in cash, and even if they did, dividends would still come to the government.
Bernie’s business transaction taxes is also a simpler fairer tax system.that could take pressure off the income tax and would also stabilize the economy from great sloshes of funds moving around the world.
Starving the government does not help. Back when I first started paying taxes in the 1970’s the IRS had a big enough budget that you could walk into a local IRS office and they would help you fill out your tax forms.. As in most cases the government can provide services for the general population at a much lower expense than the private sector. Republicans offer you a $5 tax cut, they then cut the IRS budget, and you end up paying H&R Block 100 bucks for the same service you use to get for free.
The tax system must change but a flat tax is not the answer.
If you make people who are paying little or nothing pay 20%, then they are paying more, not less, than they were. I assume under a flat-tax regime Mr. Buffett would no longer be paying less than his secretary (unless it had a lot of exemptions and deductions for rich people, of course).
However, the flat tax is a shell game, because this simple arithmetic doesn’t apply in any society with a class system. The point of class is to move wealth, goods, services, power, and so on from the poor to the rich. If it can’t be done with taxes it can be done with profits, fees, assessments, outright theft, and so on. A state owned and operated by the rich is not going to tax rich people.
So why have a flat tax rather than a progressive tax? If you can get rid of the nloop holes in a flat tax you could just as easily get rid of the loop holes in a progressive tax. The only difference is the Tax Tables.
Buffett would then pay even more with a progressive tax. The problem lies in the definition of income. A flat tax is not a panacea for tax evasion.
During the 30’s 40’s 50’s the rich had a 90% tax bracket. They paid an effective rate of 50%. During the 60’s and 70’s a 70% bracket. The problem is legal evasion. Kleptocracies allow huge amounts to accumulate to the rich. The more they accumulate the more they control the state.
Taxing at the business level makes it harder for the wealthy to avoid taxes.
I suppose a flat tax might be easier to sell to the voting public, along with a promise that it would be strictly enforced and free of loopholes. As I say above, I don’t believe it would make any real difference.
Naa— just apply Occam’s Razor.
Require that the richest 1,000 give away 50% of their total assets on January 1 of each year to a list of organizations and public projects determined directly by the voters. Or take them out and shoot them if they don’t comply. Might take a few rounds for Gates and Buffet to reach a position commensurate with their actual value to society, but eventually minor billionaires like Trump and Dimon would join the list and have their chance to contribute as well.
Why Flat Tax?
How about a Simplified Progressive Tax. Virtually no deductions and however many steps for the poorest to the richest. Based on ALL income and number of people included in household. Keep it simple.
Also, who says trusts can pay taxes on their income?
I don’t get why we let the conversation be hijacked to Flat Tax. I reject it.
Use the GINI co-efficient to determine pre-imposition of tax and post-imposition of tax income distribution. Use the GINI co-efficient to analyze tax reform (pre- and post).
Great Idea! Tie the progressiveness of the tax rate to the GINI co-efficient. I’m on-board.
Great post. Thanks.
Actually I long for the day when there is a flat tax rate rather than the current charade we have to endure, as it would only work in a far more equitable ergo less divided society.
Just think, no more posturing politicians and mysterious financiers apparently agonising over incremental movements on taxation and interest rates,supposedly making the necessary tough, informed choices, or ‘reluctantly’ balancing budgets etc when it all boils down to what the masses will really bear without kicking off and how much more can be squeezed out of them under the guise of sound financial practice.
i agree with some of the commentators, if we could have a flat tax with zero loop holes and a standard deduction that is rather huge, I’d take it in a heart beat.
A flat tax favors the upper income bracket in doing exactly what it has been doing since the mid 70s…. concentrating wealth in too fewer hands….
Yes Skip. The rich don’t earn any income and don’t pay taxes.
Income taxes are only paid by the 95% or whatever.
Yes, & set the flat tax at 95%.
That way, the standard deduction could be very high!
Hudson writes: “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.”
How does that work, exactly?
I buy and sell stocks fairly often. And this sounds like BS to me.
If you can afford to set up a beneficial trust, you can avoid paying taxes to any country.
I think what Michael is saying is that the wealthy (using Trusts and Corporations) can keep deferring the reporting of income and capital gains, so that taxes are never paid.
My wife and I have set up a trust for the benefit of a disabled child.
It has filed and paid taxes every year.
As I said, BS
explanation, and I assume we’re talking CGT here rather than income tax, but probably similar in US?
Plus I suspect that Hudson is singling out larger, wealthier investors with plenty of cash to spare (possibly some courtesy of QE and the taxpayer bailouts?) rather than proactive, responsible retirement planners necessarily.
* note the somewhat rather prescient character choices in the 2012 example given.
For a little while CA taxed corps like this
Sales in CA / worldwide sales x worldwide profits = CA profits
Doesn’t matter if all profits are in Ireland.
International corps squealed, got it changed.
Us could do the same.
The US has an ultra-high tax rate that U.S. multi-nationals do not have to pay, because they can arbitrage their earning off-shore. This guarantees that small domestic competitors will eventually pay out their working capital in those high tax rates. Refer to my article: ‘Apple Inc. Says Its Tax Rate of 0.00045 Percent Is ‘Fair’ http://www.breitbart.com/california/2016/09/01/apple-says-cutting-taxes-359944-per-1m-profit-fair/