The Final G.O.P. Tax Bill Is a Recipe for Even More Inequality

This article originally appeared on this site.

On Thursday, a group of leading inequality researchers, including Thomas Piketty and Emmanuel Saez, published the World Inequality Report, a panoramic study showing how, over the past thirty-seven years, the richest households in many countries have grabbed more and more of the economic pie. In a sad coincidence, the report came out on the same day that more details emerged about the final version of the G.O.P. tax bill, which Republican leaders are hoping to push through the House and the Senate next week. Although the bill is officially called the Tax Cuts and Jobs Act of 2017, it could more accurately be labelled the Augmenting-Inequality Act of 2017.

By now, the trends illustrated in the World Inequality Report are well known. It has been more than four years since Barack Obama, when he was President, called rising inequality “the defining challenge of our time.” Three years ago, the English translation of Piketty’s monograph “Capital in the Twenty-First Century” became a surprise best-seller. The new report by Piketty and his colleagues reiterates that “income inequality has increased in nearly all world regions in recent decades.” The document’s most valuable contribution, though, is the comparative data set it contains, which shows how the level of inequality and its rate of increase both vary widely around the globe.

The set shows, for instance, that, measuring by the share of income going to the top ten per cent of households, the United States is a good deal more unequal than Europe and China; less unequal than sub-Saharan Africa, the Middle East, India, and Brazil; and about even with Russia. “The fact that inequality levels are so different among countries, even when countries share similar levels of development, highlights the important roles that national policies and institutions play in shaping inequality,” the report says.

Which brings us back to the Republican tax bill. Tax policy isn’t the only factor that influences the level of inequality, but it is an important one. By redistributing money from richer households to poorer households, progressive tax systems can moderate the level of inequality in post-tax income. Taxes on capital, such as property taxes and corporate income taxes, affect the valuation of capital assets—housing, commercial property, publicly traded stocks, and shares in privately held companies—which, in turn, can have a big impact on trends in the inequality of income and wealth. Taxation levels also affect the pre-tax distribution of income, especially at the top. When taxes are low on high earners, such as C.E.O.s, those earners have more incentive to give themselves vast remuneration packages (with the aid of compliant boards of directors).

Taken as a whole, the U.S. tax system is still progressive, but not as progressive as it was forty years ago. The new report says that the surge in inequality, which has seen the share of over-all income and wealth of the country’s top one per cent virtually double, is “largely due to massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labor compensation since the 1980s, and in top capital incomes in the 2000s.” To help offset rising inequality, one obvious option would be to make the tax system more progressive. But the Republican tax bill goes in the opposite direction.

As virtually every independent study has shown, the G.O.P. plan showers most of its goodies (tax cuts) on the richest people in the country while doing little for poor and middle-income households. Consider the bill that passed the Senate. If the personal tax cuts and family credits it contains are gradually phased out, as the bill’s authors planned, so that the over-all projected cost of the proposal remains below a limit of $1.5 trillion, then, according to an analysis by the Tax Policy Center, by 2027 the only group paying noticeably less tax would be the richest five per cent of households.

That was bad enough. But the final bill, which Republican leaders are scheduled to release in full on Friday, is now expected to be even more of a sop to Donald Trump and his fellow-plutocrats. It would reduce the top rate of income tax, which is now about 40.8 per cent when you take into account a 2012 law that limited deductions for high earners, to thirty-seven per cent. That’s lower than the top rates that were proposed in the original bills passed in the Senate and the House. According to the Wall Street Journal, the Republicans cut the top rate further after receiving complaints from high earners in places like California and New York that the original bills weren’t generous enough to them.

Reports also say that the Republicans have expanded—relative to the House and Senate bills—the deductions for local taxes and mortgage-interest payments, both of which benefit high-income households. They have rejected a proposal from Marco Rubio and Mike Lee, two G.O.P. senators, to enable low-income families to receive a refundable tax credit even if they don’t pay income taxes. And Republicans have confirmed the abolition of the Obamacare mandate to purchase health insurance, which could have a devastating impact on the market for individual insurance plans.

The one minor tilt toward a more progressive system was to fix the corporate tax rate at twenty-one per cent instead of twenty. But, compared with the current rate of thirty-five per cent, that is still a huge reduction. Not forgetting that the bill also introduces much lower tax rates for “pass through” income generated by unincorporated businesses, it amounts to an unprecedented giveaway to people with substantial capital and wealth—the very folks who have done so well in the last few decades.

In an op-ed timed to accompany the release of the World Inequality Report, Piketty and some of his colleagues warned that the G.O.P. tax bill will “turbocharge inequality in America” and make the country look “more and more like a rentier society.” That sounds about right.

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