As I’m writing this, the U.S. Senate is debating the most massive tax reform proposal in three decades. The U.S. House has already passed a version, and if the Senate passes this one (by the time this is printed, they may have already), the two bills will go into Conference Committee to be made into a single bill, which will then be voted upon again by both chambers. If that happens, then it goes to the other end of Pennsylvania Avenue for the signature of the president.
Donald Trump ran his campaign last year as a populist, breaking with the standard GOP rhetoric of tax cuts for the rich and “trickle down” economic policies that have time and again been shown to fail average Americans, including the blue collar Republican base of the president. However, that’s exactly what he is supporting now. If this bill becomes law, within 10 years those earning less than $75,000 a year will see a significant tax increase, whereas those making more than $100,000 a year will see the greatest benefit. The argument has always been that these people are the job creators, and so when they have extra money they will spend it to invest in the economy through offering jobs. It sounds nice. We give money to those who know how to use it, and it benefits everyone down the line.
Unfortunately, it’s a lie. That isn’t how money circulates in the economy, and anyone who has taken a personal finance class should know better. The first goal of personal financial planning is to establish a rainy day fund, three-to-six months worth of income that can always be available in the case of emergency, such as job loss, medical emergency, loss of a car, property damage, etc. After that is established, you begin building your portfolio, ideally of well-diversified securities and reliable investment vehicles to save for retirement, a home, vacations and other desires. When you receive a windfall, instead of rushing to buy something with the money now, you invest it (unless you need it now for an immediate and necessary expense). This is the power of compounding interest and the future value of money.
People who are job creators know these principles, and they will abide by them every time. If the government gives them a windfall in the form of a tax break, that money is not going into immediate and necessary expenses (in case you didn’t notice, the financial market and business growth are at record highs, businesses are not strapped) but into investments. Business owners will invest that money, not put it into assets that they don’t need. Corporations will either use it to pay out increased dividends to shareholders, give bonuses to top executives, or initiate stock buy-backs to increase their price per share. Those dividends and bonuses will then be invested by those persons because they don’t need more money. They’re doing fine, and have no immediate and necessary expenses. It won’t trickle down. It will stay right there, in the financial markets, earning money for the people it was given to. Not for you.
However, what happens when someone else, not with an abundance of cash, gets a tax break? They spend it. That’s because they don’t often have a lot of extra money to do everything they need to do at once. They have to save over time, if they can. These are the people who need to repair their cars, or buy new ones. People who need to do home repair or improvement. People who need to pay down on debt, maybe so they can finally refinance for that lower monthly payment. Money, when given to people who don’t have enough of it, for whom it is truly a scarce resource, will spend it because having things now is more valuable to them than the future value of that money if they were to invest it instead. They have those immediate and necessary needs. When they then buy those things, they are funding companies and generating demand. Money doesn’t trickle down, it runs up. Because people who make less need to spend money, and when they spend that money goes to businesses who will then invest it, but at least the money passes through the hands of average Americans first. With this tax break, you won’t be seeing any money. In fact, you’ll be getting less of it, because that tax hike on you will be where the money comes from to cover federal outlays when we aren’t taxing people the rich, who have plenty. And even so, this tax bill isn’t revenue neutral. The nonpartisan Congressional Budget Office has projected the bill would balloon the deficit $1.5 trillion dollars. So much for a balanced budget and fiscal conservatism.
But this isn’t the only reason this is a terrible idea. The shockwaves of this bill reverberate into healthcare, education, veterans benefits and many other policy areas, all of which end with bad news for the sick, for students, and for military veterans. Given the decrease in revenue, the budget process would automatically initiate cuts to mandatory spending, including billions of dollars to Medicare and Medicaid. We know what this would look like, because it’s happened before. These cuts kicked in during the 2013 government shutdown, during which time healthcare providers were turning away patients because they could not afford to provide care without the Medicare/Medicaid reimbursements, especially for expensive chemotherapy treatments for cancer patients. This tax bill would make those cuts permanent.
In education, either one or both versions of the bill remove the deductibility of tuition waivers for graduate students, the student loan interest deduction and raises taxation on university endowments. Graduate students depend on waivers to complete their education and limit their student debt, and this would place a greater burden on our future doctors, lawyers, teachers and many others who require a graduate education in their field. Removing the deductibility of student loan interest will significantly increase the tax burden of recent college graduates and young professionals who already work long hours for less pay with an increasing amount of student debt.
Higher taxation of endowments is a particularly cunning way to hurt average Americans, especially our veterans. University endowments often go towards tuition waivers and institutional grants and scholarships, many of which are matching scholarships in conjunction with state or federal governments, including the many programs available for veterans to obtain a college education after ending their military service. At higher taxation rates, universities will struggle to match these grants for students and student vets, causing such a financial problem that it has been dubbed by some veteran’s advocacy groups the “Reverse G.I. Bill.”
Make no mistake about it, the GOP knows exactly what it’s doing, and chances are it isn’t trying to help you.
Ben Amis lives in Rome and works as a local Democratic activist. He studied theology at Asbury University and accounting at GNTC.