The Truth About the 2017 Tax Relief Law

WM:  Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans, April 11, 2024

The 2017 personal income tax changes should not be made permanent or extended, as has been proposed. This will reward savings and speculation, rather than providing an incentive to invest in plant and equipment. The latter responds to greater levels of consumption by households funded by both the public and private sectors, including Social Security recipients. For a more detailed treatment of why this is the case, see the first attachment - which was drafted in 2017 in opposition to the Trump-Ryan-Brady tax cuts.

The second attachment, which is an excerpt from my book, Settling (and Squaring) Accounts: Who Owns the National Debt? Who Owes It? This lays out in greater detail why government spending leads to higher GDP and why speculative investment does not, as well as a history of the relationship between deficits/surpluses in one year and growth the second year - including graphs showing these relationships by tax regime.

The 2017 Act took a year to make its way through the economy. It is not included in the last graph in the second attachment, because the next point was the pandemic. The one data point we had showed that, post tax cuts, GDP declined by one percentage point. The current tax regime requires significant deficits to produce economic growth. Once the 2017 tax bill expires, the balance will begin to shift in the tax system so that growth can occur alongside declining deficits and additional spending cuts.

The 2017 cuts rewarded hard working investment managers and the denizens of Wall Street. Mortgage Backed Securities markets, this time investing in commercial and family rental units (which is how Steve Mnuchin and Wilbur Ross made their bones - and why they championed pandemic stimulus so as not to go personally bankrupt) were incentivized by the 2017 law. They received the wealth, not those who were stuck in homes where maintenance was shifted to renters - which means that the homes Mnuchin got for pennies on the dollar are deteriorating, not creating actual wealth.

If the Committee is serious about helping hardworking Americans, increase the minimum wage and continue to press the Senate to pass the committee’s increases to the Child Tax Credit. Work must pay for people to continue to work. 

In 2021, the House proposed increasing the minimum wage to $15 per hour as part of reconciliation. Until the Senate Parliamentarian ruled that this was out of order and the votes did not exist to overrule her, the Republican Minority counter-offered a $10 per hour. 

American workers would appreciate putting that counter-offer back on the table, while ending the tipped wage sub-minimum rate. American customers are not nearly generous enough for this to be at all just. Wherever either (or both) options are proposed as ballot initiatives, they pass. In some states, higher minimums have been enacted and more economic activity, rather than less, has occurred. The reason is obvious - when lower income people have more income they spend it all back into the economy. When wealthier people get a tax cut, they take it out of the economy and into Wall Street speculation. The sad irony is that it is in the so-called “Red States” where the minimum wage has not been raised where the economy lags.

Franchise holders have a history of paying low wages and justifying their opposition to wage increases because their wages would be squeezed out. This is not the case because, again, sales will increase to compensate. That being said, the conditions of franchise employment and franchise agreements deserve attention, as well as the tactic of using the franchise system to avoid unionization and paying for such things as health insurance. If the onus on providing health care and voting for representation is shifted to the franchisor, some firms will decide that turning franchise and gig  employment into full-time employment is better. That would be a socially desirable outcome.

Any tax reform should regularize how capital gains are taxed. Our tax reform plan contains a proposal for an asset value added tax, which will tax transactions, not people or their end of the year balance sheets. At initial public offering, option exercise and the first sale after inheritance, gift or donation, the sale would logically be marked to market. If a family keeps the stock or company, there will be no tax until someone else buys it. To avoid heirs having to pay the asset value added tax altogether, expand the ESOP tax exemption to all sales of public stock, rather than just private stock. Maximizing employee-ownership will bring a new level of motivation and excellence to the economy.

In March of this year, the Budget Committee held a “Markup” of the FY25 Budget, concurrent with the President’s submission. As I stated then, the economic monster that was the 2017 Tax Law will take care of itself next year by sunsetting automatically. The March Budget Resolution was beyond Dead on Arrival. It was Buried on Passage. It did not make a dent in the news of the day.

The motivation for keeping the Trump Cuts alive is obvious. It is an attempt to bring Republican donors back to the Majority Party. Since the Insurrection, donations have not only fallen flat, they have all but disappeared. As long as the Party is tainted with Trumpism, not even preservation of these undesirable tax cuts will save it. Hopefully, the donor class is also aware of the underlying economics, which demands higher tax rates to function correctly.

Thank you for the opportunity to address the committee.  Please contact us for an in person briefing or to arrange for a public hearing on our tax reform proposals. Remember, given the involvement of members in the sad events of January 6th, there should be no delay in shifting from grandstanding to seeking actual compromise. The alternative is a 28.8% capital gains tax rate and a matching corporate income tax rate as proposed by President Biden with passage assured by soon to be Speaker Jeffries. 

Attachment: Tax Cuts and Jobs Act

Attachment: Deficit Economics

Attachment: Tax Reform Videos included