The New Tax Code: An End to Rationality
On December 1, 2017, Senator Mitch McConnell announced that they have the votes to overhaul the American tax system. The sweeping changes would eliminate 7 tax brackets and create only 4: 12%, 25%, 35%, and 39.6%. The levels of income that are taxed at these levels change too, with the 12% bracket extending up to the first 90,000 dollars, and the 25% tax rate applying up to $260,000. This means that 98% of Americans will pay less than 25% effective tax rates on their income. In addition, around 70% of all tax filers use the standard deduction, which currently stands at $6,350, will almost double to $12,000 for individual filers, and $24,000 for joint filers. This means that an individual earning up to $102,000 will now only pay 12% of his income to the federal government. In short, for most Americans this will save a lot of money.
While the tax breaks to citizens can be consequential, what this tax code really changes are the way corporations are taxed. This is changed in two major ways. First the tax code on pass through business are changed completely. Right now, pass through businesses (think contractors, or S corporations) are taxed at the individual income tax rate. Why does this matter? It makes a non-negligible difference for most small businesses in America. The income of the business is treated as the income of the owner, which means that if the business makes less than $260,000, the tax rate is 25% on income from $90,000 to $260,000. It follows that for all of the ultra-rich members of our society, whose income is diverted through pass-through companies (think Donald Trump), they are taxed at 39.6% for all income earned over $1 Million. This is now cut to a flat 25%. According to the New York Times, 95% of all businesses in America are pass-through, and they make up for the bulk of corporate tax revenue. In addition, the corporate tax rate is cut from 35% to 20%, eliminating the bulk of corporate tax revenue for the government. These changes will greatly spur growth, undoubtedly, and will increase the average wages earned by individuals.
It sounds so promising, lower taxes on individuals, concentrated to the wealthy, but spread across nonetheless. The lowered taxation for corporation should increase production, and capital investment, and promote job growth. In past years, this might be true, revealing our greatest issue with economics—we look to the past to make statements about our future. We no longer live in that era.
The American economy does not suffer from a lack of capital. In fact, it is at some of the highest levels ever seen in the history of the USA. According to McKinsey, US firms currently have over $4.7 Trillion in assets, and over $625 Billion was raised in new capital. Corporations have never had as much money available to invest as they do now. In a telling moment, when Gary Cohn, Director of the National Economic Council, asked a crowd of investors how many plan to invest the increase in revenue back into the economy, hardly any raised their hands.
There is good reason for this, while the economy is booming, investors are a lot more careful with where they place their money. Technology makes and destroys markets on a quarterly basis, and investors want to be on the right side of things. That is why EY reports that IPO’s are down from the pre-recession market, but the average IPO raises more capital than ever before.
Here is where traditional growth economics fail. This decrease in taxes is not going to result in a proportional increase in spending or growth. We would be lucky to get a good fraction. Banks and venture capitalists are not going to take these massive tax cuts and invest them into mom and pop stores. They will take this money and invest it into markets that will drive profits higher; they will invest it into automation.
Here is where we lose touch with rationality. In rational scenarios, the rich will fight to decrease taxes, and the common masses will fight against them, to make sure the tax base is sufficient to take care of the government programs that they need. It is well documented that the majority of Trump supporters come from the hardest hit areas of America, where industry has disappeared, and traditional jobs have been outsourced or automated. In 2017, these people, the vulnerable and struggling population of America, have forced congress to pass a tax code that will end their working lives as they know it. The wealth disparity that will result from this will further exacerbate the divide we have already seen in our nation. More importantly, however, these tax cuts almost ensure that the government will scale back on funding that keeps these states running. California is not in need of federal funds, Kentucky is; New York can withstand cuts to the national budgets, West Virginia cannot. The budget will need to be balanced, and this administration’s hostility towards public education and healthcare remain unmatched. Whatever gains the middle class of America will see in the short run, will be starkly undercut, with closing schools, rising costs in healthcare, and a lack of support to pay for them. Instead the rich, and the upper middle class, will gain more money, in more ways than the people below them will ever realize, and will further elect donate to candidates that will further their wealth.
In most scenarios, this would be thwarted by the anger of the public. But in Trump’s America, it is the public that wants the rich to have these cuts. This can be thought of as stupidity, idiocy, short-sightedness, or a healthy mixture of them all, but I think it’s much simpler, and much less patronizing. Americans do not understand the future that awaits them. Mark Zuckerberg does not mention Universal Basic Income in his speech to Harvard because he is a flaming liberal. Starbucks does not announce tuition waivers for its employees because they are kind. There is a mass extinction coming for the American worker, and this tax bill will only hurry its arrival.
Imagine, a decade ago, we all carried around devices in our pocket that could only handle the most rudimentary services. Ten years ago, BlackBerry was the leading technology company. In 10 short years, we have accomplished more than entire generations in history. Progress is no longer incremental, and it will not be something we have to wait for our kids to see. In 10 years we have gone from bricks in our pockets, to a generation that is openly awaiting the advent of automated cars. This is not the distant future, it’s by the next election cycle. Innately, the majority of Americans do not understand the scale at which these changes can be applied. We all believe that our jobs are special, but as a programmer I know that even my job has a window of a few decades.
To be clear, this tax bill will have a huge positive impact on our economy and workers, but as we’ve seen since the Great Recession, this increase in wealth will be concentrated into the hands of the few. For engineers across this nation, there has never been a better time. Companies across the country are ready to spend enormous amounts of money to hire the best talent for one purpose—to drive up profits. There is no faster way to do that than to eliminate and automate as many jobs as we can. There used to be a time when travel agents thought themselves too specialized to be replaced, that no computer could have access to the networks that allow them to be so successful. A billion dollar industry has grown even bigger, there are more travelers today than in the history of humanity, but humans no longer serve a role in it.
In the near long term, there are no winners. A journey to San Francisco will make that clear. As the elite gain more money, the middle class will continue to be priced out of cities and states, with very little to assist them. Just in the next decade, we will have to answer to the thousands of cab drivers for how they can live in an automated society. For the truckers of America, a symbol of the middle class, these changes might come sooner. What will we do, when service workers are automated out of jobs, or forced to work in areas where they cannot afford to pay rent. It is already common for workers to spend over 4 hours commuting to work. What happens when massive amounts of people need to do that? The increase in wages for engineers in San Francisco or Chicago will definitely increase the demand for services, with more restaurants and shops ready to take in their income. But how long will the waiters and waitresses live in shared apartments before they end up frustrated. What about the lost productivity by American workers with the increased commute?
These questions only represent a small portion of the difficult questions we need to ask ourselves as a society. Instead, our administration ignores these as real issues, and instead focuses on bringing this nation back to a 1960’s style of government and economics. With the speed at which the wealth will accrue into the hands of the few, it might be this administration itself that will have to answer these questions to a disillusioned public.
There has never been a greater time to live in America. The economy is booming, the country is safer for most Americans, and there are more opportunities available to an individual than ever before. Yet if you ask around the nation, more people are becoming disillusioned with capitalism and our economic system. Both of these things are related. The opportunities available can only be accessed by a select few. The wealth and wage available are only possible for those who can afford the high cost of higher education. The economy is robust, but only for the ones who are in the position to take advantage of it. For the rest, this tax bill is only the brightest sign that this nation no longer cares for their plight.
We need foresight, not nostalgia for the past. We need leaders ready to experiment, not set in their ways. We need to embrace the future, instead of living in fear of it. This tax bill does none of these things.
Thanks for the check anyways Mr. President.