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News from EPI Coming tax cuts for high-income households exactly the wrong medicine for the economy

Even as they have railed about the increase in federal debt incurred during the Obama administration, the incoming Trump administration is almost sure to follow congressional Republicans’ lead in pushing through enormous tax cuts that will disproportionately benefit the richest American households. If all Democratic opponents of this policy offer in response is hand-wringing about how this move will boost the federal budget deficits, a key opportunity to educate voters about the genuine fiscal challenges facing the nation will be lost.

Financing recovery and fairness by going where the money is, a new paper by EPI’s Research and Policy Director Josh Bivens and Budget Analyst Hunter Blair, identifies the three key fiscal challenges facing the nation. First, in the near-term, fiscal policy needs to aid, not thwart, the still-incomplete economic recovery. Second, once recovery is complete and sustained, revenue will be needed to finance the increase in health care spending that drives long-run deficit projections. Third, new commitments to social insurance, public investment, and income supports will be needed to reverse the rise in inequality that has characterized the last few decades.

Bivens and Blair find that that progressive tax increases—including introducing a financial transaction tax, a carbon and gas tax, and closing corporate tax loopholes—would be a key component in addressing these genuine fiscal challenges. Progressive tax increases provide less drag on economic recovery than spending cuts or other tax increases, while providing the revenue needed to finance current and future commitments to social insurance and other measures to promote more-equal growth.

“America’s richest households have seen stratospheric income growth over the past generation compared to the bottom 90 percent,” said Bivens. “While Donald Trump claims to care about the economic condition of working and middle class families, his proposed reforms will disproportionally benefit the richest households. This is not how somebody who was actually serious about addressing inequality and American economic security would proceed.”

The authors highlight recent research that shows higher top marginal tax rates do not just provide opportunities for progressive spending initiatives. These higher rates also provide a powerful check against rising income inequality by decreasing the economic incentives for well-placed economic actors—such as CEOs and top finance executives—to rig the rules of the economy to send more income there way. The coming push to lower these top tax rates will amplify the zero-sum dynamic that has characterized the American economy in recent decades, and will lead to more income being concentrated at the very top.

“The federal budget balance is not just a number that should always be shoved as quickly as possible towards surplus,” said Blair. “Instead, it is a policy tool that has profound impacts on American living standards. And sometimes this budget balance needs to be pushed towards deficit to boost American living standards, while at other times it needs to be pushed closer to a balance or surplus. But this decision about moving toward deficit or surplus needs to be evidence-based, not based on facile analogies to household checkbooks and stale conventional wisdom.”

The new paper provides concrete measures to raise revenue progressively, and includes revenue scores for a number of measures that raise top tax rates, introduce new taxes, and broaden the tax base by reducing tax avoidance for high earners. It further highlights that these measures actually have effects that amplify each other—for example, measures to broaden the tax base actually allow for higher tax rates. This paper will be discussed at a forum on Nov. 17th co-sponsored by EPI and the Century Foundation called: Paying for Progress: A tax reform agenda for the next president


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