After the Senate voted 51-49 late Friday night to pass a sweeping tax reform bill that cuts taxes for corporations and the wealthy, likely creating massive new deficits, congressional Republicans were jubilant. On Saturday Senate Majority Leader Mitch McConnell wrote that the tax bill “will help make America an economic powerhouse again.”
But their celebration is premature. Even if these cuts become law, as is expected once the Senate and House reconcile their two tax bills and President Trump signs the resulting product, the legislation is unlikely to propel us into a golden age of economic growth. We are, however, entering an era of acute social stratification and economic disparity between the rich and the poor—and American history shows that these periods usually don’t end well for the wealthy or for the country as a whole.
It’s not just because the expected economic boom won’t materialize. There is little debate among mainstream economists about that; only one in a survey of 40 leading economists projects that the tax reform will accelerate economic growth, and the new regime may actually be a drag upon growth as deficits grow. In fact, the evidence on tax cuts—particularly when the economy is healthy, the stock market is at dizzying heights, tax rates are already not punitive, and the government is struggling to meet existing obligations—is weak at best. Recent experience after the Bush tax cuts in 2001 and in red states such as Texas, Kansas, and North Carolina reinforces doubts that tax cuts for the rich result in much more than busting government budgets.
But what these cuts do achieve is a transfer of the spoils of political power from the middle and working classes to wealthy investors, heirs, real estate developers, and business owners. A new Washington Post analysis calculates that the 0.6 percent of the population earning more than $1 million will reap 60 percent of the tax cut benefits by 2027. Each of these groups—many of them overlapping among the One Percent—will receive targeted paydays with tax exemptions and lower tax rates in the Senate and House bills. We know quite well out of whose hide these cuts will come: taxes are set to rise on many lower- and middle-class households between 2018 and 2027, and McConnell and House Speaker Paul Ryan are already licking their chops to pare back Social Security, Medicare, welfare, and health insurance for poor children. Meanwhile, the elimination of the state and local income tax deduction will restrict states and cities from raising tax revenue for local government needs. All of this leads to the shrinking ability of government to pay for social services.
In fact, it is social services and an economically vital middle class, not booming profits for elites, that make the U.S. economy the envy of the world. With impoverished masses lacking access or the means to pay for health care, good schools, and care for the elderly and young children, we are headed for a society eerily reminiscent of Latin American caudillos, petro-state kleptocracies like Russia and Equatorial Guinea, and, with the ethnic divide baked into our income inequality, state-sponsored oppressors such as apartheid South Africa or the antebellum American South.
In their 2012 classic Why Nations Fail: The Origins of Power, Prosperity, and Poverty, renowned economists Daron Acemoglu and James Robinson posit that the inclusiveness or exclusiveness of political institutions is the root cause behind economic outcomes. They note that almost all wealthy societies—save a few small countries that have grown rich on oil—are pluralistic, meaning they have “political institutions that distribute power broadly in society and subject it to constraints.” These are contrasted with “absolutist” political institutions, where “the distribution of power is narrow and unconstrained.”
What does this have to do with the United States and tax reform? Surely the United States is pluralistic. We’re a democracy, right? Actually, Republicans have been remarkably frank about doing the bidding of their fat-cat donors rather than heeding the will of the public. In fact, polls show that the Senate tax reform bill is less popular than the 1993 Clinton and 2010 Obama tax increases. The Obamacare repeal that narrowly failed over the summer but which still may happen piecemeal through tax reform is even less popular, polling at a 20 percent approval rating in September. A 2015 Martin Gilens and Benjamin Page study that found that, since the 1990s, there has been no statistical difference between the approval rating among the U.S. middle class of policies that are enacted and those that are not. In other words, public opinion has virtually no effect on government decisions. What matters, according to the statistics, is what elites want.
Our reality is that business elites now call the shots in Washington, and everyone knows it. This is more or less the definition of Acemoglu and Robinson’s “extractive political institutions,” which “concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power.” Once the political tools are assembled, the economic exploitation follows: “Economic institutions are then often structured by this elite to extract resources from the rest of society.” The vicious circle gets worse: once political elites seize the reins of power and start maximizing their extraction of wealth, they use that wealth to tighten their chokehold on politics.
Sound familiar? The top one percent in the U.S. has increased its share of income from 8.9 percent to 22 percent in the last 35 years. And our legal regimes are starting to look pretty extractive: maximizing profits and dividends for business owners and investors by rigging the tax code, manipulating government subsidies, and maneuvering bankruptcy, labor and trade regimes to their advantage, while cutting government services and economic protections to the bone for everyone else.
Though this may bode ill for the future, there is potential consolation in the lessons of American history. Unlike the erstwhile neofeudal states of Latin America, the mafia-style autocracies of the former Soviet Union, or the corruption-riddled bureaucratic oligarchy of Communist China, we Americans enjoy a democracy that is still capable of throwing the bums out of power when the electorate gets sufficiently fed up. In our past, such waves of popular disgust and electoral change have occurred precisely at the apogee of economic inequality: namely, the trust-busting of Teddy Roosevelt in the early 1900s Progressive Era and the 1930s New Deal reforms of FDR.
The events that predated these episodes of sweeping economic redistribution are telling. The Gilded Age politics of the late 19th century were suffused with corruption and influence-peddling: “Businessmen wantonly bribed public officials at the local, state and national level, and political machines turned elections into exercises in fraud and manipulation.” By 1913, “about 18 percent of income went to the top 1 percent.” As popular discontent with the Robber Barons and their political enablers grew in the preceding decade, President Theodore Roosevelt and Congress enhanced the power of the Interstate Commerce Commission to rein in monopolies, and Roosevelt’s Justice Department pioneered enforcement of the Sherman Anti-Trust Act to break them up. Finally, in 1913, the 16th Amendment to the Constitution was ratified, formally clearing the way for a federal income tax passed by Congress.
Barely a decade later, the steep new income taxes were reversed. Under the Warren Harding and Calvin Coolidge administrations of the 1920s, a series of tax cuts reduced top marginal tax rates from 73 percent in 1921 to 24 percent in 1929. By 1928, the richest 1 percent possessed 19.6 percent of all income. While in the short term the economy boomed, in October 1929 the stock market crashed. Historian Robert McIlvaine notes, “Calvin Coolidge’s… [1926] massive tax cut… would substantially contribute to the causes of the Great Depression.” In 1932, FDR swept into power on a platform of public works, installing safety net protections such as Social Security, and opposing bankers and the business elite.
These historical analogues to the present, when income inequality, crony capitalism, and government unresponsive to the public reigned supreme, ended in extreme economic hardship and crushing compensatory policy measures to redistribute wealth. So while Senator McConnell and Speaker Ryan may be counting their chickens, we may be a few short years away from a major economic disruption, and the efflorescence of Bernie Sanders-style democratic socialist politics. Then, perhaps, the Republican Party will learn that regimes that don’t lift all boats are doomed to be overthrown.
Andrew Eil is an independent consultant with expertise in climate change and clean energy policy, international development and sustainable investing. As former Coordinator of Climate Change Programs at the State Department, he managed a $75 million portfolio of clean energy programs. Prior to the State Department, Andrew worked for the World Bank. Andrew has an MPA from the Woodrow Wilson School at Princeton University and a BA in Russian history and literature from Harvard University.
