Share the windfall

President Donald Trump and congressional Republicans gifted U.S. corporations a massive financial windfall last year.  The Tax Cut and Jobs Act of 2017 slashed the top tax rate on corporations from 34 percent to 21 percent, handing big businesses a pile of extra cash to spend as they saw fit.

Trump claimed that the tax cut would be “rocket fuel” for the American economy.  But that fuel has largely fizzled out before reaching workers’ pockets.  Real wages have barely budged over the last two years despite steadily declining unemployment.  Aside from a handful of one-off bonuses, the tax bill has had no noticeable effect on workers’ wages.

So where is the cash left over from the corporate tax cut going?  Increasingly, into the pockets and portfolios of executives and shareholders.  According to Politico:

Some of the biggest winners from President Donald Trump’s new tax law are corporate executives who have reaped gains as their companies buy back a record amount of stock, a practice that rewards shareholders by boosting the value of existing shares.

A POLITICO review of data disclosed in Securities and Exchange Commission filings shows the executives, who often receive most of their compensation in stock, have been profiting handsomely by selling shares since Trump signed the law on Dec. 22 and slashed corporate tax rates to 21 percent. That trend is likely to increase, as Wall Street analysts expect buyback activity to accelerate in the coming weeks.

Stock buybacks (which were illegal until 1982) are when corporations use their stockpiles of cash to repurchase their own stock.  This inflates the value of their stock, juicing the compensation of their executives, too.

This is great for the shareholder class, but does next to nothing for workers.  It’s a symptom of a larger trend where record-shattering corporate profitability increasingly fails to produce higher pay for workers.  More and more, the corporate bounty has been hoarded the benefit of executives and shareholders, with barely a trickle for employees.

How do we combat this?  Senators Cory Booker and Bob Casey have proposed a “Worker Dividend Act.”  Under their bill, corporations pursuing massive stock buybacks would have to share the wealth with their employees.  Here’s how it would work:

The total value of a company’s obligation would be calculated as the lesser between the total amount of that year’s stock buybacks and 50 percent of the company’s profits above $250 million. That total obligation would then be distributed equally to each of the company’s employees.

To see how this would play out, consider the example of Oracle, which announced it would repurchase $12 billion worth of its own shares.  That’s nearly 75 percent of its total earnings last year, which totaled over $16 billion.  (And that’s just about par for the course, as Sen. Booker notes: “[C]ompanies on the S&P 500 dedicated 91 percent of their total earnings to stock buybacks and corporate dividends, leaving just nine percent for things like raises for workers[.]”)

Under the Booker-Casey bill, Oracle would have owed its U.S. employees around $8 billion (the lesser of its $12 billion buyback and 50 percent of earnings over $250 million).  That pool of money would then be split equally among the company’s American employees.  Oracle had about 138,000 total employees around the world.  That means its U.S. employees would be in line to receive $60,000 or more each.

Ideas like the Worker Divided Act would help correct the absurd power imbalance between corporations and workers in the twenty-first century economy.  Workers deserve their fair share of the massive wealth sloshing around corporate coffers, not mere pennies on the dollar.  Only government policy can make sure they get it.

The return of the Republican “access” dodge

Last December, as the GOP brainstormed how to package their Obamacare replacement, House Republican aides came up with a cute euphemism for taking healthcare from millions of people: providing “universal access” in lieu of universal coverage.  “We would like to get to a point where we have what we call universal access, where everybody is able to access coverage to some degree or another,” a top Republican aide told the New York Times.

The “access” talking point became a go-to dodge in the GOP repeal effort.  During his Senate confirmation hearings, health secretary Tom Price repeatedly offered variations of a promise to ensure that all Americans “have the opportunity to gain access” to insurance coverage.

The Republican hope was that no one would notice the implication of their spin: the glaring fact that “access” is gigantic step backward from actual coverage.  It’s one thing to have mere “access” to a roof over your head; it’s another thing entirely to actually be covered by one.

But Bernie Sanders swiftly cut through the GOP noise at Price’s hearing.  “Has access to’ does not mean that they are guaranteed health care,” Sanders said. “I have access to buying a $10 million home. I don’t have the money to do that.”

The weak sauce of “universal access” set the tone for the slow motion nosedive of the GOP’s Obamacare repeal effort.  The line gradually disappeared as it became clear that there was no spin artful enough to sell the shitburger royale that was the Republican plan to toss 20 million plus people off of their health insurance.

But alas, the “access” dodge has been re-born to kick off yet another Republican effort to take from the poor and middle-class to give to the rich.  This time, it’s tax reform, the GOP’s con to goose working people with a pittance while showering its wealthy donor class with massive tax cuts.  It’s a plan that would hollow out the income distribution even more, exacerbating our already gaping income inequality.

To put a glossy sheen on this repulsive goal, Republicans are resurrecting the empty promise of “access.”  During a conference call with reporters previewing Trump’s tax reform pitch, one White House official said, “We’re going to build a tax code that really allows all Americans to have access to the American dream.”

Again, theoretical “access” to the American dream is far from the same thing as being able to attain the American dream.  As a matter of fact, Trump’s tax plan would give the poor a whole $40 toward that dream, while shoveling a whopping $940,000 to the already super-rich.  Who’s better positioned to buy the $10 million house here?

While White House staffers feel the inner tug to fudge the true nature of their policies, Trump has no qualms about outright lying.  On Wednesday, he promised that his tax plan will produce a “big fat beautiful paycheck” for millions of American workers.

It will not.  His plan will make the rich richer while tossing pocket change to the poor and middle-class.  It provides the same illusory and fraudulent pathway to the American dream that Trump University once did.  When it comes to providing access to broad prosperity, conservative policy is a bridge to nowhere.

Trump and the cult of the job creators

Donald Trump’s back and forth over taxing the rich continues. Shifting by the day, Trump has vacillated between promising to raise taxes on the rich and proposing to cut their taxes. However, his latest pronouncement on the issue (if it sticks) suggests that he’s coming around to the ill-conceived conservative dogma glorifying the rich as the engines of our economy — even though the evidence points toward the middle-class as the real source of growth in the United States.

Trump began his insurgent primary campaign by arguing that taxes on the rich should rise. He bemoaned the under-taxation of financiers, saying, “The hedge fund people make a lot of money and they pay very little tax.” He even claimed to agree that he himself ought to pay more in taxes, saying, “You’ve seen my statements. I do very well. I don’t mind paying a little more in taxes. The middle class is getting clobbered in this country.”

In a reversal, however, he proceeded to roll out a tax plan that offered massive tax cuts to the highest earners. Under his plan, the top tax rate would fall from 39.6 percent to 25 percent. Over the next decade, this would redistribute some $4.4 trillion in lost federal revenue to the top 1 percent of earners, who would reap more than a third of the tax benefits in his plan.

Within days of clinching the GOP nomination, Trump appeared to revert back to his initial tax-the-rich position, saying he is “not necessarily a huge fan” of his own proposal to shower the rich with tax relief. This left some believing that Trump was abandoning his supply-side tax plan to pivot back toward populism in the general election campaign.

Now, Trump seems to have changed course again. When the New York Times asked Trump about taxing the rich at higher rates, Trump responded, “I really want to keep taxes for everybody as low as possible. When you start making them too high, you are going to lose people from the country, and oftentimes these are the people who create the jobs.”

Let’s set aside the extremely dubious notion that rich people are fleeing the United States in droves over a 15 percentage point difference in the top marginal tax rate. What’s more interesting is that Trump is regurgitating the conservative myth of the rich as job creators.

Last week, I sifted through the delusional provocations of Trump’s campaign statements and found that on policy matters, he appeared to be repudiating much of the accepted GOP policy platform. This schism accounts for much of the distance between Trump and establishmentarians like Paul Ryan. “The philosophy underlying the Ryan budget is supply-side faith in the wealthy as job-creating economic generators,” I wrote. “The only job creator that Trump glorifies is himself.”

Now Trump is buying into the job creator myth. The idea that the rich are job creators is a sloganeering summation of conservative supply-side economic philosophy: make life good for the rich, and the gains will reverberate down from their beefed-up wallets to the rest of the country. Treat the ownership class well, the thinking goes, and they will expand the economy and grow new jobs.

To sell this philosophy to the public, conservatives leaned on the job creator framing quite extensively following the Great Recession. With millions unemployed and the financial elite widely reviled, conservatives tied their preexisting economic beliefs to the public’s worry about jobs. In 2011, Paul Ryan blasted President Obama’s proposal to increase the capital gains tax as “class warfare” that “will attack job creators, divide people, and it doesn’t grow the economy.” Before being felled by the Tea Party, then-House Majority Leader Eric Cantor took to Twitter on Labor Day in 2012 not to praise working Americans, but to thank the supposed job creators, saying: “Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success.”

Meanwhile, liberals were pushing back against the conservative trickle-down prescription for the economy. They called their theory of the economy “middle-out economics,” arguing that the engine for economic prosperity was not the wealthy, but rather the purchasing strength of a broad middle-class.

The liberal theory held that “a prosperous economy revolves not around a tiny number of the very rich but around a great and growing number of middle-class consumers and small businesspeople,” as Nick Hanauer and Eric Liu put it. “Rich businesspeople are not the primary job creators; middle-class customers are. The more the middle class can buy, the more jobs we’ll create.”

Similarly, David Matland of the Center for American Progress argued, “it isn’t the rich that lead the way to growth and prosperity. Instead, it is a thriving and vibrant middle class that shows us the path.” CAP backed up this theory with a compelling review of the research demonstrating that the middle-class is at the heart of American economic growth.

President Obama began espousing this theory, too. “We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class,” he asserted. He explained that “growing inequality isn’t just morally wrong; it’s bad economics. When middle-class families have less to spend, businesses have fewer customers.”

That’s the guts of the theory in a nutshell: that when middle-class families have more disposable income, they will spend that money and grow the economy. When consumers spend more, business does well and employs more workers. This sparks a virtuous cycle of economic growth throughout the income distribution.

As I’ve written, middle-out economics is both good economics and a tried and true prescription for growth in recent American history. Policies that raise the disposable incomes for the poor and middle-class—higher minimum wages; targeted tax cuts; subsidies for health insurance, childcare, and college tuition; greater social insurance protections—are more likely to generate economic growth because average Americans are simply more likely to spend this freed up money than the rich are. Indeed, during the era of prosperity following World War II through the 1970s, the American economy grew on the back of an ascendant middle class.

Middle-out economics has always been a safe bet for American prosperity. The ahistorical alternative offered by conservatives for the past four decades has simply stuffed the pockets of the rich without ever yielding the promised glories of raining growth upon the rest of the country. In fact, the decades of ascendant trickle-down thinking since 1980 correspond with a marked period of sluggish growth and economic stagnation in the United States.

As Trump waffles between tax positions, he’s debating (whether he knows it or not) about whether the source of growth in the United States is the middle-class or the fortunate elite. Trump seems to believe that the key to growth is using public funds to reward the supposed business savvy of himself and those like him. But the evidence suggests that real prosperity grows from the people buying his ties, eating his steaks, and visiting his hotels.

Bernie’s soda stumble

Sen. Bernie Sanders has managed to run a wildly and unexpectedly successful presidential campaign not just as a proud democratic socialist, but as a democratic socialist who unabashedly wants to raise your taxes.  While he leans most heavily on raising revenue out of the highest earners, he would also increase taxes on low-income and middle-class families to pay for a host of new government programs.

And a growing legion of Democratic primary voters have decided they are completely okay with this.  The Sanders campaign has insisted that voters consider both sides of the ledger, arguing that tax increases are worth it to pay for new government-provided goods like single-payer healthcare with reduced out-of-pocket costs, and like free college with no out-of-pocket tuition.  Millions of voters seem to agree.

This is a revolutionary political achievement.  Sanders has cracked the decades-old Democratic taboo that says it’s political suicide to even suggest middle-class tax hikes.  He has asked us to embrace not just Scandinavian-style policy, but a Scandinavian-style mindset that tolerates higher taxes in exchange for more collective goods and, in turn, more choice and freedom.

Which is why it is such a disappointment to see Sanders seemingly abandon these principles in the Pennsylvania Democratic Primary.  Philadelphia mayor Jim Kenney has proposed to provide universal preschool for the city’s four-year olds.  He has also proposed paying for this initiative by implementing a soda tax, levying a 3 cents-per-ounce on sugary drinks.  As Margot Sanger-Katz of the New York Times explains, “That means a tax of $4.32 on a 12-pack of soda, which typically costs between $3 and $6 at the grocery store. It would come to 60 cents of tax on a 20-ounce bottle, which usually retails for about $2.”

Hillary Clinton came out in favor of the plan, implicitly arguing that universal pre-K is sufficiently important to justify the tax increase.  But Sanders strongly opposed the mayor’s plan.  He argued that it’s a regressive tax that disproportionately hits low-income consumers, who tend to buy more sugary drinks. “Mayor Kenney deserves praise for emphasizing the importance of universal pre-kindergarten,” he wrote in a Philadelphia op-ed.  “But at a time of massive income and wealth inequality, it should be the people on top who see an increase in their taxes, not low-income and working people.”

There are a few curiosities about Sanders’s position.  For one, a tax on soda would hardly be the first sin tax to disproportionately impact the poor.  Mayor Kenney’s plan is reminiscent of the Clinton administration’s Children’s Health Insurance initiative, which provided healthcare for low-income children and was funded by an increase in the excise tax on cigarettes.  Yet low-income Americans tend to be heavier smokers than the wealthy, meaning that the poor bear the brunt of higher cigarette taxes.

In their recent legislative biography of 1990s era Ted Kennedy, authors Nick Littlefield and David Nexon explain the political strategy behind this funding scheme for CHIP.  By paying for a new government program through a tax increase targeted at cigarette smokers and manufacturers, congressional liberals were able to catalyze public health groups as a constituency backing the proposal as a counterweight to opposition conservative anti-tax interest groups.  When tax increases are more diffuse, the anti-tax groups often go unopposed during the legislative process.  In this way, liberals were able to ride the momentum of the anti-smoking push of the 1990s to finance an important new social program.

Today in Philadelphia, Mayor Kenney is attempting to replicate this strategy by garnering support from public health organizations to counter the anti-tax messaging of conservative groups and the American Beverage Association.  Like cigarette taxes, a soda tax can be pitched as not just a funding stream, but a good in itself as a health-improving deterrent against bad consumption habits.  Kenney is making the same calculation today that Kennedy, Clinton, and other liberals made in the 1990s: that any regressive impact of a sin tax is outweighed by both the health gains from the tax and the gains for poor children from the program the tax is funding.

This is a quintessentially Sanders style of analysis, which is why it’s so odd to see him dispensing with it at this stage of the game.  Take Sanders’s proposal for free college tuition.  Sanders has proposed treating public college the same way we treat K-12 education, where all students can attend for free.  It turns out that this is a fundamentally regressive proposal.  The rich reap most of the benefits from free college, largely because they tend to attend more expensive schools, and because colleges already impose a sort of private progressive redistribution via financial aid packages.

Sanders justifies his free college plan by arguing that any regressive impact is counteracted by his progressive tax plan—that the rich will more than pay their fair share through higher taxes.  Specifically, he plans to pay for free college through a tax on Wall Street high-frequency financial transactions.  Here, Sanders asks us to consider both sides of the ledger, arguing that it’s worth enacting a somewhat regressive social program—one that disproportionately benefits the rich—coupled with a progressive funding scheme.

Philadelphia’s pre-K plan is the opposite: a progressive social program coupled with a somewhat regressive funding scheme.  But Sanders isn’t evaluating both sides of the ledger now.  It would be one thing if he was arguing that the value of universal pre-K is too uncertain to justify a regressive new tax.  Given the uneven findings around the long-term impact of pre-K, it’s a case he certainly could be making.

But Sanders isn’t making that argument.  He agrees that pre-K is important, but nonetheless rejects Philadelphia’s plan out of hand because it relies on a “totally regressive tax.”

Bernie is better than this.  He has done wonders to shake the Democratic Party out of its fear-driven Tax Pledge Lite dogma.  Just five months after saying “I don’t see how you can be serious about raising working and middle-class families’ incomes if you also want to slap new taxes on them—no matter what the taxes will pay for,” Hillary Clinton herself has come around to embrace a tax that impacts low- and middle-income Philadelphians.  That quick evolution, however slight, is directly traceable to Sanders proving that it’s not a political death knell to raise taxes outside of the top 5 percent.

To get a robust social insurance system in the United States, our debate can’t just focus on taxes in isolation.  Instead, Americans must look at both costs of a policy and its benefits, and decide if a given program is a good deal.  If they come to agree that new social insurance programs are worth paying for, that’s a far bigger achievement for liberalism than telling Americans they can have new benefits paid for entirely by the rich’s money.

That is the reasoned calculus the Sanders campaign has been offering throughout the 2016 primary.  While a progressive tax code should of course tilt toward taxing the rich, the scope of Sanders’s social democratic vision also requires broad-based buy-in from working Americans.  He shouldn’t abandon a message with massive long-term political import for the sake of a futile last-ditch effort to win cheap political points.

Rainy Day Refunds (#12 & 35)

Tax Day is upon us, and Senators Cory Booker and Jerry Moran have teamed up on a bipartisan proposal aimed at using tax refunds to boost Americans’ savings. Known as the Refund to Rainy Day Savings Act, the bill would give tax filers the option of setting aside a slice of their tax refund in an emergency savings account, to be direct deposited into their checking account six months later.

Under Booker and Moran’s plan, tax filers could elect to set aside 20 percent of their refund in a savings account, where it would accrue interest for six months before being transferred into their checking account. The idea is to smooth out payment to make tax refunds last longer and give families a cushion if a financial emergency strikes later in the year. “This bipartisan legislation would allow Americans to utilize a rare moment of financial flexibility that accompanies a tax refund to plan for the future, set aside savings for a rainy day, and invest in their own financial stability,” says Senator Moran.

On the whole, this is an encouraging idea. The brutal combination of rising financial pressure and stagnating incomes has left too many Americans treading water with their savings. More than 60 percent of Americans have less than $1,000 in their savings accounts, and one out of five doesn’t even have a savings account. Even when factoring in liquid assets like retirement accounts, 44 percent of Americans do not have sufficient  funds readily accessible to stay afloat for three months. Booker and Moran hope to capitalize on the momentary financial breathing room following a tax refund to help Americans build up their savings.

Booker and Moran’s bill is particularly concerned with building savings among the most vulnerable Americans. “Families living paycheck to paycheck endure the persistent threat of sudden financial disaster,” Senator Booker notes.

To that end, their bill is largely an adaptation of a policy proposal from the Center for Enterprise Development to reform the Earned Income Tax Credit in order to provide targeted help to these very families. The EITC is a refundable tax credit and one of our most important anti-poverty programs, providing up to $6,000 in additional income to working families annually. Under CFED’s Rainy Day EITC plan, families could shift 20 percent of their EITC refund into a savings account, getting it back six months later. (CFED’s plan also gave families a 50 percent match from the IRS to further incentivize saving.  Booker-Moran does not.) It’s one of several policy proposals attempting to spread payment of the EITC to alleviate the uneven “boom and bust” yearly budget cycle for low-income households getting a large portion of their income in a single tax refund.

I’m partial to a variation of this type of plan that advances half of a family’s EITC refund in four quarterly payments, rather than deferring it. This plan was authored by Brookings Institute economist Steve Holt and tested out in Chicago by the Center for Economic Progress. CEP found that families receiving periodic payments had  financial stability, reduced their debt load, avoided predatory loans, and accumulated savings.

Poor families have a hard time saving because their resources are already stretched too thin to meet regular living expenses. One study found that 40 percent of EITC dollars were used to pay down debt, while only 39 percent of families put any of their refund toward savings, tucking away on average of 15 percent of their refunds. Because families live in the red year-round, their tax season windfalls are disproportionately spent paying down debts accrued by just keeping up with the year’s expenses. Paying off these debts from budget shortfalls thus crowds out savings.

If we advanced EITC refunds to families, they could draw on this money throughout the year to avoid sinking into costly debt. Freeing up resources that are currently spent clawing out of debt would give families the chance to create meaningful savings.

CFED considered structuring their Rainy Day EITC as a periodic payment, but evidently determined that “monthly payments would be too small and would simply be incorporated into monthly budgets,” and that other periodic deliveries would be unduly complex. However, a structure like CED’s Chicago experiment, which pays half of a family’s EITC in four quarterly payments, would retain simplicity and make fairly sizable payments: a family due $4,000 in EITC would receive $2,000 at tax time and $500 every three months. Absorbing these $500 payments into their regular budget is precisely the point, allowing families to make ends meet without relying on debt.

In their study of EITC-recipient families in It’s Not Like I’m Poor, Kathryn Edin, Laura Tach—both of whom also co-authored the Rainy Day EITC proposal—and their co-authors found that these families approached tax season with tremendous anticipation and great relief when their refunds arrived. Tach and Edin laud the lump sum EITC for providing a rare opportunity for families to rise above scraping by to plan their finances, make investments, and indulge in middle-class treats. But the joy of these families at tax time is the joy of someone momentarily lifted above constant financial peril, resembling the desperate relief of a person starving for a year finally receiving a decent meal.

Indeed, Tach and Edin found that for these families, “[g]etting into debt and trying to dig out of it were near-universal experiences.” This financial whipsawing could be avoided by padding the budgets of these families year-round. Staving off debt is the first step to building the savings cushion needed to survive misfortune and financial shock.

The proposal from Senators Booker and Moran may well help do that. It’s a laudable effort to unlock the money due to American families from the strictures of the tax code. As a general matter, the resources owed to Americans should be made available to meet the actual timing of their needs, not tuned to the tax calendar.

But there might be more effective ways to help some of the most vulnerable families shore up their finances. When families wait on their tax refunds all year long as a chance to finally catch up, it’s hard to ask them to withhold this money for a rainy day. These families might benefit more from help today than they do from setting aside for tomorrow.