Trump’s vision on tax policy success story that never was

Whatever happens in the US midterm elections today, Republicans could have done better if President Donald Trump had listen­ed to his instincts on tax.

It turns out Trump wanted to lift the top US marginal tax rate to 44 per cent from 39.6 per cent, according to Bob Woodward’s Fear: Trump in the White House.

“I’ll take the top rate to 44 per cent if I can get the corporate rate down to 15 per cent,” Trump told Gary Cohn, then one of his top economic advisers.

“Sir, you can’t take the top rate up, you just can’t,” said Cohn, a former Goldman Sachs trader who made hundreds of millions himself at the bailed-out bank.

“What do you mean?” asked Trump.

“You’re a Republican … you’ll get absolutely destroyed if you take the top rate up,” Cohn answere­d.

Destroyed by whom? The sliver of lawyers, bankers, doctors and managers, who earn more than $US418,000 ($580,550) — where the top federal marginal tax rate kicks in — a year? It’s hard to fathom how such a move could have hurt Trump politically.

As it stands, it will be a minor miracle if Republicans manage to hold the House of Representatives after today.

Over the past 21 mid-terms, the president’s party has lost an ­average of 30 seats, and Trump’s approval ratings — in the mid to low 40s — point to sizeable losses.

Cohn’s argument was dumb. For a start, the great Theodore Roosevelt, a Republican, advocated a progressive inheritance tax and income taxes to combat fortune­s in the early 20th century that he believed were under­mining US governance. You ­govern for the times.

Indeed, Trump had form for closing loopholes that helped the better-off.

His sweeping federal tax ­reform last year abolished scope to deduct state taxes, hitting residents of high-tax California and New York. It also expunged a particula­rly pernicious rule that allowed businesses to deduct executive salaries that were above $US1 million only if they were “performance-based”.

Enacted in 1993, when Bill Clinton was president, it turned out to be one of the most damaging pieces of corporate legislation in history, putting a rocket under senior manager pay and spawning the vast industry of “remuneration consultants” that promotes fiendishly complex “incentives” — around the world — which have corrupted the public’s respec­t for big business. The idea that corporate performance improve­d as a result is laughable.

Trump’s ousted adviser Steve Bannon had also advocated lifting the top federal marginal tax rate when he was in the White House.

The top 1 per cent of US earners have increased their share of household income from 12 per cent to 22 per cent since the early 1980s, according to US tax expert Emmanuel Saez. Much of this is luck — not effort or innovation.

Interest rates have plummeted, sending asset prices through the roof, while increasing globalisation has boosted the pay of skilled workers. Between 2009 and last year, the top 1 per cent in the US enjoyed 46 per cent of all income growth.

An additional four cents in the dollar wouldn’t cause too much suffering among this group; it might even encourage greater effor­t among those determined to keep up with the Gatsbys in West Egg. At a time when US inequality is back where it was in the 1920s, these perceptions will cost the Republic­ans.

Such a move could have deflecte­d Democrat accusations that Trump’s signature tax reform — his biggest policy legacy thus far — favoured the well-off. The standout component, slashing the corporate tax rate to 21 per cent from 35 per cent, has fuelled a surge in share buybacks.

In theory, lower company tax encourages investment in new projects, creating jobs and leading to higher wages. Evidence so far suggests the biggest US companies, including Warren Buffett’s Berkshire Hathaway only last week, have used the windfall to buy back their shares — a record $US1 trillion this year alone.

In April, Republican senator Marco Rubio told Time: “There’s no evidence whatsoever that the money’s been massively poured back into the American worker.”

Supporters of the corporate cut point to the pick-up in annual wage growth as evidence the reform­s are finally to work or bite. US wages grew 3.1 per cent over the year to October, up from 2.6 per cent in April.

Share buybacks aren’t ideal for boosting growth, since they divert profits from investment and resear­ch to the richest 10 per cent of households, which own about 80 per cent of the nation’s equit­ies. Buying back shares artificially boosts stock prices, so executives use them to boost the value of their stock options or meet their bonus targets.

Share buybacks were in effect illegal from the 1930s until 1982, when president Ronald Reagan removed the prohibition.

For all the naysayers, Trump has a good economic story to tell: a falling unemployment rate, a pick-up in wage growth, a booming stockmarket (notwithstanding recent wobbles), and a more confident US foreign policy, which appears to be weighing on Iranian, Chinese and North Korea­n expansionism.

It’s a pity Trump didn’t cauterise Democrat attacks on his tax economic program by following his instincts and lifting the top marginal tax rate.

In eight years, Barack Obama did nothing to reform or simplify the US tax system; his health reform­s made it even more complex. For all their bleating about supposedly marginalised groups, the Democrats are perhaps even more captured by corporate and financial elites than Republicans.

With inequality at levels that would flabbergast Ancient Greek philosophers, a higher top marginal rate, provided it affects only those earning more than five times the average income, wouldn’t have upset the US growth mach­ine. The top 1 per cent may well be paying an increasing share of US income tax, but they probably wouldn’t want to swap places.

Recall that the US was at its most respected, united, powerful and innovative in the decades after World War II, when it had a top marginal tax rate of 91 per cent on incomes above about $US1.5m a year in today’s dollars.