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Column: Don’t buy the spin: The new tax plan is a huge giveaway to the rich

If enacted, the Republican tax plan would initially add to the budget deficit. (Sign up for our free video newsletter here http://bit.ly/2n6VKPR)

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The tax cutters in the Republican Congress and White House were very careful to dangle only a few details of their tax plan before the public, but fulsome in their claims that it would be a boon to the average American — putting “more money into the pockets of everyday hardworking people,” according to a quote from President Trump at the top of the “framework” released Wednesday.

Don’t buy the spin. Judging from the scanty details in the framework, low- and middle-income Americans may or may not see a tax cut, and if they do, it will be modest. Wealthy Americans, however, will be granted immense benefits. Their most cherished tax breaks will be protected, other tax breaks will be added and they’ll even see a reduction in their top marginal tax rate.

It’s a bit premature for tax analysts to put hard numbers on the scale of the giveaways in the outline just released, and especially difficult given the lack of details. Most of the crucial information will be left to tax-writing committees on Capitol Hill. But we know what the upper crust hoped to see in the tax plan, and it’s obvious that much of its wish list has been granted.

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By lowering the tax burden on the middle class, and creating a healthier economy, we can give American families greater confidence and help them get ahead.

— GOP description of a tax plan that rewards the wealthy with immense benefits

To read the tax plan, however, one would think it’s exclusively about helping the middle class.

“By lowering the tax burden on the middle class, and creating a healthier economy, we can give American families greater confidence and help them get ahead,” the document says. “America’s tax code should be working for, not against, middle class families.”

But let’s examine a few specifics.

The capital gains tax preference is preserved. As we’ve noted before, wealthy taxpayers have been willing to give up a lot of breaks, as long as the capital-gains preference remains in place. The top tax rate on ordinary income is 39.6% (reduced to 35% in the tax proposal); the top rate on capital gains is just over half that — 23.8%.

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The preferential rate delivers an estimated $120 billion a year to taxpayers who are overwhelmingly members not merely of the 1%, but the 0.1% — they’re the recipients of almost 76% of the capital gains tax benefit. That’s because capital gains comprise much larger shares of the income of the wealthy than everyone else. Those with annual incomes of $1 million or more receive more than half their income from capital gains; working-class people earning $75,000 to $100,000 receive on average 75% of their income from wages.

There’s more to the capital gains break than merely the preferential rate. As Ed Kleinbard, the tax expert at USC, observes, it’s our only truly voluntary tax: Those with accumulated capital gains liabilities can choose when to pay them simply by deferring the sale of the capital asset because that’s when they’re collected. Hold the asset long enough to bequeath to one’s heirs, and the tax is extinguished. No other U.S. tax encompasses such an enormous benefit.

Repatriation of foreign corporate assets at a low rate. Big business has been pushing for this break for years, or since the last “one-time” repatriation amnesty in 2004. American multinationals hold an estimated $2.6 trillion of what Kleinbard calls “stateless income” offshore. They’ve resisted bringing the wealth back home because it would be taxed in the U.S. at standard corporate rates.

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The framework says foreign earnings held in forms other than cash will be subject to a lower rate, though it doesn’t say how low. In any event, the rationale, which is that corporations will use the money for investing in their future and for job growth, doesn’t hold water. As Steven M. Rosenthal of the Tax Policy Center observes, industry promised in 2004 that the repatriated profits would be used for job development and investment. For that they were gifted with a preferential 5.25% rate.

Instead, multinationals used the repatriated funds to pay dividends to shareholders and buy back their stock, actions that disproportionately benefit wealthy shareholders. In fact, the largest participants in the 2004 repatriation holiday, including Pfizer and IBM, cut jobs and research. “Once the holiday ended, the multinationals went right back to accumulating earnings off-shore, anticipating another tax holiday,” Rosenthal writes.

Repeal of the estate tax. The estate tax is the perennial target of the most dishonest Republican spin in the whole tax code. Dubbed by its wealthy critics the “death tax,” this levy supposedly burdens family farms and businesses. During the presidential campaign, Trump called the estate tax a burden on the “American worker.” Yet the estate tax affects only a few thousand people at most, all of them multimillionaires with an average nest egg of more than $30 million. Currently, the tax is set at 40% of estates, with an exemption worth $5.49 million per individual and $10.9 million per couple. Among those who almost surely would benefit from repeal: Ivanka, Eric and Donald Trump Jr., the president’s children.

Bowing to the power of the rich, Congress eliminated the estate tax entirely for 2010 — the suspension was pushed by Sen. Jon Kyl (R-Ariz.), whose state hosted armies of well-heeled retirees, and Sen. Blanche Lincoln (D-Ark.), whose constituents included members of the Walton family (heirs to the Wal-Mart fortune). The tax was restored in 2011, leaving behind only a “Law & Order” episode about rich families plotting to kill off their elders during the moratorium.

Lower rate on “pass-through” income. The Republican plan would cap the tax rate on businesses whose income is reported on their owners’ individual returns — such as subchapter-S corporations and sole proprietorships — at 25%. The problem with this provision is that in jurisdictions where it has been enacted, such as Kansas under its tea party Gov. Sam Brownback, everyone from freelancers and petty contractors to huge partnerships were able to redefine ordinary income as business income to avoid any state income tax at all.

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The GOP framework doesn’t say how it would avoid the same outcome, beyond saying that the tax committees will “adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.” All together now: Uh-huh.

Compressed tax rates. The tax proposal compresses the current seven tax brackets (with marginal rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%) into three, with rates of 12%, 25% and 35%. But it’s silent on where those rates will kick in. Notably, the rate on the bottom bracket would rise to 12% from 10%. That looks like a tax increase on the lowest-income Americans, but the GOP says it will be more than compensated for by nearly doubling the standard deduction to $24,000 for couples and $12,000 for individuals. How that will translate into a lower tax burden for those paying the lowest rate and claiming the standard deduction, and how many households will be affected, is unclear without more data.

Elimination of common deductions. The most glaring repeal of a deduction is for state and local taxes. It’s impossible to see this as anything other than a slap at residents of big-blue states, such as California and New York, whose residents can write off their high state and local taxes with itemized deductions. But this could fall into the category of leading with one’s chin, as it’s likely to cost the votes of many Republican lawmakers from those states.

The proposal would repeal the personal exemption for dependents, which this year comes to $4,050 per child. But that’s a middle-class tax break, as it’s phased out at higher income levels. The Republicans assert that they’ll increase the child tax credit and make it available to more middle-class families, but the details are unknown.

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

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