If history is any guide, rich Americans are about to help themselves to a fatter slice of the economic pie, leaving an even skimpier portion for the rest of the country.
The reason is simple: Congressional Republicans are moving closer to finalizing a tax overhaul that will lift the tax burden on America’s richest citizens and plonk it down on those less well-off.
The details remain hazy after weeks of frenzied negotiations. But the outlines of the final version have begun to emerge. The tax deal cuts income tax rates paid by the highest-earning Americans from 39.6 percent to 37 percent and raises the amount that can be inherited without paying tax. It also allows owners of so-called “pass-through” businesses — non-corporate legal structures that account for roughly 95 percent of U.S. businesses — to lower their tax burden through a 20 percent deduction and slightly cuts their rates.
The vast majority of pass-through entities are small companies. But the vast majority of the money that passes through pass-through entities goes to a small sliver of these entities that make incredible amounts of money, like hedge funds, law firms, consulting firms, and real estate operations. One economist estimates that roughly 70 percent of all business income in pass-through entities goes to the top 1 percent of U.S. earners.
Republicans argue that these measures will be good for economic growth, which slowed markedly after the Great Recession. Maybe. But they will also likely shrink the American middle class even further in the years to come, as American inequality hits levels once considered, well, Latin American.
The tax code has a lot to do with that change. Top tax rates have fallen sharply for America’s highest earners, from roughly 94 percent in the years after World War II to less than 40 percent.
Such declines are associated with large rises in inequality, as measured by the share of total national income — before taxes and transfers — that flows the the highest one percent of earners.
“Countries such as Germany, Spain, Denmark, and Switzerland, which did not experience any significant top rate tax cut, did not experience increases in top income shares,” some of the world’s foremost economists on inequality wrote in a report released on Thursday. “Conversely, the United States, U.K., and Canada experienced important reductions in top marginal tax rates and saw their top 1 percent income shares substantially increase.”
Americans like to think of the U.S. as a middle-class country. Roughly 60 percent of people identify as “middle class,” according to recent Gallup surveys.
But the rise in inequality means America’s middle-class status is now up for debate. In fact, less than half of the U.S. should now be considered “middle class” by some measures, according to a report earlier this year from the Pew Research Center. Another example: it’s now much easier to attain the American dream in Canada than it is in the U.S.
This is bad. Going back as far as Aristotle, a large middle class has been seen as important for the health of democracy. The logic is fairly simple: A society that’s too unequal is susceptible to violent, redistributive revolution from the bottom and repressive oligarchy from the top.
That’s what makes this tax deal seem like another indication that American democracy is in the midst of a doom loop. First off, it smells a bit oligarchical, given how its broad goals and details are very unpopular with Americans. (For instance, nobody wants corporate tax cuts.)
If the bill does deep damage, as predicted, to America’s democratic stabilizer, the middle class, it will make future failures of deliberative democracy even more likely. The bill also makes it harder to provide the kind of social services that will cushion the blow of people falling out of the middle class, by increasing an already large U.S. government debt — but that’s a separate story.
In other words, if you think American politics and society have been nuts lately, just wait.
Cover image: A storm photographed by Marko Korosec across the U.S.’s Tornado Alley in May 2016. (Rex Features via AP Images)