If ever there was a piece of legislation designed to guarantee that r stayed greater than g, it’s the Republican tax bill.
Remember “r>g”? It was the notation Thomas Piketty made briefly famous in his book Capital in the 21st Century, the French economist’s shorthand for the dangers that accumulated wealth could pose to society. When the rate of return (“r”) on capital assets like stocks, bonds, real estate, or factory equipment jumps higher than the rate of economic growth (“g”), he argued, we should expect inequality to swell.
Piketty’s theories aren’t exactly gospel these days. But I’ve been thinking about them a lot as I watched the GOP’s tax bill gallop towards passage (and not only because Piketty himself has been raging about it). After all, the plan is designed specifically to reward wealth—to make sure that corporate shareholders and private business owners can pocket more of our national income each year, before passing it onto their children, with only the flimsiest economic rationale to justify this. It’s a real-time demonstration of how growing inequality paves the way for moneyed interests to exert ever more control over politics and the economy, leading to the kind of world dominated by capital and inherited wealth that Piketty has warned about.
Wealth inequality has already been on a steady rise in the U.S. for years—according to the Federal Reserve Board’s Survey of Consumer Finances, America’s top 1 percent of households own more of the country’s net worth than they have at any time since the study first started in 1989. As outrageous fortunes have grown, we’ve seen billionaires like the Koch Brothers and Sheldon Adelson and the Mercer family—not to mention many smaller, but still rich donors—pour ever more money into politics. The question has been whether their efforts would ever actually bear fruit for their businesses.
This is a nontrivial issue for the future of inequality and the economy. If corporations and business owners can keep the profits flowing by investing in politics, it means they can outrun the natural economic forces that might, over time, reduce the returns on their wealth. As we’re seeing this week, their investments in the GOP are paying off.
It’s true that the rich do well in general under the Republican plan—in 2025, a quarter of its benefits go to the top 1 percent of taxpayers, 85 percent of whom will get a cut that year, according to the Tax Policy Center. But the bill is especially devoted to bulking up business profits. Republicans are reducing the corporate tax rate tremendously, dropping it from 35 percent to 21 percent, which will let CEOs shower their shareholders with more buybacks and dividends.
They are also offering a large break for so-called pass-through businesses, such as the Trump Organization or your local NFL franchise, which aren’t subject to the corporate income tax. Not counting the bill’s one-time levy on profits that companies like Apple and Google have stashed overseas, the business tax changes Republicans are enacting make up around two-thirds of their legislation’s $1.46 trillion price tag. Toss in the bill’s changes to the estate tax, which will double the amount of money today’s wealthy can pass on to their kids tax free, and you get a big, gold-wrapped Christmas gift for capital. “R” is going bonkers next year.
And what do the rest of us get in return? Republicans have promised a burst of economic growth and higher wages for workers, as companies plow their profits into investments, such as new assembly lines or office buildings. But almost nobody outside the White House or Congress is really expecting a boom. While many mainstream economists think the corporate tax cuts will boost the economy slightly—we’re talking less than one tenth of a percentage point per year, by some estimates—pretty much none believe they will generate enough growth for the bill to pay for itself, as GOP lawmakers have insisted it will, or lead to the kind of stupendous pay raises for the middle class that the administration has advertised. As for the pass-through breaks that will benefit our president? We’ve seen this movie play out already in Kansas, where state legislators finally repealed a similar tax scheme this year, after it led to spiraling deficits and rampant tax dodging while failing to produce any detectable economic growth.
As bad as the bill’s economics are, its politics seem to be worse. Somehow, Republicans have written a bill that gives away $1.5 trillion that less than one-quarter of Americans approve of. Some of that may be a messaging failure; about 32 percent of Americans said they expected to pay more in taxes under the bill, whereas only about 5 percent should next year. But it’s also possible voters just hate the bill because, as survey after survey has shown, corporate tax cuts have always been unpopular. There’s a good reason for this: Only about half of families own any stocks at all, and just one-third own more than $10,000’s worth. Most families don’t have much of a portfolio to speak of, and after years of watching big businesses lap up profits while wages stagnated, they don’t believe their fortunes are connected with corporate America’s. And for the most part, they’re right.
All of which leaves us with the overriding question: Why? Why would Republicans pass a bill so wretchedly unpopular to benefit such a small slice of Americans? Some lawmakers, like South Carolina Sen. Lindsey Graham and Rep. Chris Collins, have bluntly admitted that their donors simply demand it. Others, like House Speaker Paul Ryan, may be true believers in conservative economic dogma. And others could be self-interested: The Senate originally planned a smaller pass-through cut, until Wisconsin Sen. Ron Johnson threatened to kill the whole effort unless it was expanded, an expansion that may benefit his family’s own business interests.
But the overarching reason is the same: The Republican party answers to the interests of wealth. Lawmakers listen to their donors. They listen to conservative think tanks like the Heritage Foundation or Hoover Institution, which are funded by the wealthy to create an intellectual justification for deeply regressive policy making. And sometimes, they just listen to their own accountants. The result is a tax code that favors the interests of entrenched money. After three decades of rising wealth inequality, business owners and investors are finding new ways to extend their run. The question now is how the rest of us can stop them.