The Politics of Taxes

 

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By Ajay K. Mehrotra

The following piece was originally published by Anthropology News on May 14th.

APLA contributing editor Luzilda Carrillo Arciniega interviewed Ajay Mehrotra, Professor of Law at the Northwestern Pritzker School of Law, about recent US tax reform.

Below is a short version of the interview, edited for length.

Lucy: Could you start us off by telling us about changes in tax policy? What are they going to do, and what role they have had in American politics?

Ajay: The main purpose of taxation sort of writ large across space and time is to raise government revenue. In the United States today, taxation has also become the vehicle of choice for implementing any other kind of policy, whether it’s social, cultural, or economic policy. If you consider the United States in the nineteenth century, the main source of government revenue was the tariff, which was was all about trade policy. It was about protectionism, what lawmakers in that century referred to as protecting America’s “infant industries.” The United States had all these infant industries in iron and steel, in addition to all the other industrialized sectors that needed protection. In that sense, taxation and politics had always gone hand. In the last 20–30 years now, however, the tax code itself has become a vehicle of choice for just about any other kind of policy. Think about it: A lawmaker believes in renewable energy. What do they do? They don’t come out and say let’s spend more money on renewable energy, they say let’s create a tax credit so when people buy hybrid cars they get some money back from the tax system. That’s a major change over time. It also made our tax system incredibly complicated because now it’s pages upon pages of many other policies that have nothing to do with revenue, but are attempts to implement other reforms in policy.

Lucy: Thinking about today, what kinds of changes are we seeing with the new tax bill, and what political changes might we see out of this?

Ajay: One of the core elements of this new tax law is the reduction in the corporate rate. The statutory rate for corporations has decreased to 21 percent. That’s been the hallmark of this new tax law. On its surface, that’s probably a good thing, and certainly it is for corporations. It does make us more globally competitive. But I’m not sure it does all the other things that its supporters say it does. For example, the Trump Treasury Department claimed that people who’ve worked for corporations were going to see the biggest benefits. Yet, the majority of considerable evidence in this area suggests that it’s actually the shareholders, the owners of corporations who are going to benefit the most from the corporate tax cut. There’s also some modest rate reduction to individuals in addition to corporations. The claim is that this will lead to phenomenal economic growth and that we will have a limited deficit. But to think that we’re not going to see the kind of deficit figures that most tax experts have modeled is a mistake. No doubt about it, this new tax law is going to lead to serious deficits in the long term.

Lucy: Experts say that the budget deficit will increase by around 1.5 trillion dollars.

Ajay: My guess is that it will probably about a trillion-dollar deficit or more.

Lucy: In what I have read, many claim that this is a continuation of neoliberal policies implemented in the 1980s. Can you speak to some similarities or differences from the other big tax reform of the ‘80s to the one that we’re seeing today?

Ajay: I think you’re right that the last big tax reform was in the 1980s. When Reagan first came into office, this was one of his hallmark campaign promises and he filled it. He lowered rates dramatically. But in ‘86 they also did something else. Tax experts call it broadening the base. They got rid of a lot of things that were accepted tax benefits: deductions, credits, and exemptions that were making things not taxable. In other words, they struck their bipartisan agreement: the Republicans wanted to lower rates, and the Democrats wanted to make sure the base was broader to make more things taxable. So in the end, the ‘86 Reform Act was revenue neutral. The other thing about back in ‘86 that’s different is that Republicans and Democrats both cared about deficits.

There certainly was a laissez-faire market-oriented deregulatory turn with the Reagan administration in this country, and that meant lowering taxes. But there was still some concern about deficits, because Ronald Reagan did raise taxes later in his administration. People forget about that. Yet, that seems to be gone now: among the Republicans, a large deficit doesn’t seem to matter.

Lucy: With regards to these tax cuts, is the question that people do still believe that trickle down will work or is there something else going on altogether?

Ajay: If you consider the 1940s, the post-war period, the Republican Party of Eisenhower and even Nixon was not talking about trickle-down. Trickle-down is really a tribute to Ronald Reagan. Something happens in the 1970s as a result of the OPEC crises, the stagflation and the recession of that time period where the Republican Party fundamentally changes. There’s a dramatic shift in thinking among Republicans, and many others, including many of the economists who end up persuading Republican lawmakers away from being concerned about deficits. Eisenhower, Nixon, and other Republicans were very wary of tax cuts that would lead to deficits. The Republicans were deficit hawks. When Reagan, Thatcher, and other far-right leaning conservatives took office, tax cuts became the major policy issue that drove their philosophy.

I think part of their reasoning is based in “trickle down” as you suggest, but it is also the “starve the beast” notion. They’re coming in on a wave of anti-statism. Part of the rationale here is that if we cut taxes, we can make an argument for trickle down, but more importantly if we cut taxes then we’re going to be reducing government revenue. If you reduce government revenue, what are you doing? You’re starving the beast. George W. Bush cut taxes, for example, but he also increased Medicare through the prescription plan. So there isn’t a direct correlation between reducing taxes and reducing government spending. We’ve seen just the opposite in certain time periods where taxes have been cut, but the government spending has gone up. And so what does that mean? Bigger deficits.

Lucy: Some of what you write about academically is about the relationship between tax and citizenship and subject-hood—who gets to be like an American and under what conditions. Thinking about that background, what can you tell us about what is happening right now with Trump’s America First program?

Ajay: One thing we seem to be seeing is that the Republican Party seems to be ignoring how many people pay taxes. I call it fiscal citizenship: the notion that people, by paying taxes, are part of a community. In other words, there isn’t just one form of taxation besides the income tax. There are many immigrants who pay these taxes. In that sense they are, in fact, contributing to our society. They may not be paying income taxes, because they don’t have a social security card, but they are certainly paying taxes in other ways. If they’re renting their homes, they’re indirectly paying property taxes to a landlord; if they’re buying goods in markets, they’re paying sales taxes, and all those other ways. That is, to the degree that fiscal citizenship reflects that contribution, I think the Trump administration is really missing the boat. They don’t really seem to understand how the immigrants that they’ve singled out as somehow unworthy of citizenship are already citizens by other markers.

Ajay K. Mehrotra is professor of law at the Northwestern Pritzker School of Law. He is also currently the executive director and a research professor at the American Bar Foundation (ABF).

 Cite as: Mehrotra, Ajay K. 2018. “The Politics of Taxes.” Anthropology News website, May 14, 2018. DOI: 10.1111/AN.854

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