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Democrats and Republicans are both right about tax cut's effects

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President Donald Trump greets Sen. Tim Scott, R-S.C., on stage during a bill passage event on the South Lawn of the White House in Washington, Wednesday, Dec. 20, 2017, to acknowledge the final passage of tax cut legislation by congress. (AP Photo/Carolyn Kaster)

In a recent column, I argued that Democrats are missing the point when they attack the Republicans’ tax cuts on the grounds that they failed to “pay for themselves” after all. My argument was, basically, who cares if the tax cuts add to the deficit, as long as they improve economic conditions without creating other problems?

I focused on inflation, which no credible agency expects to get out of hand as a result of looming deficits, but inflation isn’t the only relevant concern. Another big one is the impact the tax cuts will have on the distribution of income (and wealth) in the U.S.

And on this point, Democrats are right to cry foul. But what are they prepared to do about it?

After promising to look out for the “forgotten man” (and at a time when the gap between America’s richest and poorest was already growing wider than ever), the Republicans structured the tax cuts to ensure that the lion’s share of the riches would be swallowed up by large, profitable corporations and the wealthiest people in the country. The Democratic talking points wrote themselves: “The Republicans are looking out for the rich and powerful, not for struggling families and hardworking Americans like you!”

Voters appear to have gotten the message. By 2 to 1, Americans say the tax cuts favored “large corporations and rich Americans” over “middle class families.” And it’s not some misguided perception rooted in Democratic talking points. As the chart shows, it’s definitely the reality.

The data come from the Tax Policy Center, which estimates that in 2018 the average benefit going to those in the bottom income quintile (those making less than $25,000) will be just $60. Not much to write home about.

Even the middle quintile (those with income between $49,000 and $86,000) nabs an average of just $930, whereas those in the top fifth seize an extra $7,640. But the real windfall — enough to buy a new Tesla Model 3 — goes to those in the top 1 percent.

But here’s the problem for Democrats. Even though voters see the tax cuts as mostly a giveaway to the rich, those same voters are pretty evenly split when it comes to supporting the cuts in general. Why? Some of it is pure partisanship, but I suspect it also has something to do with the fact that getting something, however little, is considered better than getting nothing at all.

Does this mean that Republicans can safely ignore the distributional effects? Don’t bet it on it.

Recent research by Moody’s confirms that the tax cuts are contributing “to the widening of the U.S.’s inequality by exacerbating income and wealth concentration.” Should these trends continue, Moody’s warns, “social tensions will continue to rise, leading to a more fractious political landscape that increases political risk.”

Uh-oh. Political risk. President Donald Trump senses the vulnerability.

With just over two weeks until the midterms, most Republicans understand that their signature legislative accomplishment isn’t popular enough to run on. The president senses it, too. He spent the last couple of weeks touting a secret plan to pass a genuine middle-class tax cut and struggling to defend the already passed cuts as good for everyone.

At a recent rally in Montana, the president rejected the idea that his tax cuts were only benefiting an elite few, saying: “Republicans passed the biggest tax cuts in American history, the biggest in American history. Everybody in this room is better for them. Everybody is better for them.”

In a sense, he’s right. But so are the Democrats. How can both be right?

Trump is right because in absolute terms, everyone is an average winner. From those in the bottom quintile all the way up to those at the top, the average taxpayer does better. But Democrats are right because in relative terms, some people do really, really well, while others barely even notice they’re “winning.”

The Democrats are a long way from wielding the kind of power the Republicans have held for the last two years. But suppose that day comes? What are they supposed to do with this semi-popular, on-average-beneficial thing they could potentially inherit in, say, 2020?

Stay tuned …

Stephanie Kelton is a professor of public policy and economics at Stony Brook University.

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