It’s taken nearly 100 days, but Donald Trump has finally found a tax proposal he can get behind. And as befits his desire to reinvigorate America’s working classes, he’s aiming straight at, um, the amount of income tax paid by law-firm partners and real-estate moguls.
Trump is going to spin this as “something-something entrepreneurship something small business something engine of the economy something something job creation.” But make no mistake: This is a straight up multibillion-dollar gift to the rich, at the expense of anybody who has a need for job security or a regular paycheck.
In any economy, the vast majority of workers need predictability in terms of income. We need to pay for food, housing, and all the other necessities of life—and that means knowing how much we’re going to get paid. But then there’s a small group of people, let’s call them “the rich,” who don’t need that kind of predictability. Because they’re rich, they can live with a lot more volatility of income. When you have a lot of money to start with, and you’re making more than you spend on an annual basis, you can put up with a bit of variance in your month-to-month income.
The power dynamic between the two groups is simple. If you need a predictable paycheck, then you need to be able to find an employer who can give you a job, and who will pay you less than the value you contribute to the organization each year. You will also pay a predictable rate of income tax, based on the W2 income that your employer reports to the IRS. If you don’t need a predictable paycheck, on the other hand, you’re much more likely to be able to capture all of the value you create each year—and you also have the luxury of being able to set up corporate structures that minimize your annual taxes.
Those corporate structures are likely to explode in popularity if Trump’s tax proposal gets passed. That’s because if Trump gets his way, he’s essentially going to take the income tax paid by people who own companies, and slash it from 39.6% to just 15%. That’s an astonishingly low income-tax rate for people who are often earning millions (or even hundreds of millions) of dollars per year.
Trump’s plan is to paint the rich as being “job creators.” Which is a tiny bit true: Most job creators are rich, and most employees are employed by a corporation. But that’s not remotely the same as saying that most rich people, or even most corporations, are job creators. In fact, 77% of businesses with income between $10,000 and $10 million pay no wages at all. But they’ll get Trump’s tax break, all the same.
It’s not hard for rich people to turn themselves into a company, especially if doing so saves them millions in taxes. You get a good lawyer, create a company, make sure that the bulk of your income flows through the company rather than to you personally, and you’re done. Rich people don’t always do that right now, because it doesn’t really help: They pay 39.6% on their income, whether it comes directly to them or whether it’s first passed through a corporation. But if the Trump plan gets passed, then everybody who can do it will do it. After all, it would mean an immediate reduction of their income taxes from 39.6% to just 15%, even if they don’t employ anybody at all. Let’s say you’re a Hollywood star, for instance, getting paid $10 million for a movie. Right now, you have to pay $3.96 million in taxes, but under the Trump plan, that amount can be reduced to $1.5 million just by making sure that the studio pays your production company rather than yourself.
Even employed people are going to start taking advantage of this loophole. Take TV anchors, for instance. They all have contracts already, and most of the time the contract says that the anchor will be an employee of the corporation. But it’s the contract that ties the anchor to the company, not the fact that the anchor is an employee. If the company can make the anchor happier by paying her company instead, they’ll do that, especially because that means they need to pay less money in things like payroll taxes and benefits. And the talent will choose to get paid through their own corporations, because the amount they save in taxes will dwarf the extra amount they need to pay for health insurance and social security.
Sometimes, you don’t even need to lose health insurance. Professional sports teams, for instance, self-insure—they pick up healthcare costs themselves—and so athletes can always be added to the roster of covered individuals whether they’re employees or not.
The not-rich can become companies too, although no one’s going to make it easy for them. If you’re toiling in the gig economy, working independently on platforms like Etsy or Uber, this tax bill is probably good news for you, at the margin.
Which is the secondary purpose of this bill. It not only makes the rich richer, it also makes the plight of everybody else even more precarious, because it institutionalizes an incentive to not get a stable, full-time job.
It’s all part of the libertarian dream, where there is no such thing as society and where even basic risk-pooling—where people get together so that they can collectively look after those who get sick—is considered anathema. When companies self-insure, as nearly all large companies do, they essentially force their healthy employees to pay for the costs of those with large medical bills. But if you’re not employed by a company, you lose that safety net, and you’re on your own, as Paul Ryan and Ayn Rand intended, at the mercy of the insurance companies.
One of the big differences between the rich and everybody else is the way that they look at steady full-time work, with an employer and benefits and a decent paycheck. For most of us, that’s an important and central part of our lives: Either we don’t have it, in which case we want it, or we do have it, and we’re glad that we do. The rich, by contrast, tend to look down on such card-punchers: They valorize “entrepreneurship,” striking out on your own, being your own boss. All of which sounds great in theory. In practice, however, it often means weeks on end with no income, never knowing when the next check is going to arrive, a debilitating constant struggle to find work, and a very high probability that your business will fail.
When Trump cuts taxes on corporations, then, he’s basically this guy:
The Trump tax plan is essentially a tax cut for people who’ve already won the lottery of capitalism—precisely the people who need a tax cut least. Lots of people enter that lottery, and most of them never win. The trick to making capitalism work is to make sure that when someone loses, they have a welfare state to fall back on. That is what encourages risk-taking. Not tax cuts for the people who have already won.