January 12, 2018

The Story of Declining Livability

Why the New Tax Plan is the Wrong Approach

By Ron Stubblefield and Denzel Caldwell

As an observation, policy conversations often take for granted why we care about growth in wealth and productivity.  The reason we care about this growth stems from the fundamental underpinning of economic demand. Demand is driven by the populace’s overall satisfaction of an available set of goods and services to meet their fundamental needs,  desires, and preferences.  Ideally, if we can grow the set of available goods and services people can choose from to meet their needs, desires, and preferences,  we can maximize social welfare. This is because we can leverage this growth to reduce the cost to meet demand. This enables us to increase livability within society while minimizing, and ultimately eradicating, the constraints of scarcity on society at large.  The United States has indeed seen annual average growth in wealth and productivity since 1947, and economic growth since the 2008 recession. Theoretically, then, the nation should be seeing an increase in overall livability.

Despite this growth in wealth and productivity, however, livability standards are in decline in the United States, according to the recent report measuring the livability of each country issued by the Social Progress Imperative. The United States currently ranks 18th in overall livability. More importantly, our nation’s ranking has declined each year since 2014, the first year these standards were measured and reported.  

This decline in livability is driven by declines in:

  • Access to water and sanitation services;  
  • Ecosystem sustainability;
  • Health care access, and quality, leading to premature deaths);  
  • Access to healthy food to meet nutritional needs;
  • Life Expectancy; and
  • Access to information and communication resources (despite being home to Silicon Valley).

And increases in:

  • Suicide and other preventable deaths due to inadequate investment in mental health care;
  • Traffic deaths and other issues of personal safety; and
  • The erosion of civil liberties and political rights.

When reviewing this, one must ask the following question: given that the nation has the fifth highest GDP per capita, which has also declined in terms of dollar value and international ranking since 2014, why are we seeing this decline in livability?

The nation has made significant economic progress over the past 50 years. Unfortunately, the  gains from  our progress have not been fairly or justly distributed. GDP growth in the United States has averaged 3.22 % per year since 1947. However, as outlined by the Economic Policy Institute, wages have stagnated for middle class Americans and have outright declined for lower wage works since the 1970s, despite increased overall productivity. This leads to growing income and wealth inequality, as highlighted by the following charts from the Urban Institute:

As estimated by the Economic Policy Institute, over 80% of this nation’s economic growth has been captured by the 1%. This group, as outlined by this study of US Tax Return Data, consist of financers, managers, supervisors, Wall St. professionals, and investors of accumulated generational wealth. Stated differently, this growth is driven by rapid increases in executive compensation and  investor value. This is despite the fact that, a series of studies highlight that the value of this growth is driven principally, not by investors nor CEOs, but workers and consumers. However, neither workers nor ordinary consumers received, in aggregate,  close to their fair share of the growth as illustrated above.  In fact, they have either received nothing or lost share value during this period of growth to the benefit of a privileged few.

While this is occurring, the following items have seen price increases that exceed the growth in inflation and wages:

  1. College Tuition-Which grew by 225% for public institutions from 1996-97 Academic Year as outlined by the College Board;
  2. Prescription Drugs-Which grew by 174% since 2005 per an AARP study;
  3. Gas Prices-Which grew by an annual rate of 3.4% over the past 20 years, eclipsing inflation by 1.3 percentage points per the U.S. Energy Information Administration;
  4. Housing and Rentals-Per the U.S. Census Bureau housing prices have doubled over the past 17 years. This growth ranges from housing price growth of 74% in St. Louis to 257% in San Francisco. Further rents increases by more than 20% since 2006 while incomes declined or stagnated since; and
  5. Food Prices-Which have grown from a range of 100% for apples to over 1100% for corn and potatoes since 1960:

Most Americans are not experiencing benefits from growth indicated by increase in success in the stock market or through market markers such as GDP, when one considers inflation, stagnant wages and the ever increasing cost to survive. Proving trickle-down economics as a farce, otherwise companies such as AT&T could already pay $200 million of bonuses out of $13 Billion in profit before the tax breaks (and agreed to do so before the tax breaks only because of union pressure and negotiations), it is no wonder the majority of  Americans are not better off. This is then further exacerbated by corporations gaining political rights and protections at the expense of the ordinary citizen; voter suppression efforts; the expansion of the police state;  recalcitrance against efforts to address climate change; increased growth in gender and racial wage and wealth gaps; reductions and  of health care services for women, children and the elderly; the deterioration of the public school system, roadways and waterways; and the fact most of the gains in income that have been captured by the 1% are not subject to FICA which is why Social Security is in crisis.

In this climate, one would think that the focus would be on developing a political agenda focused on addressing our declining infrastructure, increasing health care access and quality, protecting our civil liberties, tackling climate change, and improving opportunity for all Americans while curtailing the growth and wealth and income inequality. Naturally this focus is supported by the evidence, which empirically demonstrates that domestic spending on infrastructure and social services does significantly more to strengthen the economy than tax cuts. The evidence also shows that tax breaks for wealthy corporations and individuals cost twice as much to the economy than they ever generate for the economy.

Despite the evidence, the GOP pushed a tax act that will add at least $1.5 trillion to the national debt over the course of ten years while cutting the top corporate income tax rate from 35% to 20% (despite the fact many corporations were initially paying even less than this already due to other provisions of the tax code), reducing long term tax liability on foreign made income which incentivizes more income being pushed to foreign tax havens, increasing  the limit on the estate tax (thus shielding more wealth from taxation), enabling high earning small business owners such as hedge fund managers, doctors, lawyers, and consultants to pay a lower tax rate via the use of pass through vehicles as a tax shield, providing expanded tax protections to the Real Estate industry(where President Trump spent most of his career), and enabling those who can afford to pay for private school to use 529 plans to pay for school while minimizing tax liability at the expense of those who cannot.

It is for these, and other, reasons why many economist signed an open letter opposing this tax plan. It is is the collective belief of over  ten and half pages worth of economist from leading institutions who are signatories to this letter that this tax plan will work to the detriment of the middle class, working class, and the nation at large

Because nothing comes for free, the tax plan comes with the following eliminations and budget cuts:

  1. It eliminates the household member personal exemption while reducing eligibility and ease of obtaining earned income tax credits;
  2. It places a cap on the mortgage interest deduction for newly purchased homes;
  3. Limits the ability to deduct taxes people pay to state and local governments up to $10,000;
  4. It requires cuts to be made from the Medicare Program;
  5. It also requires cuts to be made from Medicaid and other entitlement programs;
  6. It also assumes that there are  additional cuts to HUD, CHIP, Education, etc;
  7. It then adjusts the tax rate higher over time (bait and switch at the expense of future taxpayers); while making it easier for the wealthy to shield income and wealth from taxation ; and
  8. Providing incentives  that makes it cheaper for corporations to automate and layoff employees as opposed to creating new jobs for the 6.6 Million Americans who are currently unemployed members of the labor force, and the record high 95 Million Americans out of the labor force altogether as outlined in the most recent jobs report

At a time where we as a nation are facing declining livability due to an assault on the economic and political power of the many at the expense of the few, the GOP’s recent tax bill only doubles down in this attack.

By cutting Medicaid funding, the GOP tax plan would reverse Obamacare’s gains while exacerbating health care disparities in the process by reducing funding available to State Medicaid programs.  This would be compounded by the elimination of the medical expense deduction, which exists to subsidize out of pocket health care costs. In a time of rising health care costs, cutting Medicare and Medicaid will only fuel higher cost rate growth. When coupled with the repeal to the individual mandate, which exists to get those who are low risk individuals into the insurance market to lower the cost of healthcare for those in need, and you will only watch health care outcomes further decline in this country due to higher health care costs that people cannot afford.

By further protecting wealth and high income in a period of growing inequality, the GOP tax reform plan only fuels gap growth. These gaps include, but are not limited to, higher student loan debt, lower home ownership, higher interest on debt, poorer health, limited educational attainment, limited access to resources, limited access to affordable housing and effective transportation, racial and gender wealth gaps, etc. The GOP  tax plan curtails many of the redistributive aspects of the existing tax code by not only allowing for the greater retainment of wealth, but providing greater tax cuts as a percentage of total wealth to high income earning persons who tend to be wealthier. These are financed by everyone else in either increases in tax liability in the long term, or in reduced social services altogether. This is most notable with the future of the earned-income tax credit, which low income families depend on. Due to changes in the the way that is calculated, we are stripping these families of at least $19 Billion in needed resources. Further, the new social security number submission requirements make it even harder to claim these resources, even if one is entitled to them.

This redistributive aspect of the tax code is then further eroded by the increase of estate tax limits, allowing more wealth which avoided tax to be shielded from taxation.  Consequently, the GOP  tax plan further advances wealth inequality which ultimately advances poverty and substandard living conditions leading to decline in livability within our country, and creating the most impoverished locations in the developed word as noted by the UN’s recent trip to Alabama.

This effect is then further enhanced by the elimination of state and local tax deductions. As background, these deductions exist to protect a state and localities’ taxable resources while better aligning one’s tax liability with their effective ability to pay. Eliminating this deduction increases the cost of state and local government expenditures.  This will force states to either increase taxes, thus offsetting any benefits of the GOP Tax Cuts, or cut services and infrastructure development (which our infrastructure currently has a D+ rating from the American Society of Civil Engineers) to the detriment of the taxpayer. More troublingly, is the fact this provision conspicuously punished residents of higher income states that happened to vote against President Trump.

Further, this tax plan will hurt access to affordable housing. The GOP tax plan places new  limits on how much one can deduct  payments made for mortgage interest and property taxes. Presently, these deductions subsidizes the cost of homeownership. By cutting the maximum value which can be deducted, two new behaviors are now incentivized. First, developers are less inclined to build new housing, thus reducing the generation of new housing. Second, due to the lack of subsidization for high cost housing, many people will ultimately turn to utilizing cheaper forms of housing. This leads to three implications. First, in the middle of a nationwide affordable housing crisis, which can only be fixed by increasing housing supply at a faster rate than housing demand grows, you only exacerbate this crisis.

Second, those who would otherwise pay for higher cost housing now look to traditionally cheaper forms of housing, thus growing demand. Due to this growth of demand and limit on the growth of supply, we are doubling down on the affordable housing crisis. The third effect is that this tax decision limits the growth in housing values. Many Americans whose limited wealth, ability to retire comfortably, and whose social services are dependent on home values will see an erosion on all these fronts. And they do so while Social Security is in a crisis because much of the growth in income necessary to pay for it is shielded by FICA limits which allow that funding to not be placed in Social Security, but retained by the 1%.

This tax plan, as expressed by many economists, grows the ratio of debt to GDP to levels which promote a significant recessionary risk.

Further, because the tax plan does not pay for itself, it requires mandatory cuts to the social safety net due to the PAYGO rules in place. As background context, in 2010 Congress reinstated the PAYGO financing rule. Very simply, this rule requires that any cut in taxes must be offset by either an increase in another tax or cuts to entitlement spending.  Since the reform creates a $1.5 trillion deficit, this is going to be paid for by cuts to the social safety net. A social safety net is important to mitigate the impact of poverty on people’s lives. When one cuts the safety net while investing in a tax plan that introduced the moral hazards discussed within, you are creating a tax plan that penalizes minorities and the poor for being poor and minorities. This is also done under the belief that trickle down economics works.  

The problem is that trickle down economics does not work. When last applied, Reaganomics lead to high growths in wealth and income inequality, increases in the national poverty rate, increased the national debt by 186%, failed to grow the economy to pay for the tax cuts, grew the trade deficit, failed to cut government spending while increasing spending in suboptimal areas for economic growth, and curtailed investments in human capital. Only the insane expect different results from the same approach. And that is exactly what is being witnessed today in Washington-despite all evidence to the contrary that tax cuts like the ones enacted do not lead to job and wage growth, but instead lead to declines in economic performance and livability standards for the nation. This decline will then be further exacerbated by the fact this tax plan is expected to reduce charitable giving by $20 Billion per year.

To go back to the opening paragraph, growth in wealth and productivity does not automatically improve livability.  What is often taken for granted in policy conversations about  is the question of distribution. As a matter of policy, how that growth is or is not distributed is the ultimate  determinant of increases or decreases to livability.  In a climate of rising wealth and income inequality financed at the expense of most Americans, livability in this country will continue to decline no matter how much growth  in wealth and productivity is generated moving forward.

If America is to be the world leader in livability, then we need a political and economic agenda that does not come at the expense of most Americans. This is not to say the wealthy are not entitled to political and economic rights and liberties. This is to say that the wealthy are not entitled to more rights and liberties than everyone else on the basis of that wealth and at the expense of the labor,  rights, and liberties of others. This means we need a brand new agenda and tax plan for America that places people over profits while putting the 99% ahead of the 1%. This means a political and economic agenda which prioritizes investments in human capital, infrastructure development, health care reform, environmental sustainability, information access, and the expansion and protection of political rights and civil liberties for all Americans while curtailing those of corporations and the privileged few. This is what drove Brand New Congress’s creation-this is what Brand New Congress stands for.


About the authors

Ron Stubblefield is a Baltimore Corps Fellow, where he works in local economic development. Ron volunteers with Brand New Congress by contributing to platform and policy development, and commenting on the issues that matter to voters.

Denzel Caldwell is a graduate student at the University of Oklahoma, earning his Masters in Applied Economics. He is a 2014 graduate of Morehouse College and a native of Nashville, TN.

January 12, 2018