Voodoonomics: How successive governments impoverished Malaysians


March 15, 2018

Voodoonomics: How successive governments impoverished Malaysians

by P. Gunasegaran@www.malaysiakini.com

A QUESTION OF BUSINESS | At least two ways – both very wrong in the longer term – were used to support the export sector in Malaysia in believing that growth through exports was the right thing for a developing country like Malaysia.

Even though there was economic growth, which means more wealth was created, there was impoverishment too. But how could that be? Basically, those who were rich got richer and those who were poor got poorer.

How did the government achieve export competitiveness over the years? Through two measures. First, they reduced the number of things Malaysians generally could buy by opting for a policy which weakened the ringgit. And two, they imported poverty by allowing the uncontrolled import of cheap labour.

Both improved Malaysia’s competitiveness not by raising productivity, although there was some of that, but by cutting down the cost of labour through the import of cheap labour (imported poverty) and lowering the relative value of the currency or currency depreciation, effectively lowering costs in US dollars.

Let’s look at these measures in turn.

1. Currency Depreciation

The ringgit fell in value from around as strong as around RM2.2 to the US dollar in 1980 to around RM4.0 now. The US dollar appreciated by over 80% during the period and the ringgit lost over four-tenths of its value relative to the US dollar.

Consider what that does: if an imported food item cost US$1, it was RM2.2 in 1980. But it rises to RM4 now, an increase of some 82%. But consider it now from the exporter’s perspective: If he sells something for US$1 overseas now, he gets RM4 versus RM2.2 then, again 82% more.

Unless he shares this benefit equitably with the worker – and in practice, he does not – a depreciated currency is a subsidy to exporters and a tax on workers because everyone depends on imported goods and even services for a good part of what they consume. Think in terms of food, clothing and buying from foreign chains.

While a depreciated currency improves the appearance of export figures in ringgit terms, it is still not a long-term solution for the betterment of people because it directly impoverishes a major part of the public by reducing their purchasing power – the amount they can buy with the ringgit.

2. Importing poverty through cheap foreign labour

The next major stupid move successive governments did was to import cheap labour from overseas. Until today, this is largely from Indonesia, Philippines, Bangladesh and India.

In the 1980s, this happened in the plantations affecting mainly Indian Malaysians who were displaced from the estates due to cheap Indonesian legal and illegal labour. Soon, this imported cheap labour spread into all areas, heavily depressing labour wages, affecting all Malaysian labour including Malays.

Was wealth ever created?

How terribly short-sighted! While developed countries were importing skilled and white-collar workers from developing countries, Malaysia, still very much a developing country then (and still is despite what others say), was importing cheap labour from other countries, depressing wages of a large section – probably as much as 50% – of its own workforce.

What kind of a madness was this that at the same time inhibited improved productivity by opening the tap to cheap labour and delayed the invention and adoption of new processes to reduce labour input while improving productivity per person through training and automation?

Till this day, when employers complain of labour shortage, it irritates one to see imported labour at car parks, for instance, being used to hand out parking tickets even after the process has been automated at the entry points.

Drive further in and you see others directing traffic and blowing loudly on whistles. The price of labour is so cheap that imported labour is used for such menial tasks. Are Malaysians so illiterate that they can’t read and follow signs?

As if the whole situation is not ridiculous enough, government officials and ministers regularly regurgitate garbage by saying that labour imports are necessary because Malaysians do not want to do these jobs. Pay them enough and Malaysians will do the job. Perhaps the ministers should send their daughters and sons to do this kind of work for a pittance.

And as many millions of workers are imported, a thriving business sanctioned by the government sprouts up living off the blood and sweat of workers and exploiting employers by making both parties pay ridiculous amounts for legal import, driving them towards employing illegal workers.

One may ask, what then is the alternative? If you want a broad section of the public to get richer and more affluent, the only way is to create wealth for everyone.

Image result for Productivity Matters

That means improving the overall productivity or output per person so that he or she deserves a higher wage. Not by creating wealth for some and impoverishing most via currency depreciation and depressing wages.

Ah, yes but how do you do that? There is only the hard way. First, improve the quality of education for all and focus on the right kind of education which will make people employable.

Next promote the kind of industries which will increase the dollar value of output per person and ensure that productivity gains drive wealth creation, not cost-cutting.

Third, ensure that as much as possible of the resources go towards improving educational opportunities and building the necessary infrastructure for continuing productivity improvements with as little leakage as possible.

How much of this has been done since independence? Little.

The frightening part

According to Khazanah Research Institute’s (KRI) ‘State of Household Report’ dated November 2014 and Employees Provident Fund (EPF) data on individual incomes which includes salary or wages, overtime payments and bonus in 2013:

  • 96 percent of active EPF members earned less than RM6,000 a month
  • 85 percent less than RM4,000
  • 62 percent less than RM2,000

That’s a telling figure – 62 percent of workers earn less than RM2,000 a month. How can many of them live comfortably with such an income, especially when they have children to support?

Meantime, the median monthly salaries and wages per month for individuals was RM1,700 in 2013 (see chart below). That means half of all workers get this much or less, KRI explains.

And what does an illegal Indonesian worker earn in a month these days? In March, there are 27 working days including Saturdays on which they typically work as well. Industry employers say Indonesian illegal workers cost RM70 a day, casual, that means not contracted. Multiply that figure by 27, we get RM1,890 for the month of March.

Now, the frightening part is that this is more than the RM1,700 median salary for Malaysia which means that 50% of Malaysians earn less than casual Indonesian workers!

Clearly, the majority of the country lives in poverty. Income gains for the wage-earner have not gone up enough. And for a country like Malaysia with abundant resources and which once had the highest income in Asia after Japan, that reflects a failure of government.

If one needs an example of successful economic development, you just need to look across the Causeway which started pretty much from where Malaysia did and look where it is now with the adoption of the right policy mix coupled with an incorruptible government.

Image result for Quality Education crucial Singapore

The currency–the Singapore Dollar– is now valued at three times Malaysia’s against about parity in 1980 and its per capita income is among the highest in the world.

We are not saying that Singapore is the perfect state but in terms of economic development, they have beaten us by far and continue to do so.


P GUNASEGARAM still hopes that sometime in the future (perhaps soon?) there will be a government not only of the people but for the people. E-mail him at t.p.guna@gmail.com

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the US​ Economy.


February 11, 2018

The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the US​ Economy.

Cut PMO spending, mega-projects to curb ballooning public debt, says Dr Jomo


February 4, 2018

Cut PMO spending, mega-projects to curb ballooning public debt, says  Dr Jomo

by Bede Hong

https://www.themalaysianinsight.com/s/36041/

Cut PMO spending, mega-projects to curb ballooning public debt, says economist

Economist Jomo Kwame Sundaram says there is urgent need for greater transparency and accountability in ‘off-budget’ infrastructure spending, which is not part of the federal government budget and is thereby unaccountable to Parliament. – The Malaysian Insight file pic, February 4, 2018.

UNCHECKED overspending by the Prime Minister’s Office and disproportionate allocation of development funds have led to the official government debt fast approaching RM700 billion, said a prominent economist.

Former United Nations Assistant Secretary-General Dr. Jomo Kwame Sundaram said there was an urgent need for greater transparency and accountability in “off-budget” infrastructure spending, which is not part of the federal government budget and is thereby unaccountable to Parliament.

“What Malaysia needs now is more appropriate development expenditure, not yet more operating expenditure, especially for the PMO, which has grown more than tenfold and has centralised power like never before,” Jomo told The Malaysian Insight in a telephone interview recently.

“Meanwhile, most infrastructure spending is not on the federal budget, and often involves dubious public-private partnerships, further reducing transparency and accountability, as (witnessed in) the recent rush to start the ECRL (East Coast Rail Line).”

Jomo recommended that allocations to the PMO be slashed to lower rising debt. The PMO was allocated RM17.43 billion in Budget 2018, almost double the RM8.938 billion it received in 2008.

Image result for tun razak exchangeTun Razak Exchange

Mega-projects such as the ECRL, Tun Razak Exchange, and Bandar Malaysia should also be scrutinised by an independent bipartisan parliamentary committee chaired by a member of the opposition party, said Jomo.

In the case of the 688km ECRL, should the rail system, which costs RM55 billion, nearly 8% of Malaysia’s public debt, fail to generate the expected level of demand and return on investment, it can put the government highly in debt to China.

Image result for ecrl project malaysia

“ECRL would never pay for itself. Right now, the estimated government debt is large and it is growing very fast. When you talk about debt, you have to consider both the official debt as well as the government guaranteed debt.

“And because there’s no accountability for the government guaranteed debt, there’s a lot of room for hanky-panky. There’s hardly any reporting and so on.”

Jomo said there was also a need to prevent abuse of public-private partnerships, as “ultimately it is the public that bears the costs or the bulk of the risks, while the profits mainly accrue to the private partner”.

Jomo, a Visiting Fellow at the Khazanah Research Institute, has been a vocal critic of the government’s rising operation expenditure, which has grown an average 6% yearly for the last 10 years.

Operations spending grew from RM123.10 billion in 2007 to RM219.91 billion in 2017, exceeding Malaysia’s revenue which grew at an average of 4.9% yearly since 2007, when revenue stood at RM139.9 billion to RM225.34 billion in 2017.

Federal debt during the same period rose 10% annually from RM123 billion in 2007 to RM687.43 billion as at September 2017.

A recent report by The Edge Markets revealed that going by an annual growth rate of 10.7%, Malaysia’s debt could reach RM1 trillion by 2021 on excessive spending.

By the same projection, Malaysia’s debt could reach RM2 trillion in 2028 and RM3 trillion in 2032.

Funds diverted to service debt*

View story at Medium.com

 

Jomo said high public debt, if left unaddressed long-term, would put the country at risk of default.  “Taking on debt for productive uses is generally desirable. However, much of the recent debt is not being used productively. Also, the government should be paying down debt or reducing debt when the economy is growing and incurring debt when there is a slowdown. However, for the last 10 years or more, we have just been taking on more and more debt, even when we claim the economy is growing well, which is usually seen as fiscally irresponsible,” he said.

Jomo said servicing the interest for high public debt diverted funds from other sectors, which would benefit the people, such as healthcare or education.

“Apparently that is the case in Malaysia where, allocations to public universities have been cut by more than half in the last two years,” he said.

While he acknowledged the need for development expenditure for the economy to progress, Jomo said the funding should be more targeted and “appropriate”.

“They should fund research, for example, to increase the productivity of oil palm by increasing its productive life span to 90 years from the current 25 years.Malaysia’s most successful industrialisation story is not electronics, which is controlled by foreign companies but palm oil, which is controlled by Malaysia,” he said.

* https://medium.com/@syahir21/whos-selling-oil-snake-to-whom-585c9edecf8d

View story at Medium.com

Economic Policy making under Trump Presidency


January 28, 2018

Economic Policy making under Trump Presidency

Commentary from Project Syndicate

by Edmund H Phelps

http://globalgeopolitics.net/2018/01/26/economic-policymaking-in-the-age-of-trump/

We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.–Edmund

 

Image result for Donald Trump

For decades, America has suffered from a long-run productivity slowdown that has sapped the economy of its former dynamism, and left median wages stagnant. Will the tax legislation recently enacted by congressional republicans and the Trump administration finally reverse this trend, or will it make a bad situation worse?

PHILADELPHIA – We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.

My subject here, however, is the tax legislation that Trump signed into law in December, on the promise that reducing the rate at which corporate profits are taxed will help an ailing US economy.

Political Responses to  the Malaise

For several decades, the US economy has exhibited various symptoms of economic malaise. Now, we have a political upheaval on our hands. While real (inflation-adjusted) median wages have been nearly stagnant for decades, private saving from profits and enormous capital gains have continued apace. As asset prices – to say nothing of the wealth-wage ratio – have climbed to vertiginous levels, established wealth has grown more powerful, and wealth managers have done well.

Worse still, in industries hit hard by foreign trade or automation, many jobs have been eliminated, and real wages have actually declined. As these new developments continued over the past few decades, they placed increasing pressure on society as a whole. Ultimately, there was an electoral realignment, marked by a shift in voting patterns among key economic constituencies.

Remarkably, neither Democrats nor Republicans seemed to register these economic and social ailments, or the consequences they could have. When Hillary Clinton launched her 2016 presidential campaign with a speech on Roosevelt Island, she focused heavily on achieving social justice for marginalized groups. She did not address the fact that, some six decades ago, the US economy lost the sustained growth it had been generating since the 1820s, despite depressions and inflationary cycles.

While Democrats became increasingly fixated on notions of “fairness” and what academics call the “just economy,” they apparently didn’t notice that the country had been operating for decades without a good economy. Countless people have had little or no chance of feeling fully included in economic life. They have been deprived of jobs that are actually engaging, and of opportunities to feel that they have succeeded at something.

As the renowned Columbia University philosopher David Sidorsky recently pointed out to me, ancient philosophers spoke of “the good and the just” (boni et aequi), not “the just and the good.” Clearly, the Democrats put the cart before the horse. First, we need a good economy. Only then can we devise a just way to reward participants for contributions that the economy empowers them to make.

An Attempt at a Cure

After securing the presidency – in addition to both houses of Congress – in 2016, Republicans have tried to run the ball through the opening left by the Democrats. Throughout 2017, they pursued a range of reforms to address weak investment and stagnant wages, and ended the year with the newly enacted tax legislation, which cuts the tax rate on corporate profits from 35% to 21%.

Economists who support the Republicans’ tax legislation have relied on a textbook growth model to claim that it will boost investment activity. According to their model, investment will drive up the capital stock until it reaches the steady-state level where the after-tax rate of return falls to the level of the real interest rate. The real interest rate is exogenous, and reflects investors’ time preferences, world interest rates, and other factors. The point where the rate of return intersects with the real interest rate is shown in Figure 1. (A more classical case, in which the rate of return is pulled down by capital accumulation, is shown in Figure 2.)

Supporters of the tax legislation reason that if the tax cut pushes up the after-tax rate of return, investment activity will increase, and the capital stock will expand, boosting productivity until the capital stock reaches a new steady state, which they calculate will happen in around ten years.

But, as is always the case with supply-side economics and more radical forms of Keynesianism, this approach is profoundly short-sighted. After ten years, there is no reason to think the faster growth will continue.

Without the same level of indigenous innovation that was achieved during the golden era of high growth rates, from the 1820s to around 1970, the Republican tax law will amount to nothing more than a stop-gap measure. And even over the next decade, it will not deliver truly rapid growth.

The Problem with Models

More fundamentally, we ought to ask whether it is right to expect tax cuts to translate into higher productivity growth. I would argue that, because the tax package will add to the annual fiscal deficit and the public debt, it might actually block investment, and thus derail a productivity pickup.

When I was a young economist working on my 1965 monograph, Fiscal Neutrality Toward Economic Growth, I would have looked at today’s favorable short-term conditions and actually called for a tax increase across the board, in order to stanch the federal government’s fiscal hemorrhaging. A tax hike might push down bond yields, and thus bring about higher share prices and a considerable drop in interest rates over the entire yield curve, provided the US Federal Reserve didn’t offset the move by unwinding its bond holdings.

Thinking back even further, to when I was a young student, I can remember congressional Republicans voicing their opposition to fiscal deficits, and President Harry Truman, a Democrat, enacting a run of fiscal surpluses aimed at mopping up the federal debt. These policies, helped by inflation (which lowered the real value of the debt), did not lead to a depression. There was only the 1949-1950 recession.

Nowadays, a crude form of Keynesianism is so deeply ingrained in voters’ minds that any program aimed at achieving a fiscal surplus, or even balance, has become unthinkable. Yet one wonders if the new tax law will arouse worries about the sustainability of the growing federal debt, which is already high after the presidencies of George W. Bush, a supply-sider, and Barack Obama, a Keynesian. If so, such concerns would push up interest-rate risk premia in anticipation of a depreciating dollar. Yes, the Republican plan does include some provisions to raise revenue or cut spending, but that is not entirely reassuring.

Of course, those who support the law would argue that the supposed increase in investment activity will immediately push up the dollar’s exchange rate, and that the dollar’s real value would then depreciate gradually to where it had been. Otherwise, no one would want to continue holding foreign capital. This points to a paradox in the law. Trump ran on the promise of boosting American exports, but in standard models, an appreciating dollar will depress export demand.

On the other hand, a stronger dollar will prompt domestic firms in import-competing industries to cut their markups so that potential foreign rivals will be less inclined to invade the US market. As a result, wage rates might be pulled up along with the amount of labor supplied. These particular industries, then, would experience an expansion of output and employment.

An Uncertain Prognosis

But for those who do not share the perspective of the law’s supporters, this scenario is hardly a sure thing. After all, who’s to say if the tax package will drive up business investment until the marginal productivity of capital has fallen enough to raise substantially the marginal productivity of labor? That scenario might be possible; but it is in no way assured. As New York University’s Roman Frydman and I argued in a commentary last month, the real-life US economy is not a “mechanical system in which changes in tax parameters and other inputs explain exactly why and how investment occurs and the economy grows.”

Unfortunately, the economics profession has ignored the potential implications of human agency. If far more people were to start conceiving and creating innovations, investment and wage rates might rise well beyond what the textbook model would have predicted. By the same token, if fewer people engage in innovation, investment and wages rates may rise less than expected, or even fall.

In other words, the innovation factor could very well dwarf the effect of the cut in the corporate-tax rate over the next ten years. By that point, we might not have enough evidence to determine if the tax cut was effective, or merely an inconsequential drop in the bucket.

And the uncertainty goes deeper than that. The problem is not just that the traditional model’s disturbance terms may be so large that they overshadow the effects of the tax cut, but also that the coefficients for measuring the tax law’s effect on investment or wages might not even be knowable. The innovators driving (or failing to drive) gains in productivity cannot be certain ahead of time what form their new products or methods will take, or whether they will be adopted at all. How, then, could economists ever foretell precise changes in investment patterns as a result of a tax cut, or what effects new investments will have on the marginal productivity of labor?

As I suggested in November, what we call the “natural” unemployment rate can be affected by insecurity and fear. Similarly, if an unfunded tax cut conjures visions of insolvency, corporate executives might be wary of making new investments. Or they might decide to invest predominantly in labor-saving technologies, which could actually reduce wages and eliminate jobs in some industries. Given that possibility, one cannot be sure whether the tax law will have a positive or negative effect on wages, employment, or productivity.

None of this is to say that we should avoid new departures. Certainly, we must keep trying in the hopes of making progress. Or, as Candide (in the musical) tells Cunégonde after they have both endured many difficulties, “We’ll do the best we know.”

About the Author:

Edmund S. Phelps, the 2006 Nobel laureate in Economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Mass Flourishing.

© 1995 – 2018 Project Syndicate

Trump’s democratic destruction and Asian absenteeism


December 31, 2017

Trump’s democratic destruction and Asian absenteeism

by TJ Pempel, University of California, Berkeley

http://www.eastasiaforum.org/2017/12/30/trumps-democratic-destruction-and-asian-absenteeism/

 

Image result for Trump in Danang

United States President Donald Trump stands next to Vietnamese Prime Minister Nguyen Xuan Phuc at the G20 Summit in Germany on July 8, 2017. Photo by: VGP

In the twelve months since the 2016 elections, the United States has undergone an unrelenting series of attacks on its constitutional provisions, its regulatory regime, its democratic procedures and its social cohesion. US President Donald Trump has been the knife-edge of these assaults.

He has repeatedly challenged judicial and media independence. He threatens banana republic-like judicial retaliation against his political opponents. He has green-lighted white supremacy and Nazi marchers while attacking religious, racial and ethnic minorities. He has refused to enforce existing laws while his appointments and executive orders have undercut the missions of numerous government agencies. He has exploited the presidency to enrich himself and his family while following the authoritarian’s playbook by muddying the line between fact and fiction through shameless denials of inconvenient facts — whether they be the size of his inaugural crowd, the science of climate change or the conclusion of US intelligence agencies that Russian interference helped his election.

Yet his actions are hardly those of an unsupported autocrat. A Republican Congress and an animated support base provide steady enabling. They seem convinced that they are in an existential gang war, and beneath their red jerseys, they have proven themselves better armed and more willing to sacrifice principles for one-party autocracy than their blue-jerseyed ‘enemies’.

Darkening for democracy as this domestic situation is, the immediate impact on Asia is largely indirect. As US political power focuses inwardly, US engagement with Asia atrophies. Nothing telegraphs the minimisation of foreign policy more than the evisceration of the Department of State. A diplomatic novice leads it, the department faces major budget cuts, scores of senior diplomats — including 60 per cent of the United States’ senior ambassadors — have resigned while 74 top posts at the State Department remain vacant with no announced nominee.

Despite a purported concern with North Korea, the Trump administration (as of 29 November), had not even nominated individuals to fill such key posts as Assistant Secretary for International Security and Non-Proliferation, Assistant Secretary for East Asia or Ambassador to South Korea.

Some might offer Trump’s 12 day, five-nation trip to Asia as counter-evidence. Yet aside from a physical presence in the region and a number of showy photo ops, the trip generated few concrete outcomes. Trump’s ‘America First’ speech at APEC was an unapologetic broadcasting of his government’s domestic obsession and its obliviousness to the reality that the global and regional trade regime he vilified has been vital to Asia’s post-war economic success. His last-minute decision to skip the plenary session of the East Asia Summit testified further to his administration’s narcissistic approach to Asia, including its multilateral institutions.

Underscoring the absence of an integrative strategy was the schizophrenic insistence that Asian countries should cooperate multilaterally with the United States regarding North Korea but simultaneously that they should all behave unilaterally on trade and in doing so follow the lead of the US. Equally inconsistent was Trump’s decision to decertify Iran’s compliance with the nuclear deal forged by his predecessor Barack Obama and major world leaders. The signal sent to the North Koreans could not be clearer: why enter a deal with us if we are free to ignore prior international agreements?

Such diametrically antagonistic impulses have left allies and adversaries alike confused about the United States’ motives and staying power: what are the United States’ goals, what tactics will advance their implementation and will anyone be in office to advance them?

Unfair trading practices — most particularly China’s mercantilist behaviour and constraints on foreign companies — deserve criticism. But rather than aligning allies such as Japan, South Korea and Germany, all of which have suffered from Chinese practices, the Trump administration has been approaching the issue unilaterally and inconsistently, minimising the chances for support from others victimised by Chinese practices. Thus, in his recent visit to China, Trump basked in his host’s flattering pageantry while ignoring earlier declamations about trade practices. Instead, he concentrated on pressuring China to tighten sanctions on North Korea.

Meanwhile, as its democracy deteriorates domestically, the longstanding appeal of US soft power withers. Admittedly, the United States has never been especially forceful in promoting human rights and democracy in Asia. But it is difficult to convince locals that democracy and citizens’ rights remain a high priority in the face of the Trump administration’s domestic behaviour and its expressions of admiration for Asian authoritarians like Chinese President Xi, Russian President Putin, Philippine President Duterte, Thai Prime Minister Chan-ocha and Malaysian Prime Minister Najib (not to mention Kim Jong-un, whom Trump labelled ‘a pretty smart cookie’).

Not surprisingly, during his visit to China, Trump played his ‘get out of jail free’ card on behalf of three UCLA basketball shoplifters while ignoring the many prominent political prisoners languishing in Chinese prisons. As former US national security advisor Susan Rice phrased it: ‘the Chinese leadership played President Trump like a fiddle, catering to his insatiable ego and substituting pomp and circumstance for substance’.

Image result for The American eagle

The longstanding regional order now faces major challenges, and realists across Asia must deal with the United States as it is — not as they would like it to be. Thus the other participants of the Trans-Pacific Partnership have moved ahead without the United States to forge their own eleven-nation agreement (suspending provisions previously negotiated to benefit the United States).

Meanwhile, China utilises the absence of the United States and its own economic strengths to enhance its influence over regional developments. For example, Vietnam and the Philippines have reached an accommodation with China in the South China Sea while in return for an easing of Chinese economic pressures against THAAD, South Korea has capitulated to ‘three nos’ that abdicate key security options with the United States and Japan.

As the regional order shifts, it is unfortunate for both the United States and many in Asia that Washington, obsessed with its own domestic battles, is likely to observe these changes from the sidelines.

TJ Pempel is Jack M Forcey Professor in the Department of Political Science, University of California, Berkeley.

This article is part of an EAF special feature series on 2017 in review and the year ahead.

 

A sweetheart tax deal — for the Trumps


December 22, 2017

A sweetheart tax deal — for the Trumps

by Eugene Robinson Opinion writer

https://www.washingtonpost.com/opinions/a-sweetheart-tax-deal–for-the-trumps

Image result for Republicans celebrate Tax Deal

President Donald Trump with his fawning Republican legislators celebrating the historic Tax Deal

 

One of the biggest beneficiaries of the massive, slapdash tax bill that President Trump and Republican lawmakers celebrated at the White House on Wednesday will be, wait for it . . . President Trump. What a coincidence!

The rest of Trump’s wealthy family will benefit lavishly as well, including his son-in-law and all-purpose adviser, Jared Kushner. And, of course, it’s not a coincidence at all. The chance that this President would preside over a revision of the tax code without lining his own pockets was zero. Anyone who believed Trump’s claim that the tax bill would “cost me a fortune” hasn’t been paying attention.

It is not possible to calculate precisely how much money the President will save, because he — unlike all other recent presidents — refuses to release his tax returns. But the figure is surely in the millions, assuming Trump is anywhere near as wealthy as he claims. His extended clan will have plenty of liquidity for Donald Jr. and Eric to jet off to Africa and kill more leopards and water buffaloes; for Jared and Ivanka to disappear on ski trips whenever they need to claim deniability regarding the latest administration outrage; and for the president himself to consume as many Big Macs, Filet-o-Fishes and chocolate shakes as his constitution can bear.

Trump says he is worth $10 billion; Forbes estimates his wealth at $3 billion, and some analysts think the true figure is lower. Any way you look at it, however, he’s a wealthy man — and the tax bill, which awaits only Trump’s signature to become law, is designed to make the very rich even richer.

Image result for Republicans celebrate Tax Deal

Republicans celebrate tax wins as Trump fumes over FBI Russia probe

Like all 1-percenters, Trump will benefit from the lowering of the top tax rate from 39.6 percent to 37 percent. But that’s just for starters. As is always the case with the tax code, the devil is in the details.

Trump conducts his business affairs through hundreds of “pass-through” companies whose income is taxed at the personal rate, not the corporate rate. The House wanted to dramatically slash the pass-through rate across the board, but the Senate initially balked. At the last minute, however, the Senate wrote into the final bill a 20 percent deduction for pass-through income. If a taxpayer had, say, $100 million in pass-through earnings, he or she would be taxed on only $80 million; the rest would be tax-free.

t first, senators sought to limit this sweetheart deal to companies with large numbers of employees or high payrolls — unlike Trump’s pass-through businesses, which are mostly paper entities. But the final legislation gives the full deduction, regardless of the number of employees, to pass-through companies that own a lot of depreciable property, such as commercial real estate. Which just so happens to be the president’s livelihood.

It would be hard to craft a measure more tailor-made to enrich Trump and his family. If he wanted to avoid even the appearance of corruption, of course, Trump could decline to take this tax break or donate an equivalent amount to the treasury. Somehow I doubt either of those things will happen.

Trump also gets to continue using a frequently abused tax loophole called a “like-kind exchange.” Usually, if you sell a piece of property at a profit, that profit is considered income and is taxed. Creative accountants and tax lawyers came up with ways to structure sales so that they technically qualified as trades, meaning that as far as the IRS was concerned, there was no income to tax. This practice is now ending for all types of property — except real estate. Another coincidence, I’m sure.

Oh, and most businesses will be negatively affected by a measure capping the amount of interest expenses they can deduct — except real estate investors and hotel operators, which are explicitly exempted. If this were a movie, lobbyists and lawmakers would have hammered out this last provision in a back room at the Trump International Hotel.

On the flip side, Trump’s ability to deduct the state and local taxes he pays in New York would be drastically limited. But that is nothing compared to the likely upside.

Join me in a thought experiment. Imagine that the legislature of some other country — Brazil, say, or Mozambique, or Thailand — decided to rewrite the tax code, with no public hearings or expert testimony, in a way that benefited the rich overall, with maximum financial gain for businesses like that of the sitting head of gov ernment.

What would you say?I’m pretty sure you’d use the word corruption. And you would be right.