(Chris Kleponis/picture-alliance/dpa/AP Images)
This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here.
The Trump era has been defined by corruption: secret hush money payoffs, financial entanglements with foreign governments, constant grifting, and abuse of power to reward allies and punish enemies. And the most significant legislation that President Trump has signed into law—the 2017 Tax Act—is best understood as another product of Washington's culture of corruption under Republican control.
The law showered massive new tax cuts on the wealthy and corporations at a time of rising inequality, record after-tax corporate profits, unmet domestic needs, and rising deficits. These tax cuts were deeply unpopular with the American people, but demanded by the Republican Party's political donors. Given the basic mismatch between what the American people wanted on taxes and what Republicans were delivering, congressional leaders made two strategic decisions to force their bill through Congress: They fundamentally misrepresented its contents, and they sought to move it through Congress as fast as possible with minimal public scrutiny—creating a process accessible only to well-funded lobbies. The result was a massive windfall for corporate America and the wealthy, one that preserved some of the most egregious tax loopholes while carving out new ones, at the long-term expense of working Americans.
Large tax cuts for corporations and wealthy Americans are extremely unpopular. According to a Pew poll taken in April 2017, the thing that troubled people most about the federal tax system was not the amount they paid in taxes, nor the complexity of the system. By huge margins, the top complaints were that some corporations and wealthy people do not pay their fair share. Last year, Gallup found that 63 percent of Americans believed that upper-income Americans pay too little in taxes, and 67 percent believed that corporations pay too little. Last fall, as the tax push began to heat up, more than twice as many Americans wanted to raise tax rates on large businesses and corporations as Americans who wanted to lower them. Even most Republicans wanted to either raise corporate tax rates or keep them where they were. These preferences are not terribly surprising at a time when both after-tax corporate profits and inequality are at record highs.
Yet the new administration and the congressional majority not only put cutting corporate taxes at the center of their agenda—they viewed it as an absolute must-do priority, one where failure posed an existential threat. Presumably part of this desperation stemmed from the Republicans' need simply to avoid the embarrassment of failing to pass any major legislation despite controlling the White House and Congress. But some tax bill proponents candidly admitted that what they were really afraid of was the wrath of their campaign donors.
New York Representative Chris Collins told The Hill, “My donors are basically saying, ‘Get it done or don't ever call me again.'”
Senator Lindsey Graham admitted that if Congress failed to pass the bill, “the financial contributions [to Republicans] will stop.”
The head of Mitch McConnell's SuperPAC said that donors “would be mortified if we didn't live up to what we've committed to on tax reform.”
Top donors like Texas financier Doug Deason explicitly threatened to stop the money flow for Republican incumbents unless they enacted the tax bill. “It's just disappointing when you help put people in office and they don't do anything,” he explained. Another donor issued an ultimatum to GOP leaders that no movement on tax cuts and other donor priorities “means no funding from supporters like me. No meetings, calls, contributions until we see progress.” Oil industry CEO Dan Eberhart, a top Republican bundler of contributions, had said that earlier legislative failures had pushed him to his “breaking point”—but “if meaningful tax reform passes, I would do a rethink of my position.”
Alfredo Ortiz, the head of a front group, the Job Creators Network, which lobbied for the tax bill, wisecracked: “When it comes to the donor class, I jokingly say this: A lot of these donors are RINOs in the sense that they are Republicans In Need of Outcomes.”
Faced with congressional budget rules that prevent bills from increasing long-term deficits—as the House bill did—Senate Republicans chose to make all of the tax cuts for individuals temporary, while ensuring that the tax cuts for corporations were permanent. They paid for the permanent tax cut for corporations by imposing a broad-based tax increase on individuals (through slower inflation adjustments) and by sabotaging the Affordable Care Act by repealing its so-called “individual mandate.”
The end result was a tax law that, by slashing corporate taxes, imposing a broad-based tax increase on individuals, and sabotaging the health-care system, produces shocking results in the long term: By 2027, 83 percent of the benefits flow to the top 1 percent, while most households actually see their taxes go up. Only a political system deeply corrupted by corporate political spending could have produced such a result.
Faced with the challenge of needing to pass a tax plan that turned Americans' actual tax priorities on their head, proponents resorted to brazen lies to sell the bill. The lies went far beyond puffery or shading of the facts; proponents lied about what the bill was fundamentally about. Trump's Treasury Secretary Steve Mnuchin promised that the tax overhaul would produce “no absolute tax cut for the upper class.” “This is not a bill that is designed primarily to benefit the wealthy and the large businesses,” asserted Senator John Cornyn. Trump claimed that “the rich will not be gaining at all” under the bill—in fact, according to Trump, his accountant told him he would “get killed.”
Mnuchin sacrificed the U.S. Treasury's credibility by making absurd claims, such as “Not only will this tax plan pay for itself, but it will pay down debt”—something that no credible economist believes. Mnuchin repeatedly promised to back up that assertion with an economic analysis from the Treasury staff, claiming at one point that 100 of his staff members were “working around the clock” on it. But it turned out the analysis never existed. Mnuchin made it all up. Meanwhile, he removed from the Treasury website a study by career economists that had concluded that shareholders, not workers, are the main beneficiaries of corporate tax cuts.
The need to shield the bill from public scrutiny, given its contents, also led to a compressed, secretive process. In this respect, the 2017 tax reform contrasted sharply with the 1986 tax reform. The 1986 act was enacted through a laborious, bipartisan process over years; it eliminated numerous special-interest loopholes and tax shelters over the fierce objections of their well-heeled beneficiaries; and, by ending special tax preferences, resulted in corporations paying more in taxes, allowing for broad-based individual tax cuts without increasing deficits. In 1986, a bipartisan group of legislators froze out the special-interest lobbyists.
In 2017, it was the public—and Democratic legislators—who were shut out of the process. After releasing the first version of the tax bill on November 2, 2017, congressional Republicans jammed the bill through in a 50-day sprint—an unheard-of pace for a bill of this magnitude and complexity. The House and Senate held a total of zero public hearings on the legislation. They deliberately compressed the legislative schedule to avoid having to face constituents at town halls. At various points during the process, they plunged ahead without analysis of the tax bill's distributional and macroeconomic effects, even though Republicans had spent years emphasizing the need for such “dynamic scoring.”
Major legislative changes were done on the fly at each stage of the process. On the day that the Senate considered the bill, for example, K Street lobbyists were informed of last-minute changes well before Democratic senators. Those changes were unveiled only hours before the full Senate voted on a Friday evening, giving senators virtually no chance to read them or comprehend their effects—let alone hear from outside tax experts who would find myriad glitches and loopholes in the bill (unintended or not). Some amendments were added to the legislation in illegible handwriting. Senate Democrats sought to have the Senate adjourn for the weekend so that Senators could review the legislation, but Republicans voted in lockstep to deny them that chance.
Not surprisingly, Senate Republicans' eleventh-hour changes included malodorous last-minute favors for special interests. These included a special tax break for oil and gas investment partnerships, added to the bill at the last minute by Cornyn, which not only rewarded the concerns that lobbied heavily for favorable treatment, but enriched more than a dozen members of Congress with personal investments in those types of partnerships. Cornyn's former chief of staff was one of the lobbyists who apparently pressed Congress on the issue.
The cruise-ship industry protected a coveted loophole that allows major cruise lines to pay virtually no U.S. income tax by incorporating offshore. (Royal Caribbean, Carnival, and Norwegian are legally incorporated in Liberia, Panama, and Bermuda, though all three companies' actual base of operations is in Florida.) The industry spent more than $3 million lobbying Congress in 2017, according to OpenSecrets.org, and successfully persuaded Alaska Senator Dan Sullivan to insert an amendment to protect the offshore loophole. Sullivan was one of the biggest recipients of cruise lines' political donations in 2016.
The politically powerful auto-dealer industry also secured a special exemption from restrictions on interest deductions, thanks to an intervention from Kentucky Senator Rand Paul. (As a presidential candidate in 2015, Paul had pledged to “eliminate nearly every special-interest loophole.”) Car dealers spent $5.7 million on lobbying in 2017. The industry gave nearly $9 million to candidates for Congress in the last election cycle, 78 percent going to Republicans.
The tax bill process was a bonanza for Washington's lobbying industry. More than 7,000 lobbyists worked Congress on tax issues in 2017, according to a report by Public Citizen—more than 60 percent of Washington's lobbyists. They included former aides to Trump, Vice President Pence, and the key members of Congress who crafted the bill. Three industries—drugmakers, insurers, and tech companies—engaged more lobbyists than there are members of Congress—and secured billions in tax cuts. The U.S. Chamber of Commerce alone deployed 115 lobbyists.
Tax lobbyists have paid nearly $15 million into the campaign funds of members of Congress during this election cycle, according to OpenSecrets.org, and have raised additional funds for lawmakers. In July, Speaker Paul Ryan traveled to Massachusetts ostensibly to discuss tax reform at a shoe factory—but made sure to stop off in Nantucket for a large-dollar fundraiser hosted by D.C. tax lobbyist Ken Kies, whose clients include Pfizer, Anheuser-Busch, and many other corporations and trade groups. In August, allies of Senate Finance Committee Chair Orrin Hatch hit up corporations and trade associations for six-figure contributions to the Orrin G. Hatch Foundation—a tax-exempt organization established to honor the legacy of the man who was then in the process of writing the Senate's tax bill. The fundraiser for the foundation, giving donors the chance to spend two days with Hatch at an exclusive golf resort, was held the day after Hatch had held a campaign fundraiser at the same location. “[H]is fundraising team and allies … targeted lobbyists and consultants with business before Hatch's committee to attend the events,” Politico reported. Contributors to Hatch's foundation included Merck, Visa, and the Pharmaceutical Research and Manufacturers of America (PhRMA). Some corporate contributions remain secret, since corporations often fail to disclose payments to such nonprofits, as an investigation by the Center for Public Integrity found.
Corporations lobbying for tax cuts also steered secret contributions into “dark money” groups that were backing the push for tax cuts. One such group was America First Policies, a tax-exempt organization employing several members of Trump's campaign team, including advocacy director Carl Higbie, a Trump campaign surrogate with an extensive history of racist, sexist, homophobic, and anti-Muslim statements. In May, an investigation by MapLight uncovered contributions to the group by three Fortune 500 companies that were then lobbying on the tax bill—CVS Health, Dow Chemical, and Southern Company. But those companies donated just $1.6 million of the $26 million that America First Policies raised in 2017; the vast majority of its backers remain secret. (CVS Health, which has told investors that it will pay $1.2 billion less in taxes because of the new law, and Dow Chemical have since sworn off future contributions to America First.)
For the lobbying industry itself, the tax legislation will be the gift that keeps on giving. It created dozens of tax breaks that will expire, with other tax-raising provisions whose implementation is delayed for several years. “Tax lobbyists purchased an annuity that will provide benefits for years,” quipped lobbyist and former Senate tax aide Russ Sullivan. K Street is already raking in fees from clients interested in making “technical corrections” to the bill. The bill itself might provide lobbyists and other high-paid professionals a new opportunity to lower their own tax bill by turning their businesses into corporations, and thus claiming the lower corporate rate that many of them secured on behalf of their clients.
One influential congressman even walked through the revolving door between Congress and K Street while he was still working on the tax bill. In October, Ohio Representative Pat Tiberi, the fourth-most senior member of the Ways and Means Committee majority, announced that he was leaving Congress to assume the helm of the Ohio Business Roundtable, a lobbying group representing “the CEOs of the state's largest and most influential business enterprises.” Having secured this plum position, Tiberi remained in Congress for several more months—continuing to work on and vote on the tax bill. Around the same time that Tiberi was negotiating his new job, several of the group's members, including Marathon Petroleum, were lobbying Congress and Tiberi's committee for tax cuts. This stunk to high heaven, but Tiberi claimed that the House Ethics Committee had blessed the arrangement. And, in fact, House ethics rules merely “strongly encourage” members to abstain from voting on legislation if it “provides a benefit targeted to any entity with which the Member is negotiating or from which the Member has accepted future employment.” Apparently, a massive tax cut benefiting the corporate sector writ large is not “targeted” at any one specific entity, so Tiberi saw no conflict of interest in using his committee post and his vote in Congress to push the bill forward.
Tiberi was a unique example only in that he managed to walk through the revolving door even before leaving Congress. Undoubtedly, many more of his colleagues who shepherded the tax bill will soon follow him. Many of the Capitol Hill staff members and key administration officials who crafted the tax bill have already left for lucrative jobs on K Street.
After a truncated House-Senate conference committee, which held its only public meeting after Republicans had already struck a final deal behind closed doors, the final bill was released on a Friday evening in advance of the final vote days later. Over the weekend, tax lawyers discovered that the conference committee had slipped in a new tax break largely benefiting the real-estate industry, allowing pass-through business owners to claim a special new deduction even if they do not have a substantial payroll. It soon became known as the “Corker kickback,” after Tennessee Senator Bob Corker, who had promised to oppose any final bill that “added a penny to the deficit”—and who owns millions in real estate assets—unexpectedly flipped his vote from no to yes. (Corker claimed he was unaware of the addition benefiting him because he had only read a two-page summary of the final bill.)
Congressional financial disclosures indicate that Corker was one of dozens of members of Congress who voted to cut their own taxes substantially, including several who played important roles in the bill's enactment.
Corker's Wisconsin colleague, Senator Ron Johnson, used his vote on the bill to negotiate a lower tax rate for owners of pass-through businesses: owners like himself. Johnson warned, rightly, that the international tax provisions of the bill would create “a real incentive to keep manufacturing overseas.” But days later, having secured a deal with Majority Leader McConnell to enlarge the new pass-through tax break, he got on board. And, of course, one of the biggest winners from the tax cut was the man who signed it into law. Trump and his family, including his son-in-law Jared Kushner, stand to benefit enormously from the new pass-through deduction and estate tax cut. The commercial real-estate industry, where the Trump and Kushner families built their fortunes, was perhaps the biggest winner in the tax overhaul, securing the new pass-through deduction and protecting its most important tax breaks.
The most notorious tax loophole for America's plutocrats survived the tax reform process essentially unscathed.
The carried interest loophole has long allowed private equity barons and fund managers to avoid paying regular income tax rates, and instead to pay lower capital gains rates on much of their income. Trump campaigned on closing the carried interest loophole, which he said let fund managers “get away with murder.”
But after arriving in Washington, Trump went silent on the issue. Neither the White House's blueprint for tax reform, released to much fanfare in April, nor his budget, released in May, included any proposal addressing carried interest. When the administration and congressional Republicans released a joint framework for tax reform in September, it too was silent on carried interest. Repealing the loophole was never seriously on the table as the Republicans rewrote the tax code.
The Republican Congress's failure to close the one tax loophole that Trump had campaigned on eliminating reflected Wall Street's entrenched influence and the power of its prodigious campaign contributions. The private equity industry—the primary beneficiary of the carried interest loophole—donated nearly $100 million to political campaigns in the 2016 cycle. The industry trained its contributions on key Republicans in 2017. The three biggest private equity firms contributed $1.3 million to Republicans in 2017. Recipients of this cash influx included McConnell, Ryan, Hatch, and House Ways and Means Chair Kevin Brady, and influential members of the Senate Finance Committee like Rob Portman and Dean Heller.
After the fact, Trump's team claimed that he had tried valiantly to close the loophole, but that the lobbying was just too intense on Capitol Hill. In fact, the White House did nothing, while Treasury Secretary Mnuchin, a former private equity executive, worked to undermine meaningful reform. The financiers “won on carried interest,” said one industry lobbyist, because they “pushed all the right levers along the way.”
President Trump signed the tax bill into law on Friday, December 22. He then took an early afternoon flight to Mar-a-Lago, where he announced to members of his private club, “You all just got a lot richer.”
