The Mnuchin Rule (Feb. 13)

Update 163 — The Mnuchin Rule

The Senate voted tonight to confirm Steven Mnuchin, mostly voting by party line.  West Virginia Sen. Manchin crossed the aisle and cast his vote in favor of the ex-Goldman Sachs partner to head Treasury, making it 53-47.

As Trump prepares his “phenomenal” tax plan for release later this month, its first test is compliance with the Mnuchin Rule — the pledge from the soon-to-be-sworn Secretary that there would be no “absolute” tax cut for the wealthy under the Trump administration.

The Rule, which we look at in detail below, is not just a policy commitment made and confirmed under oath by its eponymous exponent.  By reassuring millions of anxious Americans in no mood to subsidize a tax cut for the wealthy so soon after he was nominated — and only modestly modifying his pledge at his Senate confirmation hearing — he has neutralized the otherwise predictably  explosive opposition to a Goldman veteran running Treasury, but peace has its price.

Best,

Dana

——–

What to Expect

Mnuchin has made two major statements of economic policy principle since his nomination was announced that some leading Democrats have noted with approval.

•   Bracket Revenue Neutrality —  Soon after his nomination, Mnuchin pledged to make up the revenue lost on tax cuts for the rich by closing loopholes.

•  Volcker Rule ––  Mnuchin testified at    his conformation hearing that he was not opposed to that Rule and did not intend to repeal it.

Given his unequivocal statement right after his nomination, repeated in sworn testimony, the Secretary-designate should expect supported from Democrats for these two pledges.  But they will also likely seek to hold the administration to policy consistent with the Mnuchin Rule.

The Mnuchin Rule

The Rule —  as it was dubbed by Finance Committee Ranking Member Ron Wyden — comes from as clear an enunciation of policy commitment to not cutting taxes on the wealthy as one could want. As Mnuchin himself articulates it, the Rule  provides a guarantee of no net cuts for the wealthy, after taking loss of deductions into account.

Mnuchin has proposed a series of tax cuts combined with closing loopholes that will ultimately cut income taxes on the top bracket, but the claim is that the revenue will be the same. The only problem is that the math simply does not add up, not even close.

Math Class

A quick look at Trump’s campaign tax plan is a reason to suspect that the wealthy will get the largest slice of the pie once again.  Even the conservative-leaning Tax Foundation provided an analysis that shows the wealth will receive a 5.3 percent increase in after-tax income while everyone else will see somewhere between 0.2-0.5 percent.

But to understand how infeasible the Mnuchin Rule is, have a look at the starting points for the Trump tax plan that pre- and post-date the Mnuchin Rule (and radically contradict it):

  • cut top income bracket from 39.6 to 33 percent
  • cut capital gains taxes to 15 or 20 percent
  • abolish the estate tax

How many loopholes could Mnuchin possibly get rid of to make up for these massive revenue streams?  There simply aren’t close to enough deductions to make up for these cuts.  Not even dynamic school can bring these tax policies into compliance with the Mnuchin Rule.

Per a former senior Fed official on whether deductions lost would outstrip the cuts for the wealthy:  “Totally implausible. If the upper-bracket rate cut is even close to Trump’s 33 percent  number, there are not enough loopholes to close.  [One big exception, if carried interest gets taxed at 33% (instead of 15%), a few private equity guys will pay higher taxes, net net.]

Good Policy/Good Politics

While Mnuchin earned universal support from Republicans, Democrats were not so keen when the former Goldman Sachs partner’s nomination was for announced.  In fact, the Democrats on Senate Banking all boycotted Mnuchin’s confirmation vote in Committee.

Reports have indicated that Mnuchin plans on staffing his department with former Goldman Sachs bankers.  Senior banker Jim Donavan is under consideration for deputy secretary and a former Morgan Stanley banker, Justin Muzinich, is also expected to take on a senior role as undersecretary for domestic finance.  After campaigning as a friend of Main Street, the Trump administration is mostly offering more jobs for people from Wall Street than from anywhere else.  Period.

While Senate Democrats voted against Mnuchin 47-1 due largely to his past business dealings that hurt middle class Americans, they must be thankful for his commitment to the newly dubbed Mnuchin Rule.  Not many people have gotten a policy named after them only a day after being nominated, but Mnuchin was able to break that barrier. And now that the policy bears his name, he should hope the policy bears the test of time.

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