Trump’s Biggest Con

I confess that I have underestimated our 47th President. I now believe him to be the greatest con man of all times. Charles Ponzi duped an estimated 30,000 individuals out of a reported $10 million which would be worth about $160 million today. Bernie Madoff’s investment scheme conned approximately 10 thousand individuals out of a reported $64.8 billion which would be worth about $95 billion today. By comparison, Donald Trump is now on his way to duping as many as 300 million Americans out of $10 trillion.  What differentiates Trump’s scheme from those perpetrated by Ponzi and Madoff is not just its sheer magnitude, but, unlike Ponzi and Madoff, Trump is not misleading his victim as to what he intends to do. Quite the contrary, he told them exactly what he plans to do; and notwithstanding his open admissions he’s still been able to convince them that they will benefit from his scheme.

Trump’s current con clearly dwarfs all of his prior deceptions. For example, in launching Trump University (which spawned three criminal proceedings) he promised that he would only employ “the best professors” to teach his real estate investment secrets.  That venture only fleeced his estimated 5,000 victims out of an alleged $40 million. Even his Trump casino venture, which ended in four bankruptcies, only caused his creditors and shareholders to lose around $3 billion, not the trillions of dollars that 90% of Americans could lose if he completes the implementation of his plan to impose a wide range of tariffs.

In my previous article, like many other political junkies, I addressed the flawed logic underlying Trump's claimed mission to defend America from what he calls “unfair trade practices” by our international trading partners. Trump characterized his proposed array of tariff increases as “one big beautiful plan” notwithstanding the fact that it’s based on false information; namely that the U.S. is being ripped off by its trading partners. In addition, its professed purpose (to regenerate manufacturing and mining jobs in America) cannot withstand scrutiny. Still, from the perspective of a con man, it’s a beautiful plan in that it’s so well-conceived and disguised that its victims don’t even realize that their pockets are being picked.

Stated simply, his plan is essentially to replace the federal government’s corporate and graduated individual income taxes with an array of tariffs to fund its operations. As originally conceived, the U.S. Income Tax Code was a progressive plan for allocating the nation’s revenue requirements so that the burden of supporting the federal government’s activities would be fairly allocated among its citizens on the basis of their relative abilities to pay.  However, over the past forty years the provisions of the Internal Revenue Code have been revised on multiple occasions to redirect an estimated $50 trillion from the poorest 90% of the nation’s population to the wealthiest 1% of its population.  

Working-class Americans clearly recognize they've not benefitted from our nation's remarkable economic growth since World War II. What they don’t understand is why this has happened. The answer is simple; their trusted political leaders have been deceiving them with a calculated series of false narratives: that wasteful government programs squander their hard-earned tax dollars by supporting individuals who are too lazy to work; that corrupt politicians have shipped their high-paying factory jobs overseas; that immigrants are "stealing" their jobs and livelihoods; and most recently, that our nation’s trading partners are employing "unfair practices" to undermine America’s prosperity. However, the most dangerous deception of all is that Donald Trump—the current exponent of the policies that further concentrate wealth among the elite—is going to rectify these problems.

Unlike the individual income tax, tariffs imposed on imported goods make no pretense of fairly distributing the burden of supporting the activities of our federal government, but instead are wholly regressive in nature.  They target the nation’s poor so that individuals with the smallest incomes will be forced to pay in taxes the greatest percentage of their annual incomes. Conversely, those with the largest incomes pay the smallest percentage of their incomes in taxes. Were that not enough, President Trump is exempting from the tariffs a host of electronic products, a move that will benefit, Google, Microsoft, Amazon and Apple, all of whose top executives made major contributions to his political campaign and inauguration.

The obvious effect of this change in the sources of the federal government’s revenues is to funnel an even greater percentage of our nation’s wealth into the hands of its already wealthiest citizens. As a result, Trump is establishing a cadre of oligarchs similar to the one Putin created in Russia by selling his country’s principal industries at bargain prices to a small group of individuals. That move effectively enables Putin to control Russia’s entire economy because the recipients of his largess remain under his control. Although Trump is employing a different path to establish his cadre of oligarchs, the results will essentially be the same.

While Republican politicians are constantly decrying the federal government’s growing level of indebtedness, in reality they care little about the heights to which our national debt has risen. This can be seen in the way they feel about income taxes. For the past forty years, they have been reducing income tax rates and carving out deductions and exemptions that are designed to enable wealthy individuals to escape paying taxes. For example, gains reaped by those in the business of trading securities are taxed at low “capital gains” rates (20%) instead of the significantly higher rates (up to 37%) that are applied to salaries and wages. Another tax loophole engineered to minimize the taxes of the wealthy is the like-property exchange doctrine which enables real estate investors to avoid paying taxes on a substantial percentage of the gains they reap when selling and buying properties. These are just two of the many ways the Internal Revenue Code has been altered to benefit those who are not forced to live on their weekly paychecks.

Skewing the tax laws in favor of the wealthy not only takes place as a result of manipulating the provisions of the tax code, but also by impeding the way in which the tax code is administered. To appreciate this form of wealth transfer, you must understand that the vast majority of American workers have their taxes (as determined by their employers) deducted from their paychecks. Their employers also report to the IRS how much income they pay to each of their workers. This essentially prevents wage-earners from under-reporting their incomes.

By contrast, those who derive their incomes from the businesses they own or from their purchases and sales of properties and securities are essentially left to operate on an “honor system” when they report their annual incomes and deductible expenditures on their tax returns. In short, they are free to understate their taxable incomes, subject only to the possibility that their tax returns might be audited by the IRS. Whether their tax returns will ever be audited in large measure is a function of the IRS’s budget.

The odds of self-employed individuals having their tax returns audited has always been low, but in recent years it has dropped even further. Specifically, in 2011 less than 10% of  taxpayers reporting annual incomes of over $1 million were subjected to an IRS tax audit. That figure dropped to less than 2% in 2018. The result is that each year approximately $600 billion in statutorily prescribed federal income tax revenues go uncollected. To put that in perspective, that’s more than the projected annual costs of extending the 2017 tax cuts. This explains why Republican politicians for the past 45 years have been on a campaign to cut the IRS’s budget. This problem is only likely to get worse as the Treasury Department recently announced that it plans to cut the number of IRS employees by 20,000 (or 25%). 

So why do working class Americans go along with efforts to undermine the IRS’s ability to audit tax returns when every dollar spent auditing the tax returns of wealthy individuals results in three dollars of additional revenues for the federal government. The answer is that Republican politicians have long been demonizing the IRS. In this connection, President Reagan famously warned that the most terrifying words in the English language are “I’m from the government and I am here to help.” They contend that the federal government’s problem isn’t that it doesn’t collect enough revenues; it’s that it spends money like a drunken sailor.

While they are clamoring for cuts in the expenditures of the federal government, the cuts they are calling for are to reduce or even eliminate social welfare programs which enable the nation’s poorest citizens to care for their families and live productive lives. By contrast, they are not calling for cuts to the nation’s defense budget. Indeed, the budget bill which they are currently considering not only does not cut defense spending, but instead raises it to $895 billion which is in excess of the eleven largest defense budget of other nations. Just add them up: China $296 billion, Russia $109 billion, India $$83.6 billion, Saudia Arabia $75.8 billion, United Kingdom 74.9 billion, Germany $66.8 billion, Ukraine $64.8 billion, France $61.3 billion, Japan $50.2 billion, South Korea $47.9 billion and Italy $35.5 billion.

So why aren’t working class Americans revolting over Trump’s latest plan to increase the nation’s tariffs which are primarily borne by working class Americans so he can extend his 2017 tax cuts which heavily favor the nation’s wealthiest citizens. Initially, Trump misled them by contending that tariffs which are imposed on imported items are paid by the exporting nations. When the nation’s media finally was able to expose this lie, he characterized his tariff proposal as a means of protecting Americans from being “ripped off” by foreign governments. He makes it sound like evil foreign governments are the real nemesis of working class Americans and not the U.S. politicians who write and enforce our nation’s tax laws for the benefit of their wealthy campaign contributors. 

You might also ask why aren’t the nation’s economic gurus warning the public about the ramifications of what Trump is doing. The answer seems to be that Trump has clothed his plan in so many obvious absurdities that they are concentrating their efforts on revealing those absurdities and haven’t paid attention to the essence of what he is trying to accomplish. To be sure, the chart that Trump unveiled last week purporting to depict the tariffs being imposed on U.S. exports is a total fiction. It’s not even based on the actual tariffs of our trading partners. Also, imposing high tariffs on imports on foreign goods is not likely to have any significant impact on returning manufacturing and mining jobs to the U.S. as Trump has promised.  Nor are his tariffs likely to have a material impact on our nation’s trade imbalance.  Their conclusion sadly isn’t that Trump is trying to pick the pockets of working class Americans, but rather, he’s simply a “moron” who doesn’t understand macro economics.

It's not just poorly informed voters, economists with PhD’s and media pundits that have been led astray by Trump; it’s also seasoned Democratic politicians. Approximately a day before Trump announced that he intended to defer a portion of his tariff plan, he recommended that it was a good time to double down on stock market investments. That has led Democratic Senators Adam Schiff and Reuben Gallego to try to initiate an investigation into whether any members of the Trump administration with knowledge of Trump’s intention to modify his tariff plan might have traded on “inside information.” While this is a distinct possibility, seeking to hold hearings on that issue is a worthless endeavor as it won’t be pursued by the Justice Department even assuming they are successful in arranging for hearings on the subject. More importantly, it diverts attention from the major issue posed by Trump’s plans.

As I previously reported, President Trump is very close to having his new budget approved by Congress. The Senate previously approved the outline for the bill to be enacted via the “reconciliation” process; and last week the House took up a companion bill. That process immediately hit a speed bump when a few House Republicans were unhappy with the terms of the bill. Surprisingly, their objections were not over the possibility that tariff revenues would supplant the estimated $5+ trillion reduction in income tax revenues or even that the reduction in income tax revenues would be offset by cuts in Medicaid benefits. Rather, they appeared to be distressed that the proposed cuts in expenditures would not be sufficient to reduce the federal government annual operating deficits.

The next day, after an evening or arm twisting, House Speaker Mike Johnson was able to convince 218  Republicans House members to pass the resolution needed to proceed with the adoption of Trump’s fiscal agenda. Both houses of Congress must still reach an agreement over the actual composition of the budget which could take a while to work out as there significant differences among House and Senate Republicans as to how to cut taxes and lower expenses at the same time. To buy time to work out these differences, the Trump administration is simply refusing to fund numerous federal agencies and grants approved by the Congress and engage in court battles with the intended recipients of those funds. In addition, Trump has left in place a 10% tariff on all imported goods. While this is still a major increase in our tariffs, it is certainly a small fraction of what Trump initially proposed and has drawn only scant objections.

  The one major exception is that Trump has left in place a 145% tariff on all goods imported from China. China, as expected, has already retaliated with a 125% tariff on all U.S. goods. Trump realizes that China ultimately will prevail again in this trade war because its citizen have become acclimated to enduring periods of economic hardships in contrast to Americans who revolt over even modest increases in the prices of eggs and gasoline. From Trump’s perspective, however, imposing high tariffs on Chinese goods has two benefits. It serves as a demonstration to his voting base that he is a strong leader willing to fight on their behalf. Secondly it will keep those countries hit by the 10% tariffs from complaining too much for fear that they too could quickly become targets of higher tariffs on their exports to the U.S.  

There, of course, is a possibility that our trading partners will choose to follow China’s lead and impose retaliatory tariffs on U.S. exports that could torpedo Trump’s tariff initiative. Unfortunately, that’s an unlikely prospect because Trump has wisely agreed to defer the imposition of his harsher tariffs for 90 days. A number of our trading partners are reported to have already made appointments to speak with the Trump administration regarding its imposition of tariffs. Don’t expect many deals to be struck anytime soon since the 90 day extension should also give House Republicans ample time in which to tame the renegade members of their caucus. Once that legislation has been adopted Trump will be in a much stronger bargaining position. Accordingly, he is unlikely to engage in serious negotiations until his fiscal agenda has been enacted.

The higher prices that will result from Trump’s imposition of tariffs will not be well-received by Americans. In fact, many farmers and small business owners have already begun to voice their objections and seek exemptions. To some extent, Trump is counting on his base to stay calm based on his assurances that the tariffs will help build a stronger economy resulting in a higher standard of living for them. His major donors, however, are not likely to be so easily appeased, particularly those who own or control our nation’s high tech companies that rely on components manufactured in China. To appease them, Trump has already announced that he is creating exemptions for certain electronic devices and components.

It’s interesting to note that whereas the Biden administration was successful in getting Congress to approve the CHIPS and Science Act to encourage the production of computer chips in the U.S., Trump has called for Congress to repeal that Act raising fears that he might seek to block funding for it. In addition he is now undermining that Act by granting exemptions for electronic chips from his new tariffs. In short, he seems to have a greater fear of angering his most generous supporters than he has that one day our foreign suppliers of electronic chips may cut off their sales to the U.S..

Admittedly, Trump is well on his way to imposing a broad array of tariffs on the nation’s imported goods and having the Congress pass his budget legislation that will extend the 2017 tax cuts and raise the nation’s debt ceilings. That legislation might also include some significant cuts in social welfare programs, but that is not a necessary element in Trump’s plan to transform our nation’s federal government into a Putin-style oligarchy. The only thing that might scuttle Trump’s plan is if Democratic senators and members of Congress are able to sufficiently alarm American voters as to what Trump is trying to achieve and those voters rise up and frighten Congressional Republicans out of approving Trump’s budget. Even this possibility seems unlikely.