Introduction

The idea of annulling debts nowadays seems so unthinkable that most economists and many theologians doubt whether the Jubilee Year could have been applied in practice, and indeed on a regular basis. A widespread impression is that the Mosaic debt jubilee was a utopian ideal. However, Assyriologists have traced it to a long tradition of Near Eastern proclamations. That tradition is documented as soon as written inscriptions have been found – in Sumer, starting in the mid-third millennium BC.

Instead of causing economic crises, these debt jubilees preserved stability in nearly all Near Eastern societies. Economic polarization, bondage and collapse occurred when such clean slates stopped being proclaimed.

(2) What were Debt Jubilees?

Debt jubilees occurred on a regular basis in the ancient Near East from 2500 BC in Sumer to 1600 BC in Babylonia and its neighbors, and then in Assyria in the first millennium BC. It was normal for new rulers to proclaim these edicts upon taking the throne, in the aftermath of war, or upon the building or renovating a temple. Judaism took the practice out of the hands of kings and placed it at the center of Mosaic Law.[1]

By Babylonian times these debt amnesties contained the three elements that Judaism later adopted in its Jubilee Year of Leviticus 25. The first element was to cancel agrarian debts owed by the citizenry at large. (Mercantile debts among businessmen were left in place.)

A second element of these debt amnesties was to liberate bondservants – the debtor’s wife, daughters or sons who had been pledged to creditors. They were allowed to return freely to the debtor’s home. (Slave girls that had been pledged for debt also were returned to the debtors’ households.) Royal debt jubilees thus freed society from debt bondage, but did not liberate slaves.

A third element of these debt jubilees (subsequently adopted into Mosaic law) was to return the land or crop rights that debtors had pledged to creditors. This enabled families to resume their self-support on the land and pay taxes, serve in the military, and provide corvée labor on public works.

Commercial “silver” debts among traders and other entrepreneurs were not subject to these debt jubilees. Rulers recognized that productive business loans provide resources for the borrower to pay back with interest, in contrast to consumer debt. This was the contrast that medieval Schoolmen later would draw between interest and usury.

Most non-business debts were owed to the palace or its temples for taxes, rents and fees, along with beer to the public ale houses and other payments to these institutions. Rulers initially were cancelling debts owed mainly to themselves and their officials. This was not a utopian act, but was quite practical from the vantage point of restoring economic and military stability. Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their corvée labor duties and serving in the army.

Most personal debts were not the result of actual loans, but were accruals of unpaid agrarian fees, taxes and kindred obligations to royal collectors or temple officials. Rulers were aware that these debts tended to build up beyond the system’s ability to pay. That is why they cancelled “barley” debts in times of crop failure, and typically in the aftermath of war. Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs.

As interest-bearing credit became privatized throughout the Near Eastern economies, personal debts owed to local headmen, merchants and creditors also were cancelled. Failure to write down agrarian debts would have enabled officials and, in due course, private creditors, merchants or local headmen to keep debtors in bondage and their land’s crop surplus for themselves. Crops paid to creditors were not available to be paid to the palace or other civic authorities as taxes, while labor obliged to work off debts to creditors was not available to provide corvée service or serve in the army. Creditor claims thus set the wealthiest and most ambitious families on a collision course with the palace, along the lines that later occurred in classical Greece and Rome. In addition to preserving economic solvency for the population, rulers thus found debt cancellation to be a way to prevent a financial oligarchy from emerging to rival the policy aims of kings.

Cancelling debts owed to wealthy local headmen limited their ability to amass power for themselves. Private creditors therefore sought to evade these debt jubilees. But surviving legal records show that royal proclamations were, indeed, enforced. Through Hammurabi’s dynasty these “andurarum acts” became increasingly detailed so as to close loopholes and prevent ploys that creditors tried to use to gain control of labor, land and its crop surplus.

Fast-forward to today’s world. The most recent financial clean slate was the 1948 Allied Currency Reform of Germany. Basic business debts were left in place, along with employer debts to employees. The population was allowed to keep minimum working balances. But the residue of debts was cancelled, on the logic that most were owed to former Nazis. Applauded as a “free market,” Germany’s economy was freed from the postwar debt legacy that had shackled it after World War I. The aftermath in 1948 left Germany’s economy effectively debt-free, paving the way for the Economic Miracle that followed.

(3) Social purpose of Debt Jubilees

The common policy denominator spanning Bronze Age Mesopotamia and the Byzantine Empire in the 9th and 10th centuries was the conflict between rulers acting to restore land to smallholders so as to maintain royal tax revenue and a land-tenured military force, and powerful families seeking to deny its usufruct to the palace. Rulers sought to check the economic power of wealthy creditors, military leaders or local administrators from concentrating land in their own hands and taking the crop surplus for themselves at the expense of the tax collector.

By clearing the slate of personal agrarian debts that had built up during the crop year, these royal proclamations preserved a land-tenured citizenry free from bondage. The effect was to restore balance and sustain economic growth by preventing widespread insolvency.

Babylonian scribes were taught the basic mathematical principle of compound interest, thereby increasing the volume of debt exponentially, much faster than the rural economy’s ability to pay,[2] an argument recently revived by Thomas Piketty, in Capital in the Twenty-First Century, (2014). That is the basic dynamic of debt: to accrue and intrude increasingly into the economy, absorbing the surplus and transferring land and even the personal liberty of debtors to creditors.

Debt jubilees were designed to make such losses of liberty only temporary. The Mosaic injunction (Leviticus 25), “Proclaim liberty throughout the land,” is inscribed on America’s Liberty Bell. That is a translation of Hebrew deror, the debt Jubilee, cognate to Akkadian andurarum. The liberty in question originally was from debt peonage.
To insist that all debts must be paid, regardless of whether this may bankrupt debtors and strip away their land and means of livelihood, stands at odds with the many centuries of Near Eastern clean slates. Their success stands at odds with the assumption that creditor interests should always take priority over those of the indebted economy at large.

Low interest rates, “quantitative easing,” and the mitigation of antitrust laws led to more mergers and acquisitions in 2017, but that’s only going to fuel greater wealth inequality and tighten the corporate grip on the political system, explains economist Michael Hudson.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.

The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri/Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be back here.

GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?

MICHAEL HUDSON: It’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. Central banks are pursuing quantitative easing that offers money at almost zero interest rates. At the same time, you have the tax system’s giveaways to the FIRE sector, capped by deregulatory policies that are encouraging mergers and acquisitions by dismantling the antitrust legislation that has been in place since the New Deal.

The tax giveaways in the Republican tax law two weeks ago enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers to now shift them to their head office accounts. (Most were kept in U.S. dollars all along, but in the name of “false flag of convenience” companies.) All this tax-avoidance money that has been accumulating since 2004 can now be replaced in the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers.

So the companies are going to be very cash-rich. They’ve anticipated most of this and you can look at these mergers and acquisitions as part of an arbitrage operation. If a hedge fund, a bank or large corporation can borrow at 1%, they can buy stocks that are yielding 10% or even more – or, for that matter, even less. They can get an arbitrage difference between the 1% they pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.

When you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raiding. Hedge funds have been doing this, as well as corporate financial managers. With borrowed money you can take over or raid a foreign company too. So, you’re having a monopolistic consolidation process that’s pushed up the market, because in order to buy a company or arrange a merger, you have to offer more than the going stock-market price. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.

But suppose you’re a company that doesn’t want to be bought out. Suppose you’re a corporation trying to defend yourself from this merger and acquisition movement. In that case, you do is what they’ve done since the 1980s: You take a poison pill, using your earnings to buy your own stock. Some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that it pushes up the stock and leaves nothing in the corporate treasury to be raided by these raiders.

The upshot is that on the part of attackers and defenders alike, you have a process that bids up stock prices. Since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get. That basically is the financial and fiscal war in a nutshell.

GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here. But aren’t those policies also good for the bottom 90%? After all, it keeps interest rates low for ordinary borrowers, such as people who have mortgages or credit cards to pay off, and also helps keep unemployment low. What would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?

MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all.

If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying. And if you miss a payment, even to a utility company, your rate still goes up to 29% or whatever. And if the bank won’t lend to you, you still have to pay 50% or 100% or 500% to the payday loan people backed by JPMorgan Chase and other Wall Street banks as major customers. So no, the 99% have not benefited from quantitative easing. Quantitative easing is to benefit the financial sector, which means basically the 1%, not benefit the rest of the economy.

We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could be more “centrist” and say the top 10% versus the bottom 90%. But there’s definitely a stratification at work here.

GREGORY WILPERT: The Financial Times quotes analysts who say that they expect mergers and acquisitions to accelerate even more in 2018. You touched on this when you mentioned the Republican tax reform. So would you basically agree that M&A will accelerate? What are some of the underlying causes for a further continuation of this process of centralization?

MICHAEL HUDSON: There are two underlying causes. For one thing, now that the Republicans are in power in the United States – and I don’t think it would matter if Hillary’s Democrats were in power – they’re not enforcing the antitrust regulations. What deterred a lot of mergers and acquisitions in the past was the threat of creating a monopoly, so the antitrust laws prevented you. But now they’re saying, you can make a monopoly, but make sure the 99% pay through the nose. You can make a monopoly and charge the 99% higher monopolized prices.

So, what you’re having is a rentier revolution. The aim of the 1% isn’t to make money by profits by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.

For instance, if you end internet neutrality and permit mergers of the big information technology corporations, that’s a form of rent seeking. It’s part of today’s political revolution.

In theory, the global financial system is supposed to help every country gain. Mainstream teaching of international finance, trade and “foreign aid” (defined simply as any government credit) depicts an almost utopian system uplifting all countries, not stripping their assets and imposing austerity. The reality since World War I is that the United States has taken the lead in shaping the international financial system to promote gains for its own bankers, farm exporters, its oil and gas sector, and buyers of foreign resources – and most of all, to collect on debts owed to it.

Each time this global system has broken down over the past century, the major destabilizing force has been American over-reach and the drive by its bankers and bondholders for short-term gains. The dollar-centered financial system is leaving more industrial as well as Third World countries debt-strapped. Its three institutional pillars – the International Monetary Fund (IMF), World Bank and World Trade Organization – have imposed monetary, fiscal and financial dependency, most recently by the post-Soviet Baltics, Greece and the rest of southern Europe. The resulting strains are now reaching the point where they are breaking apart the arrangements put in place after World War II.

The most destructive fiction of international finance is that all debts can be paid, and indeed should be paid, even when this tears economies apart by forcing them into austerity – to save bondholders, not labor and industry. Yet European countries, and especially Germany, have shied from pressing for a more balanced global economy that would foster growth for all countries and avoid the current economic slowdown and debt deflation.

Imposing austerity on Germany after World War I

After World War I the U.S. Government deviated from what had been traditional European policy – forgiving military support costs among the victors. U.S. officials demanded payment for the arms shipped to its Allies in the years before America entered the Great War in 1917. The Allies turned to Germany for reparations to pay these debts. Headed by John Maynard Keynes, British diplomats sought to clean their hands of responsibility for the consequences by promising that all the money they received from Germany would simply be forwarded to the U.S. Treasury.

The sums were so unpayably high that Germany was driven into austerity and collapse. The nation suffered hyperinflation as the Reichsbank printed marks to throw onto the foreign exchange also were pushed into financial collapse. The debt deflation was much like that of Third World debtors a generation ago, and today’s southern European PIIGS (Portugal, Ireland, Italy, Greece and Spain).

In a pretense that the reparations and Inter-Ally debt tangle could be made solvent, a triangular flow of payments was facilitated by a convoluted U.S. easy-money policy. American investors sought high returns by buying German local bonds; German municipalities turned over the dollars they received to the Reichsbank for domestic currency; and the Reichsbank used this foreign exchange to pay reparations to Britain and other Allies, enabling these countries to pay the United States what it demanded.

But solutions based on attempts to keep debts of such magnitude in place by lending debtors the money to pay can only be temporary. The U.S. Federal Reserve sustained this triangular flow by holding down U.S. interest rates. This made it attractive for American investors to buy German municipal bonds and other high-yielding debts. It also deterred Wall Street from drawing funds away from Britain, which would have driven its economy deeper into austerity after the General Strike of 1926. But domestically, low U.S. interest rates and easy credit spurred a real estate bubble, followed by a stock market bubble that burst in 1929. The triangular flow of payments broke down in 1931, leaving a legacy of debt deflation burdening the U.S. and European economies. The Great Depression lasted until outbreak of World War II in 1939.

Planning for the postwar period took shape as the war neared its end. U.S. diplomats had learned an important lesson. This time there would be no arms debts or reparations. The global financial system would be stabilized – on the basis of gold, and on creditor-oriented rules. By the end of the 1940s the United States held some 75 percent of the world’s monetary gold stock. That established the U.S. dollar as the world’s reserve currency, freely convertible into gold at the 1933 parity of $35 an ounce.

It also implied that once again, as in the 1920s, European balance-of-payments deficits would have to be financed mainly by the United States. Recycling of official government credit was to be filtered via the IMF and World Bank, in which U.S. diplomats alone had veto power to reject policies they found not to be in their national interest. International financial “stability” thus became a global control mechanism – to maintain creditor-oriented rules centered in the United States.

To obtain gold or dollars as backing for their own domestic monetary systems, other countries had to follow the trade and investment rules laid down by the United States. These rules called for relinquishing control over capital movements or restrictions on foreign takeovers of natural resources and the public domain as well as local industry and banking systems.

By 1950 the dollar-based global economic system had become increasingly untenable. Gold continued flowing to the United States, strengthening the dollar – until the Korean War reversed matters. From 1951 through 1971 the United States ran a deepening balance-of-payments deficit, which stemmed entirely from overseas military spending. (Private-sector trade and investment was steadily in balance.)

U.S. Treasury debt replaces the gold exchange standard

The foreign military spending that helped return American gold to Europe became a flood as the Vietnam War spread across Asia after 1962. The Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. Finally, in August 1971, President Nixon stopped the drain by closing the Gold Pool and halting gold convertibility of the dollar.

There was no plan for what would happen next. Most observers viewed cutting the dollar’s link to gold as a defeat for the United States. It certainly ended the postwar financial order as designed in 1944. But what happened next was just the reverse of a defeat. No longer able to buy gold after 1971 (without inciting strong U.S. disapproval), central banks found only one asset in which to hold their balance-of-payments surpluses: U.S. Treasury debt. These securities no longer were “as good as gold.” The United States issued them at will to finance soaring domestic budget deficits.

By shifting from gold to the dollars thrown off by the U.S. balance-of-payments deficit, the foundation of global monetary reserves came to be dominated by the U.S. military spending that continued to flood foreign central banks with surplus dollars. America’s balance-of-payments deficit thus supplied the dollars that financed its domestic budget deficits and bank credit creation – via foreign central banks recycling U.S. foreign spending back to the U.S. Treasury.

In effect, foreign countries have been taxed without representation over how their loans to the U.S. Government are employed. European central banks were not yet prepared to create their own sovereign wealth funds to invest their dollar inflows in foreign stocks or direct ownership of businesses. They simply used their trade and payments surpluses to finance the U.S. budget deficit. This enabled the Treasury to cut domestic tax rates, above all on the highest income brackets.

Socialism a century ago seemed to be the wave of the future. There were various schools of socialism, but the common ideal was to guarantee support for basic needs, and for state ownership to free society from landlords, predatory banking and monopolies. In the West these hopes are now much further away than they seemed in 1917. Land and natural resources, basic infrastructure monopolies, health care and pensions have been increasingly privatized and financialized.

Instead of Germany and other advanced industrial nations leading the way as expected, Russia’s October 1917 Revolution made the greatest leap. But the failures of Stalinism became an argument against Marxism – guilt-by-association with Soviet bureaucracy. European parties calling themselves socialist or “labour” since the 1980s have supported neoliberal policies that are the opposite of socialist policy. Russia itself has chosen neoliberalism.

Few socialist parties or theorists have dealt with the rise of the Finance, Insurance and Real Estate (FIRE) sector that now accounts for most increase in wealth. Instead of evolving into socialism, Western capitalism is being overcome by predatory finance and rent extraction imposing debt deflation and austerity on industry as well as on labor.

Failure of Western economies to recover from the 2008 crisis is leading to a revival of Marxist advocacy. The alternative to socialist reform is stagnation and a relapse into neofeudal financial and monopoly privileges.

Socialism flowered in the 19^th century as a program to reform capitalism by raising labor’s status and living standards, with a widening range of public services and subsidies to make economies more efficient. Reformers hoped to promote this evolution by extending voting rights to the working population at large.

Ricardo’s discussion of land rent led early industrial capitalists to oppose Europe’s hereditary landlord class. But despite democratic political reform, the world has un-taxed land rent and is still grappling with the problem of how to keep housing affordable instead of siphoning off rent to a landlord class – more recently transmuted into mortgage interest paid to banks by owners who pledge the rental value for loans. Most bank lending today is for real estate mortgages. The effect is to bid up land prices toward the point where the entire rental value is paid as interest. This threatens to be a problem for socialist China as well as for capitalist economies.

Landlords, banks and the cost of living

The classical economists sought to make their nations more competitive by keeping down the price of labor so as to undersell competitors. The main cost of living was food; today it is housing. Housing and food prices are determined not by the material costs of production, but by land rent – the rising market price for land.

In the era of the French Physiocrats, Adam Smith, David Ricardo and John Stuart Mill, this land rent accrued to Europe’s hereditary landlord class. Today, the land’s rent is paid mainly to bankers – because families need credit to buy a home. Or, if they rent, their landlords use the property rent to pay interest to the banks.

The land issue was central to Russia’s October Revolution, as it was for European politics. But the discussion of land rent and taxation has lost much of the clarity (and passion) that guided the 19^th century when it dominated classical political economy, liberal reform, and indeed most early socialist politics.

In 1909/10 Britain experienced a constitutional crisis when the democratically elected House of Commons passed a land tax, only to be overridden by the House of Lords, governed by the old aristocracy. The ensuing political crisis was settled by a rule that the Lords never again could overrule a revenue bill passed by the House of Commons. But that was Britain’s last real opportunity to tax away the economic rents of landlords and natural resource owners. The liberal drive to tax the land faltered, and never again would gain serious chance of passage.

The democratization of home ownership during the 20^th century led middle-class voters to oppose property taxes – including taxes on commercial sites and natural resources. Tax policy in general has become pro-rentier and anti-labor – the regressive opposite of 19^th-century liberalism as developed by “Ricardian socialists” such as John Stuart Mill and Henry George. Today’s economic individualism has lost the early class consciousness that sought to tax economic rent and socialize banking.

The United States enacted an income tax in 1913, falling mainly on rentier income, not on the working population. Capital gains (the main source of rising wealth today) were taxed at the same rate as other income. But the vested interests campaigned to reverse this spirit, slashing capital gains taxes and making tax policy much more regressive. The result is that today, most wealth is not gained by capital investment for profits. Instead, asset-price gains have been financed by a debt-leveraged inflation of real estate, stock and bond prices.

Many middle-class families owe most of their net worth to rising prices for their homes. But by far the lion’s share of the real estate and stock market gains have accrued to just One Percent of the population. And while bank credit has enabled buyers to bid up housing prices, the price has been to siphon off more and more of labor’s income to pay mortgage loans or rents. As a result, finance today is what is has been throughout history: the main force polarizing economies between debtors and creditors.

Global oil and mining companies created flags of convenience to make themselves tax-exempt, by pretending to make all their production and distribution profits in tax-free trans-shipping havens such as Liberia and Panama (which use U.S. dollars instead of being real countries with their own currency and tax systems).

The fact that absentee-owned real estate and natural resource extraction are practically free of income taxation shows that democratic political reform has not been a sufficient guarantee of socialist success. Tax rules and public regulation have been captured by the rentiers, dashing the hopes of 19^th-century classical reformers that progressive tax policy would produce the same effect as direct public ownership of the means of production, while leaving “the market” as an individualistic alternative to government regulation or planning.

In practice, planning and resource allocation has passed to the banking and financial sector. Many observers hoped that this would evolve into state planning, or at least work in conjunction with it as in Germany. But liberal “Ricardian socialist” failed, as did German-style “state socialism” publicly financing transportation and other basic infrastructure, pensions and similar “external” costs of living and doing business that industrial employers otherwise would have to bear. Attempts at “half-way” socialism via tax and regulatory policy against monopolies and banking have faltered repeatedly. As long as major economic or political choke points are left in private hands, they will serve s springboards to subvert real reform policies. That is why Marxist policy went beyond these would-be socialist reforms.

S. Peries: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

A general consensus is emerging that Trump’s tax plan, which he presented last Wednesday will benefit mostly the country’s upper classes and corporations. In fact the only people that got a tax increase are the poorest taxpayers. A quick scan of even business press headlines will reinforce what I’m saying. For example, Bloomberg writes, “Tax reform could open a huge loophole for wealthy Americans”, and the conservative magazines National Review has a headline that reads, “Congressional Republicans tax plan isn’t great for Trump suburbanites.” However Trump himself promised on Wednesday that he and the rich generally would not benefit from this plan. Here’s what he said.

D. Trump: Our framework includes our explicit commitment, that tax reform will protect low income and middle income households, not the wealthy and well-connected. They can call me all they want, it’s not gonna help. I’m doing the right thing, and it’s not good for me, believe me.

S. Peries: Joining us to analyze what Trump’s tax plan would mean for us is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. He’s the author of several books, and the most recent among them is J Is For Junk Economics. Good to have you back, Michael.

M. Hudson: Good to be here, Sharmini.

S. Peries: Michael. Let’s cut to the chase here. Everyone seems to agree that this tax plan will benefit only the rich. Give us a sense of your main points of why you want to contest this tax plan is beneficial for all.

M. Hudson: Sure. It should be called the Leona Helmsley tax plan. Only the little people will pay taxes. But about the loopholes, the interesting thing is Trump said he wasn’t going to gain a penny, and he may have been telling the truth. That would be true if he’s already paying zero income tax. So his income tax rate is going to go from zero to zero.

That’s about the same for a lot of the biggest corporations in America. Apple, Google, Alphabet, these companies that have been taking all of their profits abroad, trillions of dollars, supposedly, that they’re holding abroad. They haven’t paid any U.S. taxes on this money, because they’ve held them nominally in a teeny little office in Ireland, or the Cayman Islands, claiming that they have to pay hardly any income tax at all.

The misrepresentation here is that Trump says that he can now bring all this money back from these offshore enclaves and tax avoidance zones. The reality is the money’s never been in these zones. It’s been in America all the time. Apple, Google and rich real estate companies simply hold all this “foreign” money in an American bank, but in the name of the foreign affiliate, an office registered in Panama or some other offshore enclave.

So there’ll be zero effect on the balance of payments, but it will lock in their zero rate, enabling them to have avoided taxes for over a decade. I think 2004 was the last such tax holiday. They’ll bring them all back now, without having to pay much tax at all.

S. Peries: Michael, another method that wealthy individuals and companies can use to avoid paying taxes is deducting investment expenses. Tell us how this works.

M. Hudson: If you look at the real estate sector’s loopholes, since World War II the National Income and Product Accounts (NIPA) report that real estate is hardly paying any income tax at all. If you own a building and you’re an absentee owner – not living there, not a homeowner, but absentee owners – they avoid paying any income tax because they don’t earn any reportable income. They pay interest, which is a tax-deductible expense, or they pretend – under the accounting rules that their lobbyists have bought from Washington – that the buildings actually are depreciating in value, even while the price is soaring. It’s going way up, they don’t have to pay an income tax. Then finally, when they die neither their estate nor their heirs have to pay any capital gains. The heirs get it without having to pay any tax.

The richest people have to pay an estate tax, but that’s being knocked out also. I think that everybody, as you pointed out, who’ve looked at the tax plan, says, “All the benefits are at the top. Where’s the benefit for the low-income people?”

Well, the wage earners are going to have to pay more tax. The minimum tax rate is actually raised from 10% to 12%. Also, people who live in Democratic states, New York, New Jersey, Maryland, California and so forth, will not be able to subtract the state and local taxes that they’ve been deducting from their taxable income all these years. So the tax rate for wage earners, for people who actually have to file tax forms and declare an income, is actually going to go up. The economy is going to be made poorer.

S. Peries: Now, Trump and his supporters argue that tax reductions will make the U.S. more competitive, and it will lead to more investment. In an earlier interview that we had with Dean Baker, he points out that historically this has not happened when taxes on corporations and on the wealthy were reduced. So if it does not lead to more investment, what do the corporations do with this additional untaxed income?

M. Hudson: They’re going to do the same thing they’ve done with 92% of corporate earnings in the last decade. They’re going to pay it out as higher dividends, pushing up the stock price, and most of all they’re going to use the money for stock buybacks. They’re going to buy back their stocks to raise the price. They are not going to invest.

The reason you would invest would be to sell more goods to the market and expand the economy. But most corporations, and certainly Wall Street, know that the game is over. The economy has not grown since 2008, except for the financial sector and the real estate sector. That is, except for the richest 5%. For 95% of Americans the economy has shrunk, just like it’s shrinking in Europe.

Corporations know this and say, “There’s only one thing we can do, now that the game is over and the economies are shrinking. We’re going to take the money and run. We’re going to pay all the tax cuts we get and give it to our stockholders.”

S. Peries: What are the consequences of this for us?

M. Hudson: It means the class war is back in business with a vengeance. But I don’t think it’s going to go through. There is no way that a group of Republican senators are really going to commit political suicide by actually voting for this plan, any more than they voted for Trump’s medical health plan revoking Obamacare.

What this is really doing politically though, is driving a stake through the heart of the Democratic party. The Democrats are so sure that the kerfuffle over this tax plan is going to backfire against the Republicans that the knives are out. They’re fighting like they’ve never fought before against the supporters of Bernie Sanders, against Elizabeth Warren. The Wall Street-Hillary, wing of the Democratic party says, “Now we’re going to win the election. We don’t need Bernie supporters. We don’t need the working class. We can form an even more right-wing party than Hillary had and what her program was.”