2.2.2 Hidden Jackpots in the CARES Act

And then, there are hidden treasures for the wealthy in a bailout bill like this one which runs through Congress with lightning speed—allowing the majority, in this case the Republican majority in the Senate, to sneak into the bill beneficial tax changes for the wealthy that they had previously been trying to get passed.

One such provision temporarily suspends a limitation, passed in 2017 as part of the massive Republican tax code revisions, on the amount of deductions to nonbusiness income (e.g. capital gains) that owners of businesses that are established as “pass-through” entities can claim as a way to reduce their taxes owed.¹⁹⁰ The provision effectively amended section 172(a) of the Internal Revenue Code, which deals with “net operating loss deductions” for all kinds of entities, including farmers, insurance companies, businesses and taxpayers other than corporations.¹⁹¹ The section that effectuates changes is itself innocuous and imperceptible, using language that no lay person would suspect of having much impact. It is the kind of language that starts:

(1) IN GENERAL.—The first sentence of section 172(a) of the Internal Revenue Code of 1986 is amended by striking ‘’an amount equal to’‘and all that follows and inserting’’an amount equal to—

’’(1) in the case of a taxable year beginning before January 1, 2021, the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and

’’(2) in the case of a taxable year beginning after December 31, 2020, the sum of—

’’(A) the aggregate amount of net operating losses arising in taxable years beginning before January 1, 2018, carried to such taxable year, plus

’’(B) the lesser of—

’’(i) the aggregate amount of net operating losses arising in taxable years beginning after December 31, 2017, carried to such taxable year, or

’’(ii) 80 percent of the excess (if any) of—

’’(I) taxable income computed without regard to the deductions under this section and sections 199A and 250, over

’‘(II) the amount determined under subparagraph (A).’’.¹⁹²

The nonpartisan congressional body, the Joint Committee on Taxation (“JCT”), headed by Senator Chuck Grassley (R-Iowa) and Representative Richard Neal (D-Mass), issued a report on March 26, 2020, estimating some of the revenue effects of the tax provisions included in the CARES Act.¹⁹³ It estimated that the amendment to section 172(a) of the IRC, as it affects tax payers other than corporations, would reduce tax revenues by $74.3 billion in 2020, with continued reductions over the next decade, resulting in total revenue losses over the period 2020-2030 of $169.6 billion. In addition, the “Modifications for net operating losses (‘NOLs’)” (corresponding to the “increase taxable income limitation for net operating loss from 80 percent to 100 percent of taxable income, and allow 5 year generally NOL carryback”) was estimated to generate $80 billion in lost tax revenue in 2020.¹⁹⁴

In a subsequent letter dated April 9, 2020, responding to an informational request from Senator Sheldon Whitehouse (D-RI) and Representative Lloyd Doggett (D-Texas), the JTC broke down the likely distributional effect of the tax change by income category, revealing that the tax reductions would disproportionately benefit the wealthy.¹⁹⁵ In its table, the JTC documented that 81.8% of the total reduction in tax liability of $86 billion in 2020 (in other words $70.3 billion in reduced tax revenues) would likely benefit those with an income over $1 million. The table also revealed that there will be approximately 43,000 returns filed by taxpayers with income over $1 million. In effect, this suggests that taxpayers in that highest tax bracket (over $1 million in income) will receive on average a tax bonanza of $1.63 million.¹⁹⁶

This represents, as Senator Whitehouse and Representative Doggett state, “a massive windfall for a small group of wealthy taxpayers from a Republican provision in the coronavirus relief bill.”¹⁹⁷ As they emphasize, in fact, 95% of those who will likely benefit from the tax change make over $200,000.¹⁹⁸ Representative Lloyd Doggett put it in these terms: “For those earning $1 million annually, a tax break buried in the recent coronavirus relief legislation is so generous that its total cost is more than total new funding for all hospitals in America and more than the total provided to all state and local governments. Someone wrongly seized on this health emergency to reward ultrarich beneficiaries, likely including the Trump family, with a tax loophole not available to middle class families.”¹⁹⁹

All in all, this minor tax provision hidden in the CARES Act will reduce tax revenues—in other words, increase the wealth predominantly of the wealthy—by an estimated total of $195 billion over ten years according to the JCT.²⁰⁰ That far outweighs much of the benefits of the CARES Act for those ordinary citizens getting a $1,200 check.

One need not look further than to the CARES Act—or, for that matter, the bailout of 2008—to realize that all the talk about the American system of free enterprise is a smoke screen for a system of state control that funnels wealth primarily to the wealthiest and most privileged, which in this country corresponds to the white upper-class.

There is no better demonstration of this than the behavior of the American stock markets in the six months following the outbreak of the COVID-19 pandemic. The economic news could not have been worse. Unemployment reached depression levels. Economic growth dropped precipitously. And the stock markets hit record highs for months. In March and April 2020, over thirty million Americans filed first-time unemployment claims, pushing unemployment to its highest levels since the Great Depression. Despite that, the U.S. stock markets recorded in April their best month since 1987²⁰¹; after an initial shock, the markets rallied steadily, rising over 30% since their lows in late March. Dire economic news continued to pound the country for the following four months. In the second quarter of 2020, the American economy lost a third of its steam, with quarterly economic growth (GDP) declining at an annual rate of 32.9%—the worst quarter in at least 145 years.²⁰² And yet, the S&P had its best month in August 2020 since 1986, and the NASDAQ since 2000.²⁰³ The Dow Jones rose above 29,000 in September 2020 to reach record highs from before the pandemic.²⁰⁴

Most economists were puzzled and offered fanciful daily explanations.²⁰⁵ Even Paul Krugman had little to say, suggesting that “Investors are buying stocks in part because they have nowhere else to go.”²⁰⁶ But the reasons are obvious and there is no wonder the markets defied the economic crash: the pandemic is a boon for capital extraction. For the markets, there is nothing like a good crisis when the right people are in power. It provides the perfect opportunity for more capital extraction. Philip Mirowski wrote tellingly about this during the last debacle—the financial meltdown of 2008—under the moniker “Never let a serious crisis go to waste.”²⁰⁷ Now too, the Faustian logic is clear.

First, President Trump and the Republican Senators have made it crystal clear that they have the backs of the large-cap corporations no matter how bad things get.²⁰⁸ By strengthening the largest corporations now, the CARES Act will help them weed out their smaller competitors and facilitate monopolistic practices later. After the pandemic, the large-cap corporations will be poised to reap extractive profits, while most small businesses and mom-and-pop stores will be out of business.

Second, the sunset provisions on the bailout restrictions will allow shareholders and managers to enrich themselves when an economic recovery eventually happens, again without ever needing to build reserves because they know they will be bailed out next time as well. As Tim Wu details, these recurring bailouts have allowed wealthy managers to pillage in good times—through stock buybacks and exorbitant executive pay—and get rescued in bad.²⁰⁹ This too enhances market value while extracting capital for the wealthy.

Third, Trump has sapped any momentum toward universal health care by promising financial exceptions for coronavirus-related health care costs. These COVID-19 carve outs may protect the Republicans from backlash in the November 2020 elections. After it’s all over, the less fortunate will continue to be ravaged by ordinary cancers and poverty-related diseases without any coverage, to the financial benefit of private insurance and corporate and wealthier taxpayers.²¹⁰

Fourth, the pandemic is disproportionately decimating the most vulnerable populations: the elderly, the poor, the uninsured, the incarcerated, and persons of color. The racial imbalance is unconscionable²¹¹: the coronavirus mortality rate for African Americans is almost three times higher than the mortality rate for whites.²¹² The rates of infection in prison and jails are also horrifying.²¹³ The populations at risk are disproportionately older and poorer, so on Medicare and Medicaid. Some refer to this as “culling the herd.”²¹⁴ Market investors can expect that social security will be less of a drag on the economy in the future.

Fifth, the Republicans have been able to secret into the bailouts tax bonanzas for millionaires. The earlier provision just discussed—suspending the limitation on the amount of deductions to nonbusiness income that owners of businesses established as pass-through entities can claim as a way to reduce their taxes owed—will disproportionately benefit about 43,000 taxpayers in the highest tax bracket (over $1 million in income) who will receive an average windfall of $1.63 million per filer.²¹⁵

The stock markets have become the mirror of this ugly truth of capital extraction. Michel Foucault presciently observed, back in 1979, that markets are the touchstone of truth in neoliberal times.²¹⁶ And the ugly truth that they reveal today is that the pandemic is a goldmine for large-cap corporations, institutional investors, and the wealthiest. I once overheard a New York real estate tycoon talking about the land grab in the Adirondacks in the 1930s and commenting “Wasn’t the Great Depression grand!” Institutional investors must feel the same way about the COVID-19 pandemic.

Sadly, one can hardly expect that much difference in a Democratic administration, especially one that is equally beholden to Wall Street and wealthy donors. The last two—those of Bill Clinton and Barack Obama—avidly embraced neoliberal policies such as workfare for the unemployed and welfare for the corporate elite. The Paulson and Geithner bailouts of 2008 were the model for today’s.

None of this is new, and it replicates fully the experience of 2008. As Mirowski demonstrates well, neoliberal extractive capitalism was strengthened, rather than weakened, by the 2007-2008 crisis. The proponents of neoliberalism persevered, undaunted, redoubled their efforts to capture the economics profession, pulled the wool over people’s eyes, found ways to co-op protest movements like Occupy, and came through with policy proposals and responses that outflanked the left-leaning neoclassical economists. In the process, they extracted even more capital from the economy. As Mirowski writes, “The tenacity of neoliberal doctrines that might have otherwise been refuted at every turn since 2008 has to be rooted in the extent to which a kind of”folk" or “everyday” neoliberalism has sunk so deeply into the cultural unconscious that even a few rude shocks can’t begin to bring it to the surface long enough to provoke discomfort."²¹⁷

“They know what it means to never let a serious crisis go to waste.”²¹⁸

It is time for the proponents of coöperation to learn this lesson.

It is time to stop talking about “capitalism,” perhaps even “neoliberalism,” and refer instead to the system of tournament dirigisme.

The only way forward, now, is a genuine transformation that replaces our existing dirigiste regime with coöperative, mutualist, and non-profit enterprises.