Taking The “Reform” Out Of “Tax Reform”

Everyone is talking taxes these days, and not just because the deadline for filing individual tax returns came and went this past week. Last Saturday, administration opponents marched in Washington and other cities to protest President Trump’s refusal to release his tax returns. Last month’s battle over the American Health Care Act turned in part on the budget consequences of repealing the Affordable Care Act’s redistributive taxes on high-income individuals. New polling suggests that Americans of both political parties are increasingly concerned about how few taxes corporations and the wealthy pay. And now, congressional Republicans have promised to pass a comprehensive tax reform bill for President Trump’s signature that will both simplify the tax code and reduce taxes on most Americans.

It’s unclear whether Republicans will make another go at trying to pass health care reform before taking on taxes. The intricacies of the budget reconciliation procedure required to get around a senate filibuster will play a part in the decision, though the President, with typical off-the-cuff bluster, announced a tax bill would be forthcoming this week. But regardless of the order, the whole agenda is doomed. While the contradictory Republican politics on healthcare has attracted most of the attention, the difficulty of harmonizing GOP dogma with the practicalities of tax reform are just as stark. What Republicans talk about when they talk about “tax reform” (perhaps the title of Paul Ryan’s frighteningly bad Raymond Carver adaptation) is quite different, and far more unpopular, than what the rest of us understand it to be.

The purported justification for rewriting the tax code is to reduce its undeniable complexity. Rather than simply apply a standard rate to all income, the current U.S. tax code applies differential rates to various forms of income and then contrives a Swiss Cheese approach of deductions and exemptions, incidentally creating an industry of tax consultants and advisers. This unneeded complexity is prone to manipulation by the connected while producing few benefits. So, the “big idea” behind tax reform is to eliminate deductions and exemptions while reducing overall tax rates. In DC speak, this is called “broadening the base and lowering rates.” Republicans have repeatedly promised that done in this manner, reform could be “revenue neutral” so as not to increase the deficit.

Unfortunately, Republicans don’t actually want to broaden the base in ways that would make tax reform possible. To understand why, you need to appreciate the breadth of the proposed cuts and also unpack what tax “base” the GOP would supposedly “broaden” to offset them. Since 2013, the highest marginal income tax rate is 39.6% on all income earned above $415,050 for individuals and above $466,950 for married couples filing jointly. Lowering rates by the levels Republicans have talked about—Mitt Romney proposed a 28% for the top tax bracket in 2012—would cost the federal government a massive amount in revenue. And that ignores the giant reductions in capital gains, corporate, and estate taxes which inure almost entirely to the rich. Indeed, If there was any doubt that the GOP was the party of the ultra-wealthy, it should have been dispelled by the risible statement by a high-society Jeb(!) Bush turned Donald Trump supporter who claimed in August of last year that repeal of that tax was “the linchpin of the conservative movement.” This statement was enough to make even the conservative American Enterprise Institute blanch, considering that 97% of estate tax collections come from the top 10% and 35% of collections come from the top 0.1%.

“Broadening the base” to make up these enormous cuts could be accomplished only through some combination of increasing the number of people who pay federal taxes and/or by eliminating most of those inefficient deductions and exemptions. The problem, though, is that accomplishing the former would add a pittance to the federal coffers, while doing the latter two would overwhelmingly harm the wealthy contributors that make up the GOP’s core constituency (a third option, creating new federal tax streams, is an anathema to Republicans).

The inadequacy of increasing the number of tax payers is obvious. When Republicans bemoan the nearly half of Americans who don’t pay federal taxes, they neglect to mention that most of those “freeloaders” earn too little to pay federal income tax. They also ignore the federal payroll taxes for Medicare and Social Security that workers have taken out of their paychecks regardless of their income. Even if the GOP proposes to eliminate the Earned Income Tax Credit aimed at the working poor, and proposes to tax the Social Security benefits of the low and middle income elderly, the increase in revenues would be quite small.

Meanwhile, the big-ticket deductions that could raise significant revenue may be favored by the middle-class but function as large giveaways to the rich. The home mortgage interest deduction gives large benefits to those with high-value properties while doing little to actually incentivize home buying. Similarly, the charitable giving deduction provides the wealthy huge tax benefits so that they can direct that money to their own pet causes. So, too, with the various retirement savings exemptions and deductions (depending on the type of retirement account). The wealthy are more likely to be able to save for retirement and save more, and would do so without the tax benefit.

When you put together all the taxes Republicans want to cut with all the giveaways they want to protect, you get a reform impossible to accomplish. Indeed, we know that the numbers don’t add up because Mitt Romney proved that they don’t. During his 2012 presidential campaign, Romney put forward a tax plan that offered very specific tax cuts and extremely nebulous base-broadening. His inability to name a single deduction that he’d eliminate was widely panned. Analysts for the non-partisan Tax Policy Center concluded that “the basic power of arithmetic is overwhelming in showing that Governor Romney has so far overpromised on the tax side.” No matter. Romney simply refused to get specific because he couldn’t. Donald Trump, for his part, offered a tax plan during the campaign that didn’t even bother to promise revenue-neutrality—if enacted it would bust a $9.5 trillion hole in the federal budget over ten years. No wonder he hasn’t mentioned it since the election.

What all of this means is this: Republicans don’t support tax reform, they support tax cuts. Those tax cuts will disproportionately benefit the wealthy. And when they are enacted without offsetting reductions in the loopholes that litter the tax code, they will also massively increase the deficit. Either Republicans will jam through a form of these unpopular cuts or they will be tripped up by the same tensions within their caucus that derailed the AHCA. But there will be no true tax reform in this Congress.

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