Do we need tax reform? If so what should it look like? Why do we need ‘reform’ and what should our goals be in changing the federal tax system?
These questions should be uppermost in our minds as we digest the sketchy proposal put forward this week by Republican leaders. We need a positive proposal, or at least the broad shape of one. Criticism of the Trump/McConnell/Ryan proposal is too shallow and won’t take us anywhere.
Should we be trying to lower federal tax receipts overall, or just make the burdens fairer? Do we want to tax every dollar earned in the same way, or are there certain activities we want to encourage through the tax code? If so, which activities? Investments? All investments, or just those reasonably expected to generate new jobs?
Should corporations be taxed as well as individuals? At the same rate? Charitable contributions? Home ownership? Both of those even if they disproportionately favor those with higher incomes?
We need to be grappling with these questions, tough as these may be. I believe we need fairer taxes, but not a tax cut. We need the federal government to do at least as much as it is doing at present.
One of the few public policy matters on which Donald Trump and Hillary Clinton agreed during the campaign was that the ‘carried interest’ loophole for hedge managers should be closed. For starters it tells you a great deal about the Republican sketch that it doesn’t even bother to mention that loophole. “Carried interest is the portion of their clients’ profit paid to managers of private equity, venture capital, real estate, and other funds in return for managing those funds. The payments are the managers’ compensation, for which the top tax rate would otherwise be 39.6%. But because of the loophole, carried interest is instead taxed at the capital gains rate, which tops off at 23.8%.” Not fair, not defensible.
The failure to address the carried interest loophole is the first indication that this is not ‘tax reform’ but rather a tax cut for the wealthy. E. J. Dionne of the Washington Post certainly thinks so. “The only thing today’s Republican Party knows how to do is cut taxes for the very rich.”
The response from the proposal’s supporters is that this tax bill (once written) will generate enough economic growth that it will pay for itself and benefit everyone. Bruce Bartlett, a policy adviser to Ronald Reagan, lays that shopworn untruth to rest. The bipartisan, wonky Committee for a Responsible Federal Budget agrees. (You can read here, on p 8, what the Republican Platform in the 2016 election had to say about the federal debt. Hint: it didn’t call for a massive increase in the debt.)
A good deal of the initial commentary about the proposal focused on the call to repeal the estate tax. “To protect millions of small businesses and the American farmer, we are finally ending the crushing, the horrible, the unfair estate tax, or as it is often referred to, the death tax,” Donald Trump said in a speech unveiling the proposal. Politifact rated this statement “Pants on Fire” for its level of dishonesty. A tiny number of farms or small businesses are affected by the estate tax today. Eliminating the estate tax would benefit the very wealthy.
The most comprehensive analysis of the effect of the proposal so far comes from the Urban-Brookings Tax Policy Center. They estimate that if passed the federal government would lose $2.4 trillion over the first ten years and a further $3.2 trillion over the subsequent decade. This would add significantly to the federal debt. The beneficiaries would primarily be those with high incomes, especially those in the top 1% of U.S. incomes.
One deduction the sketchy proposal would eliminate is the provision in the tax code that would allow you to deduct what you pay in state and local taxes from your tax bill. (The provisions for exempting employer-provided health care, mortgage interest payments, and charitable giving – all largely benefitting the more affluent would stay in place.) This would hit particularly hard those states with higher state taxes – most of them more likely to vote Democratic. It will also likely be one of the more controversial features of the proposal.
But the real issue is not what we make of this or that feature of the proposal. The real question is what would fairer taxes look like?
Here’s what the 2016 Republican Platform said about taxes – and on page 1.
The current tax code is rightly the object of both anger and mockery. Its length is exceeded only by its complexity. We must start anew. That will be an enormous undertaking and, if it is to succeed, it must command the attention and approval of the American people. It cannot be engineered from the top down, but must have a common sense approach, and be simplified.
Our proposal is straightforward. Wherever tax rates penalize thrift or discourage investment, they must be lowered. Wherever current provisions of the code are disincentives for economic growth, they must be changed. We will not divide the American people into winners and losers. We will eliminate as many special interest provisions and loopholes as possible and curb corporate welfare, especially where their erosion of the tax base has created pressure for higher rates. We will be mindful of the burdens on families with children and the impact on an aging population. We will seek simplicity and clarity so that every taxpayer can understand how much of their income is consumed by the federal government.
We will welcome all to this enterprise — to discuss, debate, challenge, and amend — so that together we can restore economic growth for the American people and, even more important, renew their faith in the future.
Perhaps it is a place to begin. But, in fairness, here’s what the Democratic Platform called for (p 12):
At a time of massive income and wealth inequality, we believe the wealthiest Americans and largest corporations must pay their fair share of taxes. Democrats will claw back tax breaks for companies that ship jobs overseas, eliminate tax breaks for big oil and gas companies, and crack down on inversions and other methods companies use to dodge their tax responsibilities. We will make sure that our tax code rewards businesses that make investments and provide good-paying jobs here in the United States, not businesses that walk out on America. We will end deferrals so that American corporations pay United States taxes immediately on foreign profits and can no longer escape paying their fair share of U.S. taxes by stashing profits abroad. We will then use the revenue raised from fixing the corporate tax code to reinvest in rebuilding America and ensuring economic growth that will lead to millions of good-paying jobs.
We will ensure those at the top contribute to our country’s future by establishing a multimillionaire surtax to ensure millionaires and billionaires pay their fair share. In addition, we will shut down the “private tax system” for those at the top, immediately close egregious loopholes like those enjoyed by hedge fund managers, restore fair taxation on multimillion dollar estates, and ensure millionaires can no longer pay a lower rate than their secretaries. At a time of near-record corporate profits, slow wage growth, and rising costs, we need to offer tax relief to middle-class families—not those at the top.
Democrats believe that no one should be able avoid paying their fair share by hiding money abroad, and that corrupt leaders and terrorists should not be able to use the system of international finance to their advantage. We will work to crack down on tax evasion and promote transparency to fight corruption and terrorism. And we will make sure that law-abiding Americans living abroad are not unfairly penalized by finding the right solutions for them to the requirements under the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR).
We will offer tax relief to hard working, middle-class families for the cost squeeze they have faced for years from rising health care, childcare, education, and other expenses.
Maybe there are some ideas here, too. Let’s talk about what we want to accomplish together.