Doing Nothing About Taxes Is Better Than What Republicans Want to Do

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Posted in: Tax and Economics

Can I think of changes to the tax code that would be good for the economy and improve people’s lives? Like anyone who has studied the U.S. tax system for any length of time, yes, I have some ideas. At some point, I might even write down a few of those thoughts.

For now, however, I am going to take a much simpler position on taxes: We should leave bad enough alone. Every tax proposal that the Republicans in Congress have suggested would take us in the wrong direction. Better to sit tight than to move backward.

Before getting into the policy details, however, one must always acknowledge that the first issue in tax reform is and always will be politics. And the politics of tax reform are always impossible.

The (Thankfully) Unwinnable Politics of Republican Tax Reform Efforts

In the maelstrom of Donald Trump’s presidency, we are already seeing cycles repeat themselves. Repealing the Affordable Care Act (ACA) is the priority for a few days or weeks. Then Trump does some outrageous things, and we all forget about policy. After a few days of confusion, we are told that tax cuts are the real Republican priority.

We are currently in the “repeal the ACA” part of this cycle. Now that Senate Republicans’ have finally revealed their hyper-secret health care bill—which, as everyone should know by now, is really a combination of huge spending cuts for middle class and poor people along with an enormous tax cut for rich people—public opposition is growing, and that is not good for Trump or the Republicans.

That means that it will soon be time for Republicans to change the subject again (especially because Trump is always tweeting himself into ever deeper legal trouble). Even before the Senate’s health bill was revealed, House Speaker Paul Ryan was already calling on his troops to get behind a “once in a generation” opportunity to rewrite the tax code in his regressive image.

Actually, it is not just Democrats and liberals (two groups that do not completely overlap) who should be opposed to Ryan’s push on taxes. As a conservative columnist recently pointed out, Trump himself has given congressional Republicans every reason to walk away from voting for any major legislation (regarding taxes or anything else):

If they pass Trump’s tax cuts, they run the risk that Trump will call it a giveaway to the rich, or if they pass repeal of Dodd-Frank, they might get labeled Wall Street pawns by the president.

The immediate motivation for that statement was Trump’s recent statement that the House-passed repeal-and-replace health care/tax cut bill is “mean, mean, mean.” Trump and Republican leaders leaned heavily on their members to vote for that bill, but Trump did not hesitate to hang them out to dry.

In that environment, why would anyone vote for what will surely be a hugely regressive tax giveaway to the ultra-rich? To do the president a solid? Loyalty is expected in TrumpWorld, but it is most definitely not rewarded.

Although some congressional Republicans will surely fear Trump’s wrath if they do not go along with everything he demands, there is now every good reason for anyone from a not-absolutely-safe seat to think more than twice about backing a tax cut bill that will be easy to attack (because it will be awful).

Even so, talking about tax reform is a surprisingly alluring trap for politicians of all stripes. A big part of the problem is that taxes are complicated enough that even smart people can be bamboozled by Republican talking points.

For example, a liberal legal scholar recently wrote in The New York Times: “Supply-side economics … is bad science but savvy politics, because it communicates to working-class whites that Republicans understand what they want: jobs. ”

How in the world could anyone think that supply-side tax cuts—that is, trickle-down economics, in which businesses and rich people get tax cuts and everyone else waits in vain for the winning to begin—“communicates” to anyone that Republicans care about jobs? That is, what about supply-side economics in particular communicates that point?

The Republicans do talk about supply-side economics as an elixir to create jobs, but that is because they are relying on people not to know what supply-side economics really is. One could just as easily say that any policy—any policy at all, no matter how little connection it has to actually creating jobs—“communicates” to people that Republicans understand that people want jobs.

After all, any politician can put “policy A” and “jobs” in the same sentence. Even if some people fall for the scam, we cannot conclude that that particular policy is savvy politics, because it can easily be replaced by policy B, and the new version can then be repeated as the next big lie.

The point is that, despite convincing some people through pure repetition, Republicans do not have a job-creating policy, and their tax cuts are no more politically savvy than any other policy that falsely claims to creates jobs. What they actually have is a make-the-rich-richer policy that they are willing to describe dishonestly, over and over and over again.

In my most recent Verdict column, I returned to the fantasyland of supply-side economics and the magical promise that tax cuts will fully or partially pay for themselves. Although everything that I wrote in that column is still true, my point here applies to Republican tax-cutting ideology more generally.

Ronald Reagan’s budget director once famously said that the Reagan tax cuts were a Trojan Horse, that is, a plan that included across-the-board tax cuts that were politically necessary to accomplish what Republicans really wanted, which was tax cuts for the rich.

Now, Ryan-led Republicans are so ignorant, stupid, or malevolent that they are willing to build a see-through Trojan Horse. They still make noises about supply-side fantasies, but it sometimes seems more like a matter of muscle memory than actual conviction on their part. It is all about making inequality worse, and they care less and less about hiding that fact.

But Can’t We Do Something Good About Taxes?

As I noted above, however, there are plenty of reasons to criticize the current tax system. No one would have designed it this way from scratch, and one can always think of ways to improve it.

One problem, however, is that some liberals unnecessarily give ground on tax policy, especially when it comes to business taxes. The Obama Administration, for example, frequently communicated its willingness to cut corporate tax rates.

Why? One left-leaning commentator recently wrote that “[b]ig tax cuts for the rich and even for major corporations, which are more justified substantively, aren’t popular.” Why would he say that tax cuts for major corporations are “more justified substantively” than straight tax giveaways to rich people?

There has long been a popular talking point that U.S. corporate taxes are higher than taxes in other countries. This supposedly puts U.S. corporations at a disadvantage internationally, and the argument then leads to the conclusion that corporate taxes must go down in order to improve U.S. competitiveness.

As a theory, this does have a superficial coherence. However, the fact is that corporate tax revenues have (with some ups and downs) been shrinking as a percentage of U.S. tax revenues for decades, currently totaling less than a fourth of the revenue that we collect from the individual income tax and one-third of what we collect from Social Security and Medicare payroll taxes.

Corporations paid significantly more of the tax bill in the Fifties and Sixties, when business was booming—and, significantly, when workers were receiving a consistent share of the growing pie, leading to the great middle class prosperity of that era. That broad-based prosperity ended with the Reagan era, which also happens to be when corporate and high-end taxes were being reduced.

Moreover, even though the top corporate tax rate is 35 percent, the effective rate that corporations pay is on average 14 percent, as a recent analysis by the Economic Policy Institute explains in detail.

How can that be? One of the classic misdirection plays for Republicans is to emphasize marginal tax rates, which are the rates that apply to taxpayers’ “next” dollar of income. In any progressive system, marginal rates are going to be higher than average (or “effective”) rates, which gives demagogues an opening to fool people into thinking that taxes are higher than they are.

Take a simple example. Suppose that we had a tax system in which the first $90,000 of a person’s income is not subject to tax, and everything beyond that is taxed at a marginal rate of 20 percent. How much will a person who earns $100,000 in income pay?

The answer is $2,000 (20 percent of the $10,000 that are taxable). What is that person’s effective tax rate? It is in fact only two percent, but an anti-tax politician will always say that the tax rate is twenty percent. That is literally true in one sense of the word, but it is highly misleading (and deliberately so).

This, by the way, is an important aspect of debates about tax rate reductions in the past. The top marginal rate in the U.S. was at one point 91 percent, which is very easy to demagogue. But it is important to remember that the top rate did not kick in until an individual had (in inflation-adjusted terms) $1.7 million in taxable income, and for couples filing jointly the top bracket began at $3.4 million.

That most definitely does not mean that an individual who had, say, two million dollars in annual income would pay 91 percent of that in taxes. The first $1.7 million would have been taxed at much lower rates, so that the effective rate would be significantly lower. Even so, all a politician has to do is say, “We once had tax rates of 91 percent,” and everyone says, “Oooh!”

Of course, that is not to say that 91 percent was the ideal top marginal rate. As I mentioned in my most recent Verdict column, even the left-leaning economist Thomas Piketty’s work suggests that the top marginal rate should be in the 75-80 percent range. Again, however, even if we adopted those top marginal rates, that would not mean that anyone would turn over three-quarters of their income to the Treasury Department.

The Deductions Game

The other important aspect of this already confusing story is that taxable income is not at all the same thing as total income. People and corporations are allowed to take many deductions and exclusions that reduce the amount of their income subject to taxes.

For example, the hypothetical person who was paying a 91 percent marginal rate on two million dollars of taxable income in 1960 was able to reduce his taxable income by deducting all kinds of expenses. This further reduces the actual bite of taxes against a person’s or corporation’s true income. In fact, in some years at that time, people earning millions of dollars paid no federal income taxes.

Indeed, the reason that U.S. corporations pay only a 14 percent effective tax rate, even though the top marginal rate is 35 percent, is a story about deductions rather than about progressive marginal rates. Using a variety of tax strategies, some corporations are frequently able to reduce their tax bills to zero.

There is a good argument that this is a bad overall system, where some businesses pay higher effective rates while others pay lower rates, depending on who can take advantage of a plethora of specialized deductions—business-friendly deductions that, by the way, Republicans have enthusiastically loaded into the tax code over the years.

The problem is that the current Republican Party has shown no consistent interest in changing the deductions in a way that would result in different types of businesses paying similar effective rates. The politics are brutal, because in order to get some businesses down to the 14 percent average, it would be necessary to take away deductions from other businesses to bring their effective rate up to the average.

The result is that Trump and the Republicans view corporate tax “reform” as a way to cut taxes for all corporations, not just those with relatively high effective tax rates. In an era where the Republicans are using revenue constraints as an excuse to cut essential programs like Medicaid (which helps not just poor people but never-poor people like middle class retirees and the disabled), this is insanity.

Moreover, as that report from the Economic Policy Institute shows, corporate profits after taxes are at all-time highs. If the tax system—as screwy as it can be in its many details—is harming American businesses, sign me up for that kind of harm.

The bottom line is that Republicans will use any tax bill as a reverse-Robin Hood mechanism. Whether it is a bill to reform the entire system or only a bill that changes how businesses are taxed, Republicans have one goal—and that goal is most definitely not to make the tax system or the economy work better for ordinary people.

There are plenty of good tax reform ideas. None of them are on the table now. Opening up the tax system to allow Republicans to work their way down a cherished regressive wish list is a bad idea.

Posted in: Tax and Economics

Tags: Legal, Tax

  • Chriss Street

    The Economic Policy Institute’s analysis of the corporate profit percentage earned on revenue and corporate taxes paid should be an endorsement of supply-side economics, because it demonstrates that high nominal tax rates actually give big corporations the ability to drastically constrain competition from small and medium size businesses that actually create new jobs.

    EPI’s corporate profits and payments are derived from big corporation reported activities, as found in SEC 10Ks. But that sector of the economy has the luxury of lobbying and international tax gaming to pay extremely low taxes.

    The best example of this is Apple’s CEO, Tim Cook, who called the most valuable corporation in thee world’s current effective tax rate of 0.00045 percent as “fair.” http://www.breitbart.com/california/2016/09/01/apple-says-cutting-taxes-359944-per-1m-profit-fair/

    Apple pioneered the infamous “Double Irish Flip” in the 1990s. Since then, most Silicon Valley tech firms employ similar tax-avoidance scheme that involve a combination of an Irish and a Dutch subsidiary in the Caribbean to shift profits to low tax jurisdiction, and then on to a virtually “no tax” jurisdiction before “recognize” profit.

    Big corporate entities love the nominal U.S. corporate tax rate, because it keeps their profits elevated by only hamming small and medium size competitors. That damage is demonstrated by the plunge by over one third in the percentage of self-employed individuals in the U.S. since President George H.W. Bush broke his “read my lips” promise and raised taxes. https://hbr.org/2014/02/where-are-all-the-self-employed-workers

  • Brett

    Mr. Buchanan shows his hard-core liberal views of not wanting to cut the high taxes in the U.S. which would create more jobs (decreasing unemployment and pay-outs to welfare recipients) and stimulate more economic growth. The economy has already picked up since the January inauguration, in part on belief that relief from the economy-busting taxes and over-regulation of the Obama administration is coming.

  • Slim Chance

    The issue isn’t about tax cuts for the rich or for corporations (noting that the vast majority of corporations in the U.S. are closely held family businesses that could hardly be characterized as “rich.”) What you, and apparently every other liberal (and every Republican, for that matter), desires is to retain the ability to give affect to your social or economic agenda through tax laws. In other words, through the complex, unreadable and incomprehensible proverbial small print, you can do indirectly that which the American people would never let you get away with directly.

    A tax deduction here, a tax credit there and you can encourage, promote, even outlaw pretty much anything you want. There is a desire for more women in the work place and to minimize incentive to be a stay-at-home Mom. Answer? Easy. Tax credit for six-figure income households to send their kids to state-sanctioned child care institutions. if your honest (and I have my doubts). you must concede that if the American people were ever asked to vote on the matter, child care subsidies for six-figure income families would never get past first base. And the list of these kinds of slight-of-hand social engineering are the reason the tax code is virtually indecipherable. (Indeed, it is amazing to me we regard a tax system that a common ordinary citizen couldn’t possibly comprehend as fulfilling substantive due process is amazing to me).

    Your tweaks, the Republican’s tweaks, Democrats’ tweaks – they’re all equally harmful as they stem from the same paradigm – the ability to promote a social and/or economic agenda through the back door. In that way, the current system can NEVER be fixed. It should be trashed and a tax system created that is relatively impervious to political manipulation, like a national sales tax (and I don’t give a big rats rectum about claims it would be “regressive.” That’s just another way of saying you would lose your social engineering capabilities. You want to give other peoples money away? – then stand up and make your case and let them decide – directly. And I also don’t care if it means we take in less revenue overall – if indeed that’s the case. At least then we’ll have a better idea what kind of government we can afford).