Re­peal and re­place the tax code

The Oklahoman (Sunday) - - OPINION - WASH­ING­TON POST WRIT­ERS GROUP

The Repub­li­cans’ tax bill would some­what im­prove the ex­ist­ing rev­enue sys­tem that once caused Mitch Daniels (for­mer head of the Of­fice of Man­age­ment and Bud­get, for­mer In­di­ana gover­nor) to say: Wouldn’t it be nice to have a tax code that looked as though it had been de­signed on pur­pose? Today’s bill, which is 429 pages and is apt to grow, is an im­plau­si­ble in­stru­ment of sim­pli­fi­ca­tion.

And it would worsen the tax code’s al­ready sub­stan­tial con­tri­bu­tion to “moral haz­ard.”

Econ­o­mists use that phrase to de­note cir­cum­stances in which in­cen­tives are for per­verse be­hav­ior. Today’s tax code is such a cir­cum­stance, and the Repub­li­can bill would ex­ac­er­bate this by ex­pand­ing the $1,000 child credit to $1,600 with an ad­di­tional $300 “fam­ily credit” for each par­ent and non-child de­pen­dent, and by dou­bling the stan­dard de­duc­tion to $12,000 for in­di­vid­u­als and $24,000 for mar­ried cou­ples. These mea­sures would in­crease the num­ber of per­sons not pay­ing in­come taxes and would fur­ther de­crease the per­cent­age of in­come tax rev­enues paid by low­in­come earn­ers.

Al­ready 62 per­cent of Amer­i­can house­holds pay more in pay­roll taxes than in in­come taxes.

The bot­tom 50 per­cent of earn­ers sup­ply less than 3 per­cent of in­come tax rev­enues. Forty-five per­cent of Amer­i­can house­holds pay no in­come tax, ei­ther be­cause they earn too lit­tle or be­cause they qual­ify for enough ex­emp­tions and cred­its to erase their li­a­bil­ity. Sixty per­cent pay noth­ing or less than 5 per­cent of their in­come. Forty per­cent of earn­ers are net re­cip­i­ents from the in­come tax be­cause they qual­ify for re­fund­able tax cred­its. All this means that an al­ready large Amer­i­can ma­jor­ity has a van­ish­ingly small in­cen­tive to re­strain the growth of a gov­ern­ment that they are not pay­ing for through its largest rev­enue source.

These facts might be the re­sults of de­fen­si­ble tax and so­cial poli­cies. They should, how­ever, be dis­com­fit­ing to those re­main­ing con­ser­va­tives who dis­pute Dick Cheney’s no­tion that “Rea­gan proved deficits don’t mat­ter.” Deficits mat­ter for their po­lit­i­cal as well as their eco­nomic ef­fects: Deficits make big gov­ern­ment cheap, en­abling the po­lit­i­cal class to charge tax­pay­ers rather less than $1 for ev­ery $1 of gov­ern­ment ben­e­fits dis­pensed.

Today’s Repub­li­can bill is sup­posed to demon­strate to the party’s Trumpian base that congressional ma­jori­ties mat­ter and must be ex­tended. But the facts about par­tic­i­pa­tion in the in­come tax mean that the bill is un­likely to as­suage the in­jured feel­ings of core Trump sup­port­ers, un­der­stood as down­scale white work­ing-class vot­ers who sup­pos­edly are seething be­cause they are not ben­e­fit­ing enough from bur­den­some gov­ern­ment. They might have valid griev­ances, but not ones that can be ad­dressed by in­come tax rate re­duc­tions for in­di­vid­u­als. Pay­roll tax re­duc­tions would be an­other mat­ter.

And all in­di­vid­ual earn­ers will ben­e­fit to some ex­tent from cut­ting the cor­po­rate rate from 35 per­cent to 20 per­cent. The in­ci­dence of cor­po­rate tax­a­tion — who ac­tu­ally pays it — is fiercely de­bated by econ­o­mists. Suf­fice it to say that cor­po­ra­tions do not pay taxes, they col­lect taxes. Un­cer­tainty about the in­ci­dence of cor­po­rate tax­a­tion is one rea­son the Repub­li­can bill’s cor­po­rate tax rate is 20 points too high.

This year’s best tax bill, which Rep. Bob Good­latte, R-Va., has in­tro­duced six times since 2006, is four pages long and con­tains fewer words

(411) than the new Repub­li­can bill has pages. It is ti­tled, with al­most un­prece­dented ac­cu­racy, the “Tax Code Ter­mi­na­tion Act.” It would nul­lify the ex­ist­ing 4 mil­lion-word code as of Dec. 31, 2021, and re­quire that by July 4 of that year it must be re­placed by a new one, which would nec­es­sar­ily be one de­signed on pur­pose.

Ge­orge Will georgewill@ wash­post.com

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