Repeal and replace the tax code
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.