Reframing the tax-reform debate
President Donald Trump and Republican congressional leaders kicked off the fight for tax reform with the joint release of what was labeled a framework. Liberals promptly won the first round. For liberals, tax reform can only be viewed through the prism of income inequality. In addition to raising revenue for the government, one of the purposes of the tax code is to redistribute income to ameliorate income inequality. Tax reform that shifts any of the burden of paying for the government from the rich to others is ipso facto bad.
In announcing the framework, Trump and the congressional leaders accepted the liberal overview of tax reform. No tax cuts for the rich in our plan, they averred. Instead, a big middle-class tax cut.
This was quickly proved to be a canard.
The Tax Policy Center did a preliminary analysis. With the framework, the burden was shifted from corporations to individuals, and the rich got a big tax break.
GOP sympathizers claimed bias. It’s true that the Tax Policy Center is a joint venture between two left-wing organizations, the Brookings Institution and the Urban Institute. And the analysis makes assumptions about things left undefined in the framework, such as the income spectrums for the proposed individual income-tax rates.
However, the assumptions aren’t unreasonable, being based on a previous House GOP plan. Moreover, such a burden shift is inevitable however the missing details in the framework are filled in.
The main thrust of the framework is to reduce the tax on business profits. The corporate income-tax rate would be reduced from 35 percent to 20 percent. Pass-through business profits, which are taxed at the individual rate, would be reduced from a high of nearly 40 percent to no more than 25 percent.
Economists don’t really know where the incidence of business taxation truly falls. Some of it is passed on to consumers in the form of higher prices. Some is passed on to workers in the form of lower wages. And some of it is borne by shareholders in the form of lower profits.
How much is absorbed by each constituency is a function of competition and elasticity of demand, which differs from company to company.
But some significant portion of the benefit of lower taxes on corporations will flow to the owners through higher profits. And business owners will be disproportionately wealthy.
So long as Republicans accept the liberal overview of tax reform, they will lose the public debate.
But there’s no need to accept the liberal overview, and no political gain from accepting it.
The left continues to argue that the rich need to pay their fair share, which is always defined as more. But the tax code already reifies the liberal overview.
In 1980, prior to the Reagan tax cuts, the top 1 percent of income earners paid 19 percent of federal income taxes. Today, they pay nearly 40 percent, even though they make ONLY 20 percent of the total income.
The top 10 percent of income earners pay 70 percent of the income tax, even though they make less than 50 percent of the dough.
According to the National Taxpayers Union, 35 percent of those who earned money and filed an income-tax return paid nothing in federal income taxes.
Now, it is possible to have pro-growth tax reform that raises more money for the federal government with little in the way of distributional reallocations. The Simpson-Bowles Commission did just that, with a top rate for both individual and corporate income taxes of less than 30 percent.
That, however, requires going pretty much whole hog on eliminating credits and deductions, which Trump and the GOP leaders aren’t ready to do.
Given how sharply progressive the tax code currently is, pro-growth reforms that don’t increase the deficit or shift the burden from the rich are difficult to concoct, without going whole hog.
To sometimes win the public argument, Republicans have to reject the liberal overview on tax reform.
The parties best serve the country when they offer choices the electorate can toggle between.
The Democrats are the party of a redistributionist tax code. If the electorate is in the mood to stick it to the rich, the Democrats are the obvious party of choice.
Republicans should be the party of a pro-growth tax code. And lower marginal tax rates, for workers and investors, are the key to boosting growth.
Sometimes voters will be in the mood for growth over redistribution, if they ever actually get to hear the argument.