“We must do ‘something’ on health care so we can get to tax reform. Now!”
This is the latest rage and clamor among the big donors, lobbyists, and consultants within the less intelligent arm of the Democrat Party, otherwise known as the GOP.
The entire argument is built upon a false premise and will not result in sound policy unless conservatives grab the mantle on tax policy away from the party establishment.
There are many emergency public policy issues vexing our economy, society, sovereignty, security, and the core of our ability to operate as a democratic republic: the judicial oligarchy crisis, Afghanistan, debt, the entitlement and dependency state, uncontrolled immigration, Islamic terrorism, the collapse of the civil society, and challenges to religious liberty and core family values, just to name a few. These are all either new problems or issues where the trends have dramatically worsened, have become unsustainable, and will destroy our country. The same cannot be said of the tax code, at least not in terms of trends, unsustainability, and a sense of urgency.
As much as we all hate the tax code, “tax reform” is not one of those emergency “triage” issues needed to solve an unsustainable trajectory within the next few months. If anything, relative to almost any other policy issue, the trend on taxes has gotten relatively better after the Reagan and Bush tax cuts. The political realities of what we are dealing with today will make any play for tax reform an interception rather than a touchdown. Which is why it would be better to stay away from it, at least from a “comprehensive approach,” and tackle more pressing issues, such as immigration, terrorism, and homeland security – or de-regulation of major industries, government reforms, and stripping down the judiciary from its autocratic nature.
Don’t get me wrong: A fair tax or a truly low flat tax that doesn’t punish productivity, redistribute wealth, and socially engineer the economy with asset bubbles induced by tax pork would go a long way towards reviving our economy. There would be no better cause to pursue. Except that is not on the menu. Because of the following factors, it is clear that “tax reform,” which is already ill-defined, will never result in the sort of fair, pro-growth, limited-government outcomes we are looking for and will likely make things worse.
1. Debt is the challenge of our time, not taxes: Taxes used to be the most important domestic policy issue, not only because the tax structure determined how much money stayed in the private sector, but because it was the source of nourishment for the federal leviathan. As such, by cutting taxes, we’d accomplish both the goals of economic growth and limiting the size of government. That era is over. Debt, serviced by monetary manipulation, is the new nourishment of a much greater entitlement state than Reagan ever feared. That is the challenge of our time, much like taxes were the challenge of Reagan’s time. The lesson of the Bush years was that we succeeded on the tax issue but needed to begin work on spending, entitlements, and dependency. Instead, we have gone backwards.
2. Budget scoring severely limits tax reform: Closely related to the first point – because crushing debt and entitlements are the challenge of our time, it makes balanced budgets that much harder. Mandatory spending is projected to cost $34 trillion over the next 10 years, and deficits are estimated to grow by $7.8 trillion. And that is using the CBO’s everlasting optimistic baseline for both revenues and spending. The health care crisis alone will sink this country into insolvency before we reach the end of the 10-year budget window. In addition, there is a consensus to increase military spending. And that doesn’t begin to factor in Ivankacare and the $1 trillion infrastructure porkulous plan. This is a very different era from the Bush years, when there was a projected surplus. To be clear, I’m not one of those who believes we should pass up any opportunity to cut taxes. We have already crossed the Rubicon of Greece-like debt by funding endless dependency without paying for it, so I’m not about to start applying rules of balance to giving people back their own money and growing the economy. But that is the view of conservatives. Republicans in Washington will feel constrained by the need for deficit-neutral “tax reform.” They are already looking for all sorts of corresponding tax increases and new revenue streams to offset any cuts. That will not end well.
3. Not a lot of juice to squeeze out of tax cuts for non-wealthy: The dirty little secret is that half of tax filers don’t pay, on net, federal income taxes. Thanks in large part to the success of the Reagan and Bush tax cuts (plus the Obama tax increases on the wealthy), lower income and lower-middle income earners don’t incur a net positive tax liability. The bottom two brackets have already been eliminated. By definition, any tax cut is going to be enjoyed primarily by the wealthy because they are the ones who pay the taxes.
According to the Tax Foundation, in 2014, the top 1 percent paid 39.5 percent of all federal income taxes, even though they earned just 20 percent of the income pie. The top 5 percent paid 60 percent of the income taxes, even though they earned just 36 percent of the income. The bottom 50 percent, on the other hand, paid just 2.75 percent of the income taxes, even though they earned 11 percent of the income pie. The point is that the income tax is already more progressive than it’s ever been. Yet Republicans have no ability or desire to properly articulate this. Inevitably, they are accused of “cutting taxes for the wealthy.” As such, every time they pick up the “tax reform” ball, they wind up throwing even more refundable tax credits at the bottom and raising taxes, on net, for those at the top.
There is simply not a lot that can be done in terms of a tax cut plan that won’t be perceived as tax cuts for the rich. Not that there is anything wrong with that. This is why it would be wise for Republicans to focus on the hidden tax of regulations, such as the ethanol mandate and many other pernicious interventions, which collectively cost all families $15,000 a year. Until we abolish the 16th Amendment through an Article V convention, I just don’t see any political appetite from this party to truly flatten out the tax code. A true flat tax (even with an exception of the first $30,000) will result in a tax increase on many people. Personally, I’m fine with a low flat tax raising just enough revenue to fund the constitutional aspects of the federal government and with making sure that such a tax would be paid by everyone. But politically speaking, Republicans will never let that happen.
4. Liberals are writing the tax plan: The main players behind the administration’s tax plan are Gary Cohen, Steven Mnuchin, and Wilbur Ross – not a single Republican among them. This will not end well.
5. Buying off Democrats with porkulous: The administration has already hinted that it intends to work to garner Democrat votes rather than push reforms to the existing practice of the filibuster in the Senate. Some prominent supply-siders are already advocating for a trade of tax cuts for more infrastructure spending. As we’ve noted before, transportation spending should be devolved to the states instead of purveying the wasteful federal transportation sinkhole. It’s not worth the trade.
6. Health care must be fixed first: One of the most important reforms that can be made to the tax code is equalizing the treatment of health insurance plans purchased by the individual with employer-provided plans. This will help tackle “the original sin” of health care and get more people to cost-continuously purchase their own plans rather than rely on the over-utilized employer system. The problem is that until and unless Obamacare is repealed, there is no individual market left to which people can take their tax deduction and purchase a cheap plan. Given that Republicans don’t plan to repeal Obamacare – just simply “pass a health care bill” – there is no point in fixing the tax distortion on health insurance.
The path forward
The best way to preempt a bad tax plan is for conservative members of Congress to introduce Trump’s campaign tax plan as a bill and approach the president with it in the hopes of making this plan the default position. His plan is actually really good and politically defensible because it is not flat (which is nearly impossible to achieve), cuts everyone’s taxes, but lowers marginal rates significantly. Recently, the Trump administration has disavowed this plan, but conservatives should not let the president violate another campaign pledge.
However, even such a plan that we agree with will take months to iron out the details and build the proper case for it publicly. If the president doesn’t understand that and wants a quick “victory,” the best course of action is to push for an immediate reduction of the corporate tax rate from 35 percent to 25 percent without getting rid of any deductions (which would disrupt business models and take longer to work out). This will inject an immediate pro-growth shot into the economy at a time when it badly needs a recovery.
A modest reduction in corporate taxes is a proposition even many Democrats are on record as supporting. This has been a consensus issue, it will not disrupt the market, and it will not lose much revenue. Corporate taxes don’t bring in that much revenue to begin with. This can all be done in the short run while making the case for Trump’s original plan on individual taxes over the next few months.
When approaching the tax issue, Republicans cannot make the same mistake they did with the health care bill. We can’t assume “tax reform” is a policy punchline we all agree with, the same way “repealing Obamacare” clearly didn’t mean what it denoted. Both the broad principles and philosophy behind the effort as well as the details of the specific proposal matter. In the case of health care, Republicans adopted the Democrat philosophy, and the details of their original bill codified Obamacare instead of repealing it. The same will hold true for taxes unless conservatives take a proactive approach to stave off bad policy.