The politics of tax reform

President Donald J. Trump participates in a tax reform kickoff event at the Loren Cook Company, Wednesday, August 30, 2017, in Springfield, Missouri. (Official White House Photo by Joyce N. Boghosian)

Habitual liars and serial exaggerators like Donald Trump generally don’t make the best spokespersons for their causes. That doesn’t mean, however, that everything that they say or believe is a lie. Their untruthful behavior which makes them excellent targets for criticism distracts from a discussion of the merits of their policy prescriptions.

President Trump’s criticism of the mayor of San Juan precipitated one of the latest tweetstorms. In terms of vituperative value, my personal favorite response so far was from Lin-Manuel Miranda. “You’re going straight to hell, @realDonaldTrump,” tweeted Miranda. “No long lines for you. Someone will say, ‘Right this way, sir.’ They’ll clear a path.”

Advertisement

There’s not much doubt as to where the creator of “Hamilton” stands.

October is the month when lawmakers will begin consideration of the fiscal 2018 federal budget in the hope that tax reform can be completed this year. Because the budget resolution requires only a majority of each house of Congress for passage, it is expected to pass as long as it’s not so specific that the Republicans start fighting amongst themselves. Budget passage is a key precondition to achieving a big overhaul of the tax code, which the Republicans believe is the key to unleashing a major stimulus in the nation’s economy. It’s the centerpiece of the party’s strategy. I predict a federal budget deficit this year of the magnitude of those of the Reagan and Obama years.

A framework is a plan for a plan of a plan. Released last week, the Republican framework for federal tax reform is ten pages long. Each page is framed by a thick black line with a simplified (three stars and three bars) flag, the words “tax reform” in all capital letters, under which are three phrases in very small letters (more jobs, fairer taxes, bigger paychecks).

Beyond this decoration the first page sets a pugnacious political tone. It contains only eight all-capital words: “UNIFIED FRAMEWORK FOR FIXING OUR BROKEN TAX CODE.” “Broken” is superfluous. As the adage goes, why would one fix something that isn’t broken?

The Trumpian framework document for tax reform includes simplifying the system, lower taxes (“give American workers a pay raise”), leveling the playing field with other countries, repatriating offshore American capital, and ending tax loopholes. That’s it. All the “details” are up for negotiation, it seems.

The lobbyists have already jumped into the fray. The elimination of the deduction for state and local taxes is just one of many contentious parts of the proposal. Breaks for capital investment, research and development spending, and credits for low-income housing will continue, the GOP framework says, because “they have proven to be effective in promoting policy goals important to the American economy.” The personal standard deduction will almost double. And there’ll be an overdue reduction in the corporate tax, which many large businesses don’t pay, anyway.

The tax framework poses the same problem as the GOP health plan: the administration may not be able to get enough Republican votes to pass it. “There’s always infrastructure,” mocked an article in Slate referring to a policy area where votes gained from each amendment would not be offset by lost votes somewhere else.

Wall Street has been booming as it has waited for this part of the Trump political agenda — and not just because wealthier Americans will do very well under the proposed tax act. Apparently, the one percent will do fine, getting, according to a Tax Policy Institute paper, more than half the total tax breaks. But Wall Street expects a broad stimulus effect. “This huge tax cut will be rocket fuel for our economy,” Trump told the National Association of Manufacturers last Friday in Washington.

The Democrats think the Republicans favor a more regressive tax system, increasing inequality, and an anti-government push that rewards greed rather than reviving the animal spirits of American capitalism. Further, the Democrats are fearful that the Republican plan will give a disproportionate share of tax relief to those constituencies that support the GOP.

Writing in the Harvard Business Review, Eric Toder put the matter into one succinct sentence: “Republicans favor lower taxes and reduced levels of public goods and services, except for defense spending, and believe high-income people should bear a relatively smaller share of the aggregate tax burden than do Democrats.”

The huge economic literature on tax cutting leads to a single conclusion: Sometimes tax cutting works and sometimes it doesn’t. Obviously, not all tax changes will have the same impact on growth. “Reforms that improve incentives, reduce existing distortionary subsidies, avoid windfall gains and avoid deficit financing will have more auspicious effects on the long-term size of the economy,” economist William Gale recently concluded.

Very few politicians who have already made up their minds on the basis of their own ideology are interested in the facts. “The two central questions in tax policy are how much revenue to raise and how to allocate the tax burden among income groups,” Toder wrote. “The answer to the first question determines how much of the nation’s resources will be devoted to public purchases — such as defense, infrastructure, public health, education, and social safety net programs — and how much to private uses. These are political choices, not just economic ones.”

Post Your Thoughts