In a proposal that purports to make the tax code simpler, allow American workers to keep more of what they earn, make American businesses more competitive globally, and repatriate overseas cash, President Donald Trump and Republicans are unveiling the outline of their tax reform plan today.
The plan simplifies the tax code by reducing the number of tax brackets and by eliminating most deductions (popular deductions for mortgages and charitable contributions are not on the chopping block), and drops the corporate tax to 20 percent.
According to the Tax Foundation, the United States has the highest corporate income tax rate in the developed world—and the third highest in the entire world. So this makes sense from an economic point of view. But this plan also repeals the estate tax, also known as the “death tax.” Republicans can expect their opponents to demagogue this as “tax cuts for the rich.”
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One way to avoid this tag is to highlight what this proposal also does: It doubles the standard deduction, which means that the first $24,000 a married couple files is not subject to taxation. The same goes for the first $12,000 a single person files. There’s also a child tax credit and a non-refundable credit for caring for other dependents.
But even the deductions are controversial, and potentially harmful. Conservative think tanker and author Henry Olsen argues that eliminating these itemized deductions constitutes a huge tax-hike on upper middle-class families. This is complicated: Republicans want to double the standard deduction, but most upper-middle income people get their deductions by stacking things up (state and local income tax, charitable, mortgage deductions, etc.) What this means is that unless your itemized deductions from mortgage and charitable and so on exceed the standard deduction, you will lose those, too. So Olsen argues that if you’re currently deducting more than the proposed standard deduction, you lose it all, which constitutes a tax increase.
This is politically dubious. “These people are the likeliest to be unsure about their prior Republican allegiance. Just as they are deciding whether they are still open to the Republican Party, the GOP raises their taxes,” says Olsen. Others have argued that even Reagan couldn’t get rid of state and local deductions (and wouldn’t this just lead us all to move to Florida or Texas?)
The point here is that doubling the standard deduction probably won’t be enough to convince most Americans this is good for them. For this reason, it’s vitally important that Republicans can make the case for why corporate tax cuts matter to all of us—otherwise, they will get tagged with the derisive “trickle-down” label. As President Trump’s chief economist Kevin A. Hassett and Aparna Mathur of the American Enterprise Institute (AEI) have pointed out, numerous studies conclude that lower corporate taxes result in higher wages. Their own empirical study shows a “direct link between corporate taxes and manufacturing wages” (PDF). This is a hard sell, but it makes sense that the more tempting it is for people to start a business here today, the more likely it is for you to find a job at said business tomorrow.
Critics are already pointing out the plan does not address revenue, which is often code for saying it does not include other taxes. The plan would presumably stimulate the economy by incentivizing the repatriation of income held abroad, as well as the creation of new businesses. As Club for Growth president David McIntosh said in a statement, “Fundamental tax reform comes around only once in a generation, and this is our chance. The outline is both aggressive and very pro-growth with its rate reductions.”
Even assuming one believes that tax cuts can stimulate the economy (I do—depending on how they are implemented), the problem is that you actually have to pass them. And, based on the GOP’s failure to repeal and replace Obamacare via reconciliation (meaning that they only needed 50 votes), there’s no telling how long it might take to pass tax reform.
The problem is that the longer it takes to cut taxes, the longer it will take to stimulate the economy. Last winter, Treasury Secretary Steven Mnuchin promised “very significant” tax reform by the August recess. Even assuming that now-defunct deadline, Mnuchin estimated that the combined economic benefits of regulatory relief and tax cuts “will take a couple years to get growth.” So how long will it take now? Past the mid-terms, to be sure.
The bottom line here is that despite all of Trump’s talk about populism and tariffs, if you are a Ronald Reagan/Jack Kemp conservative, there is much to like in this plan. If you are a liberal, there is much to disdain. This proposal tries to learn from the lessons of history, pairing corporate tax cuts with simplification of the tax code and deductions to help middle-class Americans. This is really a fight that has been taking place for decades. The question is not whether these ideas are good, but whether Republicans (this time) can sell them.
The good news is that Republicans are probably more united on this issue than they were on healthcare, and though it won’t be easy, healthcare is one of the most dangerous and divisive public policy issues in America. On the other hand, nothing Republicans have done since Trump was elected should give us any confidence that they won’t botch this one, too.
What is more, just like with healthcare, any time you try to “reform” things you are picking winners and losers. This proposal hasn’t been out long, and we are already seeing examples of people who will end up paying much more under this plan. Here’s hoping this at least turns out to be a civilized debate, not another culture war clash.
