President Trump visited Indiana this week to campaign for tax reform. This is welcome news because the president’s personal involvement on a truly important policy issue is a novelty. More importantly there is a great deal of bipartisan consensus on the need for serious tax reform. This should be low hanging fruit for congress.
The broad outline of the GOP proposal involves cutting the tax rate on corporations and individual income tax payers, and reducing the number of exemptions and deductions that crowd our vast and inequitable tax code.
The arguments in support of the changes are simple and widely supported. The US corporate tax rates are the highest in the developed world. More damaging are the loopholes created by congress that heavily distort individual firm and household tax rates. The most distinguishing feature of the US tax code is the ease with which affluent families and corporations can avoid paying taxes.
The most pernicious examples are federal tax loopholes that can be exploited by a large team of tax attorneys and accountants. Americans should be outraged that at least once over the past decade Ball State University paid more federal taxes from renting out empty dorm space to summer band camp than the global conglomerate General Electric did on all its operations. But, GE has more tax avoidance specialists than IU, Purdue and Ball State have professors. This is deeply wrong, and fuels rightful anger and mistrust of government.
The personal income tax rules are filled with ways to avoid taxes that fall inequitably on households. A full 47 percent of families pay zero federal income tax, and more than a quarter of these qualify for a negative income tax – the Earned Income Tax Credit. Of course these folks pay other taxes, but make no mistake about it. Income taxes are a sole burden of middle class and richer families. There is a plethora of seemingly nice tax loopholes from retirement savings and college plans, to home office dedications that enable those with more income to reduce their tax burden. Income tax has simply become unfair.
The goal of this tax reform isn’t so much to reduce the rate, but to get similar taxpayers to pay more similar rates. To do that, tax rates must be reduced, while loopholes must be eliminated or standardized. The math on this is pretty straightforward, but the extreme arguments for and against the effort are mostly bad demagoguery.
Many on the right will argue that the big tax cut will stimulate the economy, maybe bringing in more tax revenue. They are mistaken for two reasons. First, even if tax rates drop, some taxpayers will pay less, and others, like GE, will pay more. Second, the historical effect of tax rate cuts, even when they are large, suggest a smallish economic boost. For every tax dollar lost to rate cuts, we might see a quarter or 35 cents in new taxes due to economic growth. This should be welcomed, but it isn’t a federal budget panacea for a country that is $20 Trillion in debt.
The folks on the left will screech against a tax cut for the rich. They too are mistaken. The loophole removal will benefit middle and upper middle class families the greatest, while corporate tax cuts will be very broadly felt. The best research on the subject finds a large share of corporate tax cuts shift to labor income. More importantly though, today close to half of all families own stocks, and more than 60 percent will own stock over their lifetime. Sorry Bernie, we are all capitalists now.
This tax reform is also worth some risk taking at the national level. Our economy is growing at a shockingly low rate, and new business formation is at historic lows. Removing some of the heavy cost of doing business, especially for new firms, should be a strong bipartisan goal. That is why this tax reform effort deserves real consideration in the coming weeks, and we should welcome the president’s personal involvement.