Almost Everything Is Wrong With the New Tax Law

BN-WT601_3ll6Y_OR_20171227102908The president’s signature and his notes on his Oval Office desk, Dec. 22. Photo: Brendan Smialowski/Agence France-Presse/Getty Images

This article, surprisingly critical of the new tax law, appeared in this morning’s Wall Street Journal, which has otherwise written favorably about the new law. Mr. Blinder, who wrote the article, is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve. 

Read it and weep.

By ALAN S. BLINDER  Dec. 27, 2017 for The Wall Street Journal

Dec. 20, 2017, should go down in political history as a day of infamy or absurdity, probably both. After passing a massive tax bill without a single Democratic vote—something highly unusual in itself—congressional Republicans gathered with President Trump on the White House steps that day to engage in an orgy of self-congratulation.

The president patted himself on the back so vigorously that he might have required physical therapy. One after another, Republican senators and representatives competed for the honor of offering the most unctuous praise for their Maximum Leader. But Sen. Orrin Hatch of Utah, who was previously thought to be level-headed, set a new standard for fawning by declaring that Mr. Trump may be the greatest president ever. Ever? Not Lincoln? Not Washington?

Was this love-fest because Republicans had just passed an economically sound and wildly popular tax bill that was winning praise from tax experts and scoring marvelously in public opinion polls? Not quite. Polls show that Americans hate this bill.

As they should.

First, while the president is wildly inaccurate when he claims the Tax Cuts and Jobs Act is the biggest tax cut in history—as a share of gross domestic product, the Reagan and George W. Bush tax cuts were far larger—it may be the most regressive. Ordinary people don’t know the details—does anyone at this stage?—but they understand that the new law is larded with provisions custom-made for the rich and superrich while offering mere crumbs for the middle class. Further, once the phase-outs occur at the end of 2025, even most of the crumbs disappear. The Tax Policy Center estimates that the share of tax cuts accruing to the top 0.1% of taxpayers will rise from 8% in 2018 to an astounding 60% in 2027 if Congress doesn’t extend the expiring cuts.

Second, the act emphasizes cutting taxes on corporations, not on people. Few Americans buy into the “trickle down” argument that tax benefits showered on corporations will translate mostly into higher wages and vastly faster economic growth. Most of the economic evidence supports their skepticism.

 Third, the tax cuts blow a large hole in the federal budget, and most Americans think the deficit is already too large. Have you noticed how Republican politicians stop caring about the deficit when their minds turn to tax cuts for the rich? Some of them are already clamoring for cutbacks in spending on income support, nutrition and health care because—you guessed it—the budget deficit is so large. They didn’t even wait for the ink to dry.

 

Fourth, many Americans are rightly suspicious of deals that get rammed through Congress on a strictly partisan basis, with no public hearings, but with language drafted by lobbyists under cover of darkness. But Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan understood the wisdom of the old adage that a rotting fish smells worse the longer it sits on the dock.

Let’s imagine that Mr. Trump and the Republicans really wanted to reform the tax code, rather than just deliver tax cuts to the rich. What might they have done instead?

First, Congress could have simplified the tax code rather than complexified it. To be fair, there is some genuine simplification in the Tax Cuts and Jobs Act. A few loopholes did get closed, and the near-doubling of the standard deduction will make paying taxes easier for millions of Americans. Terrific. But the new law also includes complex new provisions for taxing pass-through income from unincorporated businesses and corporate income that is earned (or, rather, booked) abroad. These defy description, will baffle people for years, and will spawn quite a few tax shelters.

Second, the tax changes could have been designed to be distributionally neutral, as the 1986 tax reform was, or even progressive. But once you decide to concentrate on reducing the corporate income tax, giving a sizable tax preference to pass-through business income, cutting the estate tax, and lowering the top income tax rate, you are headed down a highly regressive road.

Third, a true tax reform would have been revenue-neutral—again, as the 1986 reform was. Some taxes would have gone up while others went down, leaving only a negligible effect on the budget deficit.

 Fourth, a Congress truly focused on tax reform would not have thrust a completely unrelated dagger into the heart of ObamaCare. I refer to the repeal of the penalty that enforces the individual mandate. This mean-spirited provision is a first step toward “repeal without replace,” a foolish and cruel approach that Congress rejected last summer. Notice that the huge savings from this provision don’t come from cutting anyone’s taxes. They come, according to Congressional Budget Office estimates, from 13 million Americans dropping off the health insurance rolls over a decade.

And that’s just a hint of what’s to come. Already, Republicans are taking aim at other parts of ObamaCare, Medicare, Medicaid, food stamps and more. Class warfare? Yes, score the first round for the upper class.

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