The Republican Tax Reform Effort: Sound, Conservative Economic Polices or Special Interest Priorities?
Republicans have paved the way for major reforms to the US tax system without Democratic input by passing their fiscal-year 2018 Budget along partisan lines. Although Congress sets only the 30 to 40% of the US Federal Budget that is discretionary spending through the appropriations process, it does play an oversized role in setting public policy priorities, which have huge impacts on the American People and the US Economy. In this particular case, Republican Senators, minus Rand Paul, have chosen to hypocritically abuse the budgeting process to short-circuit legislative safeguards that ensure meaningful consensus built on minority input and abandon their own cause of fiscal responsibility. Without any checks and balances standing in their way, the question now is what envisioned Republican tax reforms will actually mean.
Today, the US government has the largest budget of any other government with the biggest debt of any nation in history. Although the US has also had the world’s largest economy for more than a century, it is one of the least taxed economies of the world. Since the rise of “Reaganomics” under the Reagan Administration, the US has increasingly fueled an explosion of government spending with a mounting supply of the fake asset called debt. This has enabled more affluent individuals and businesses to exchange their tax bills for IOU’s, which are to be repaid by future generations. Instead of honestly confronting the fiscal reality of the Federal Budget, GOP tax reform priorities appear to further ease the social responsibility of affluent individuals and businesses who benefit the most from the US economy while placing a greater burden on future generations.
The desire to simplify the tax code, including through a long overdue increase in the “standard deduction,” and lower the overall tax rates are commendable goals, but decreasing the tax brackets from seven to three has the potential to increase taxes for poor to middle class workers who face the loss of useful deductions. Not only do the changes sought by the GOP disproportionately favor wealthier US taxpayers, the targeting of all but two tax deduction for eliminations caters to the concerns of special interests favored by President Trump. Billionaire real-estate developer Donald Trump would retain the deduction for interest paid on mortgages. Home ownership helps persevere family wealth, but only those who make enough to itemize their tax returns will benefit. To boot, it also helps subsidize the cost of owning a home, so buyers are willing to pay more, thus helping inflate prices and pricing lower income families out of the housing market.
The Republicans would also eliminate the tax break businesses received for providing their employees health insurance, which would imperil the health insurance of most Americans. One can argue that this is a special interest tax break, but workers are not a special interest group. They are the American People. One could also argue government should not exert undue influence over businesses and communities. Government does, however, represent the American People and manages the affairs of the governed community, so government is charged with promoting pro-social behavior. Marriage, for example, is a pro-osocial behavior, because it strengthens family and social cohesion, thus government should not inadvertently penalize marriage by taxing married couples at a higher rate than if they were two single people, i.e. the so-called marriage penalty.
This is also why the charitable deduction, which Trump wants to preserve, is a legitimate tax deduction. What qualifies as a pro-social charitable, tax-exempt cause raises a lot of questions and opens the tax code to the influence of special interest groups, but it is a worthwhile and necessary risk. Government must promote, not undermine, socially responsible activities and business practices. Where there is potential abuse of the charitable deduction, the hassle of dealing with it is small in comparison to the cost of eliminating charitable deductions altogether. Encouraging businesses to fulfill the interests of workers, including their well-being in terms of health, is also an example of the government supporting the health of individuals and communities.
Meanwhile, the GOP is also seeking to eliminate the ability of taxpayer to deduct their State and Local taxes, which reflects the broader priorities of certain Republican factions. First and foremost, taxing the money paid to State and Local governments is a blatant example of double taxation. Ending the deduction would allow the Federal government to raise a great deal more money to offset tax reform, but it would also put pressure on State and Local governments to either freeze or decrease their tax rates. It would, in turn, encourage lobbying in State and Local governments where transparency is generally more lax and lobbying is far more pervasive. Given Republicans allegedly favor State and Local control over Federal, this assault on the ability of State and Local government to conduct business contradicts their expressed values.
The proposed changes would encourage and force States to rely more on sales taxes and fees, which are highly regressive ways of taxing, forms of double taxation, and easily evaded by national businesses and highly mobile, more affluent individuals. In other words, this policy preference caters to those businesses and individuals that have enough money to avoid paying taxes and will do it at all costs. Ending the deductions for State and Local taxes paid would allow for overall rate cuts, but it would also institute a “starve-the-beast” approach at the State and Local level. Quite frankly, taxes are a necessity for proper governance. The consequence of not taxing is debt and/or a collapse of proper governance.
Because local State government provide the greatest amount of representation, State and Local government can be more responsive to the needs of the governed. It is, therefore, the responsibility of the Federal government to support State and Local governments instead of undermining the authority and power of State and Local governments. Eliminating the ability of taxpayers to deduct their State and Local tax payments from their federal bill undermines the power of State and Local governance. It also reveals the loyalty of proponents to businesses and affluent individual over proper governance and the American People. The burden, versus cost, of proper governance should be spread eventually among taxpayers, not just those who cannot avoid paying taxes.
Furthermore, the US tax code has become a mechanism to redistribute the wealth of the Nation. Tax credits for families and corporations amounting to more than what they pay into the system are overt examples of redistribution. Raising the “Child and Dependent Care Tax Credit” as a sweeter may help the GOP garner public support for their priorities, but it is a form of wealth redistribution that subsidizes low wages and adds to the Deficit. Military and other government spending has, of course, always uplifted select communities. How government spending is paid for, however, determines the distorting effects the US government has on the US economy. Republican proposals that encourage degenerative wealth redistribution and economic distortions are the kinds of policies that fiscally reasonably conservatives, who detest government interference in the free markets, should be against.
Absent a progressive tax code, which evenly distributes the burden, versus cost, of government, the tax code would place an enormous burden on those who cannot afford, which hinders their ability to improve their economic standing and later take on more of the burden, while easing the burden of those who can afford it better, which allows them an greater competitive economic advantage. That said, Republicans hope to lower the US corporate tax rate to 20% from the current 35%. Required to pay the highest corporate tax rate in the world when they repatriate their overseas profits, corporations face a perverse incentive that explains why US-based companies keep more than $2 trillion in profits overseas while other corporations feel compelled to change their citizenship through so-called corporate inversions.
Effective US corporate tax rates are, however, in the single digits, which are on par with most US trade partners. The advantage of a low tax rate, versus the use of tax breaks to reduce a high rate, is that corporations are better able to predict their annual tax burden, which fosters economic stability. What Republicans want to do is lower the corporate and switch to a territorial tax system where businesses simply pay taxes on what they earn at home. When advanced economies like Japan and the United Kingdom switched to a hybrid territorial tax system, they gained a competitive advantage over other countries. With the territorial tax system becoming a norm around the world, they started to lose some of that advantage. If the US switches to a territorial tax system as the world’s largest economy and competitor, however, all of that advantage will be gone.
In turn, suppressed taxes will simply make it easier for corporations and individuals, who have an advantage in shifting their wealth around the globe, to make more money overseas and safeguard their wealth in stable economies without paying taxes needed to that support stability. The “free trade” craze, includes the push for a territorial tax system and President Trump has campaigned against, creates a perverse inventive to abandon one’s domestic economy in favor of a more “competitive” environment, i.e. the lowest bidder economy, while harming businesses that cannot abandon their own ship for a cheaper one. The only reason many economies have not suffered directly from these policies is that they have derived a competitive advantage. Unfortunately, the liberalization of domestic tax codes does not create a level playing field for international taxation that, in theory, should favor healthy competition and innovation.
Before American workers paid federal income taxes, the US Government was largely funded by tariffs and other fees imposed on those looking to access the American economy. As the world grew more complicated and expensive, the Federal government passed the Sixteenth Amendment in order to collect a "fair share" of revenue from American citizens. Because the cost of the government is only going up, governments must increase their revenue. As the “free trade” movement favors the elimination of tariffs, this means taxes must be increased for domestic taxpayers, which will increase the pressure for those most financially mobile to seek overseas safe havens. The root of the problem is that policies like these do not allow for the disproportionate funding needs of governments. Because the US economy is the largest and its military budget is also the largest, it must collect the largest amount of revenue.
When countries are forced to compete by taxing less, particularly when the burden is too great for their increasingly poor citizens to bear, they cannot afford to invest in global security, which has largely been subsidized by the United States. The developed countries under economic liberalization have seen their national debt balloon and the wealth of their citizens concentrated into the pockets of the few, which will eventually lead to crippling instability. As such, simply imposing a territorial tax system without major reforms in the US tax code and US trade relations will only hurt the global economy in the long-run. Maintaining the status quo will, of course, only hurt the US and the global economy in the long-run.
With that in mind, one of the biggest debates among Republicans is over so-called pass-through businesses. Pass-through businesses are essentially entities that record businesses revenue as their owner’s revenue and vice versa, thereby forcing small business owners to pay the higher individual tax rate while making clever individuals eligible for the lower corporate tax rate. The current top rate is 39.6% for individuals and the statutory tax rate is 35% for corporations. Many Republicans want to lower rates for small to medium-sized businesses, which create the majority of jobs in the United States. This objective probably makes for a sound economic policy, yet others want to prevent the abuse of the lower corporate tax rate, which is an example where Republican priorities are upside.
The majority of tax dollars come from the wealthy, yet their burden, i.e. the impact their tax obligations have on their standard of living and spendable income, is far less than average-income to poor Americans. The same is true of corporations versus small businesses. Not only do corporations face a lower tax obligation than individuals, they have an opportunity to take advantage of numerous tax-deductions that pass-through businesses do not have. This gives corporations an unfair competitive advantage. Because many of these deductions act as incentives, which can push corporations to invest in businesses development and higher wages, eliminating them, whether or not to lower the overall tax rate, would be counterproductive.
The Republican debate should, therefore, forgo the issue of pass-through businesses and focus on individual tax rates. Wealthy corporations should not have lower tax rates than individuals. The US economy and US government, after all, exist to serve the interests of individuals, not machine-like, often transinternational corporations. A higher tax burden should be placed on wealthier corporations, not individuals. The counterargument is the double taxation faced by corporations, yet the tax on investment income derived from a corporation is no different than payroll taxes paid on income derived from a job at a corporation. If anything, sales taxes are an example of double taxation on the earnings of all American taxpayers.
If Republicans want to reform the tax code to ease the burden of taxes and simulate the economy, they need to shed their corporate-centered views on taxes. They need to ease the burden on consumers. They need to ease the burden on smaller businesses that create jobs and contribute to their local economies. They need to make the benefits of corporate tax rates available to more businesses. They also need to stop favoring wealthy corporations as doing so gives them an unfair advantage. Taxes should not distort the economy. Favoring corporations gives them extra income to out compete their smaller, domestic revivals, whether or not they actually contribute to local, State, and National economies.
Unfortunately, Republicans likely cannot deliver a tax code that actually serves the interests of the United States nor the interests of the American People, because their views are upside. By catering to corporate interests, Donald Trump’s envisioned tax policies seek to stimulate the economy. Although the effective corporate tax rate is already close to 15%, making it easier for corporations to avoid taxes would allegedly offer corporations more money to invest in the economy. Business growth and development is not, however, driven by the amount of money a company has to spend. It is a product of increased demand. As such, consumers are the ones who need more money to spend, if corporations are to invest in growth, thus the tax reforms needs to focus solely on putting more money into the pockets of average Americans.
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