[OP-ED]: We need higher taxes
Can we get real about “tax reform,” the Republican promise to enact deep tax cuts that will spur economic growth? Probably not, but let’s give it a try.
For starters, we can stop calling it “reform.” That’s a charged word, implying that the new tax system will be superior to the old. We don’t know that for a fact; the new tax system might be worse. Better to call what we’re doing the “tax debate” or “tax overhaul.” (The point here is a general one. Advocates of policy changes routinely label their proposals “reform.” This suggests improvement, which may be nonexistent.)
Second, we cannot afford a net tax cut. If we are to lower tax rates and simplify complex tax provisions, we must offset the revenue losses by plugging loopholes, raising other taxes or cutting spending. Under current policies, the Congressional Budget Office has projected $10 trillion of deficits from 2018 to 2027. Trump’s tax plan, including provisions that would raise revenues, would add another $3.5 trillion of deficits over a decade, estimates the nonpartisan Tax Policy Center (TPC).
Third, if tax cuts were initially financed by more deficit spending, the costs of today’s lower taxes would be transferred onto future generations. “Tax cuts often look like ‘free lunches’ for taxpayers, but they eventually have to be paid for with other tax increases or spending cuts,” says a new report from the TPC. (The report is based on a broad outline of Trump’s plan, subject to change.) This is not “reform.” Social Security and Medicare -- paid mainly by workers’ payroll taxes -- already involve huge intergenerational transfers. Deficits are both a cause and consequence of those transfers.
Still, the superficial appeal of Trump’s tax plan is undeniable. For individuals, taxes would be reduced and simplified. There would be only three personal rates -- 10, 25 and 35 percent -- compared with today’s top rate of 43.4 percent. The top corporate rate would fall from 35 percent to 15 percent. To help pay the cost of these cuts, most itemized deductions would be ended (exceptions: the deductions for charitable contributions and mortgage interest payments).
Roughly 71 percent of households would receive a tax cut, estimates the TPC. The trouble is that the tax cuts are regressive: That is, compared to household incomes and existing tax burdens, they favor the rich and upper middle class as opposed to the poor and lower middle class. The cuts for the richest fifth of Americans would average $19,510, with the cuts for the top 1 percent averaging $196,420, estimates the TPC. Meanwhile, the fifth of Americans in the middle of the income distribution would get an average cut of $1,320.
Actually, there would be nothing wrong with this if there were convincing evidence that lower tax rates stimulate significantly faster economic growth. But there isn’t. Tax cuts may cushion a recession and improve the business climate, but they don’t automatically raise long-term growth. A 2014 study by the Congressional Research Service put it this way: “A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates.”
The truth is that we need higher, not lower, taxes. When the economy is at or near “full employment,” the budget should be balanced or even show a slight surplus. At 4.3 percent, the jobless rate is surely close to full employment, while the deficit for fiscal 2017 is reckoned to approach $700 billion, about 3.6 percent of the economy (gross domestic product). Both figures are expected to increase, despite continuous (assumed) economic growth. The gap can’t be blamed on the business cycle.
We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake. In the past, I have advocated a carbon tax -- introduced gradually to minimize any recession risk -- as a pragmatic way of paying for the government we want, while trying to cope with global climate change. Letting the federal debt buildup continue is an exercise in self-serving optimism. It presumes that the possibly adverse consequences (the crowding out of private investment, a currency crisis) will never materialize.
Given the complexities, the best we can probably expect from a tax overhaul is a modest reduction in tax rates paid by tightening or eliminating some tax preferences. This would not be undesirable; the fewer tax preferences, the less lobbying to keep or expand them. Washington’s “swamp” would be a tad drier.
But we should not delude ourselves that we are fixing the economy, the budget or the tax system. Mostly, through deficits, we would be shifting the costs of today’s lower taxes and higher benefits onto tomorrow’s Americans through higher taxes and lower benefits. Admitting this would require a more honest debate than most Americans are willing to abide.