Thursday, January 18, 2018

The Republican Tax Reform: Part 3–How Major a Reform Is This, Actually?

In the big scheme of things, this is not a major reform.

Republicans should tone down their crowing about this.

Democrats should stop treating it like it’s the end of the world.

The biggest part of this reform is the reduction in the corporate tax rate. This was so “on the table” for so long that it was part of both Obama and Romney’s plan in 2012. So, at least for Democrats, their complaints about this deserve at least the contemplation of saying “How dare you complain about this?”

Turning the tables, the removal of the tax for not signing up for health insurance under Obamacare is something the Democrats have a legitimate beef about. Sure, it’s probably an unethical idea, but it’s a kinda’ sorta’ reasonable workaround to a problem neither party has solved. I think the Democrats (and the media) overstate the case with their everyone-loves-Obamacare mantra because many people clearly don’t. But I think they have a point in arguing that if the Republicans couldn’t modify Obamacare at all, then this is kind of a cheap shot rather than a fall back position.

As to the limit on SALT deductions, that idea has been around for a long time. The same with the increase in the standard deduction. Either party could have proposed those.

All in all, this is some reform, but it’s not big reform.


Well then, what could have been in a big reform?

How about no corporate tax at all (economics students will recognize that all corporate profits are eventually paid out to people who pay income tax on them anyway)?

How about reducing the number of income tax brackets? How about getting the brackets down to just one (an income tax that’s flat, like just about all other taxes)?

How about taxing consumption instead of income? Europe moved in this direction a long time ago with their heavy use of VAT taxes.

How about reducing the indiscriminate use of means-testing in social programs, which amounts to imposing the highest tax rates on some of the poorest people?

How about eliminating almost all of the credits and write-offs on the individual an corporate tax forms? Most of these are just handouts to politically favored groups.

How about eliminating the mortgage interest deduction? This encourages over-investment in residential real estate. It also encourages overleveraging, which I seem to remember was a big problem they were going to fix because it had serious consequences when the real estate bubble collapsed in 2007.

How about putting corporate deductions and individual deductions on the same footing: businesses can deduct health insurance expenses but individuals can’t, and businesses have wider latitude to deduct interest expenses. I’m not even advocating picking one over the other, I’d just like them to match up so that we don’t push one type of expense towards one type of entity.

How about giving some credit for parents who pay for school outside of public systems? Currently, just about everywhere, if your kid does not go to public school you pay for it, and you still pay the full cost of public schools too. That’s just odd.

How about stop using the tax system to promote stupid stuff? Solar power may be cool, but it is not remotely cost effective even with subsidies, and we basically just lie about that. We’ve got really good figures on what the optimal carbon tax is, and in the worst case scenario solar is still a waste of money in most situations. Wind power is even worse.

When Social Security was enacted, the actuaries worked out a retirement age that provided a certain amount of coverage. If we matched that today, we’d have to raise the retirement age to about 80. We have to collect a ton of taxes just so we can divert money into making payments for seniors who didn’t pay enough in because they weren’t expected to live this long. And Medicare is a similar but far worse problem. All tax reforms are minor if they don’t address this.

All of these have been suggested over the last 30 years, and some of them have gotten fairly long and deep runs into the D.C. swamp.

Do note that there is some overlap in this list, so it might not make sense to do all of them.

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