Saturday , December 16 2017

Tax Reform

Summary:
I read with interest the Unified Framework for Fixing our Broken Tax code. The bottom line is a cut in the corporate tax rate to about 20%, roughly the world average. It also proposes an end to the estate and gift tax.These are small steps in the right direction. It's not a once-in-a-generation clean-out-all-the-junk tax ...

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I read with interest the Unified Framework for Fixing our Broken Tax code. The bottom line is a cut in the corporate tax rate to about 20%, roughly the world average. It also proposes an end to the estate and gift tax.These are small steps in the right direction. It's not a once-in-a-generation clean-out-all-the-junk tax reform.

As an economist I am most saddened by what is missing. Tax reform, designed to support long term growth, should have two main characteristics:

1) Lower marginal rates, by broadening the base. This reduces the disincentives to work, save, invest, start businesses, while raising the same revenue.

2) Simplicity, stability, transparency, and consequent evident fairness. (By fairness I mean each of us knows the others are paying taxes too, and do not suspect that lobbying, political connections, and clever tax lawyers are getting others off the hook.)

These two are essentially missing from the document. The left has seen the tax code pretty much entirely as a vehicle for subsidy and redistribution for a long time. This Republican document, sadly seems to have bought that view.  The goal is to
"put more money into the pockets of everyday hardworking people."
Well, without changing government spending, that means less money in someone else's pocket.



I searched for the word "incentive." Here are its occurrences:
"Ending incentives to ship jobs, capital, and tax revenue overseas. ..puts an end to the incentives for shipping jobs overseas...It ends the perverse incentive to keep foreign profits off shore" 
"retains tax incentives for home mortgage interest and charitable contributions"
"the framework explicitly preserves ... tax incentives [for]: research and development (R&D) and low-income housing." 
Fixing profit repatriation and the incentive to move your business overseas is a good idea, though don't count on it to unleash a wave of investment in the US. I have no idea how it affects "jobs." The second two are the opposite of tax reform. "Marginal" appears once,
Domestic manufacturers will see the lowest marginal rates in almost 80 years. 
To be fair, it does say
"Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes. "
But it does not say which tax breaks and loopholes, other than to say that mortgage interest, charitable deductions,  and low income housing are off the table. (With the failure to so much as move Medicaid to a block grant, I don't have much hope for the other big one, the tax deductibility of employer-provided group health insurance.) With the chance of any substantial deduction-financed rate lowering off the table, that's an invitation for everyone to get in touch with their lawyer and lobbyist.

To be fair, it does say
   simplicity of “postcard” tax  ling for the vast majority of Americans.
But this simplicity comes largely by exempting a swath of voters from any obligation to pay Federal taxes:
the framework simplifies the tax code and provides tax relief by roughly doubling the standard deduction to: $24,000 for married taxpayers filing jointly, and $12,000 for single filers.
The tax code itself gets no real simplification, transparency, or stability. 

Ronald Reagan himself understood that corporations pay no taxes. All taxes apparently paid by corporations come from higher prices, lower wages, or lower payments to shareholders. The right corporate tax is zero. Tax people. This document offers  
Tax relief for businesses, especially small businesses.
In sum, it pretty much abandons the idea of tax reform, designed to improve "supply side" growth, appropriate for an economy at full employment, in favor of tax cuts, at best a short-run Keynesian stimulator in appropriate for the moment; and it accepts the notion that the basic function of the tax code is to transfer money to or from various groups.

Its reception is therefore predictable. 

Binyamin Appelbaum, writing "News Analysis" in the New York Times, not the opinion pages, is titled well, "Trump Tax Plan Benefits Wealthy, Including Trump." It starts
The tax plan that the Trump administration outlined on Wednesday is a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest. 
Well, sell a tax plan by its income transfer features, with Democrats who think entirely that way, and no surprise, "tax cut for the wealthy" is all you will hear.
The administration and its congressional allies are proposing to sharply reduce taxation of business income, primarily benefiting the small share of the population that owns the vast majority of corporate equity.
Even the corporate tax is evaluated not by its incentives, but by presumptions about its distributional effect. It's wrong -- only a small share of the population holds stocks directly, but every American who has a pension fund, including government employees, is invested in the market.
President Trump said on Wednesday that the cuts would increase investment and spur growth, creating broader prosperity. But experts say the upside is limited, not least because the economy is already expanding.
Well,  sell a tax reform as a "tax cut," whose economic effects come from who gets "money in their pocket" rather than by incentives, and no surprise people evaluate it as a Keynesian tax cut.

I don't dream that the Times and Democratic Party would say anything about a Republican tax plan other than "tax cut for the rich" or think of economic effects in incentive and growth terms rather than Keynesian terms. But one could at least give them an argument to disagree with!

The times Editorial revealed full-on Trump derangement conspiracy theorizing is alive and well. They are happy to speculate in print that the Treasury Secretary, the leaders of the House and Senate, and a little battallion of policy wonks are hard at work on a tax reform proposal all for the purpose of... lowering President Trump's personal taxes.

I found the WSJ editorial a more useful, and balanced summery of the small but definite promise, and the many dangers.

So yes, if this went through, it could be a good step in the right direction. It could show Congress can do something, and could pave the way for a real tax reform. Just as changing Medicare to block grants would have been a good small step in the right direction. I'm consequently not holding my breath.

But I am still (always) optimistic. If this fails, there will be no choice but to embark on a real reform.
Make no small plans for they have no power to stir the soul.  
You can always count on the Americans to do the right thing after they have tried everything else.
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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