WASHINGTON, November 3, 2017 – The goals of the GOP tax plan are to stimulate economic growth, simplify the income tax code, eventually raise more tax revenue and conform to some vague notion of “fairness.” The GOP proposal is a good “second best” solution. That means it is not the best plan, but it is the best plan that this Congress could pass.
Originally, the GOP tax plan reduced taxes for all Americans. The Democrats, however, voiced strong opposition to cutting taxes for the highest income earners, even though they are the only group to see an income tax increase over the last 20 years or so. In 2012, President Obama raised taxes on the wealthy from 36% to 39.6%. Every other tax bracket stayed the same.
In 2013, Obama increased the Medicare tax by 0.9% on higher income earners, raising that tax from 1.45% to 2.35%. Obama also raised the capital gains tax on high-income earners from 20% to 23.8%.
Since 2012, high-income earners have seen significant tax increases. Obama felt this was the right thing to do; that the wealthy should pay their “fair share,” although “fair share” was left as a concept.
Not only did this long-held but unproven notion make income inequality worse. It also destroyed capital creation, leading to a continuation of America’s already slow-growing economy. The GOP initially tried to fix this. But Democratic opposition forced the GOP to change their plan and eliminate any tax break for the wealthy.
Indeed, in most cases, the current draft legislation would effectively raise taxes on the wealthy, since they will lose some of their deductions, particularly in states that have high state income tax rates.
The GOP tax plan is a good second best solution.
To simplify the tax code and treat all taxpayers the same, the GOP wanted to eliminate almost all deductions. But special interest groups forced some deductions back into the plan in order to win their support.
A prime example: The home building industry wanted the home mortgage interest deduction to remain in its present form, fearing that a loss of the deduction or any part of it would hurt new home sales. The reality is that paring back this deduction likely would not have harmed sales although it may switch some households from buyers to renters.
In that case, the new homes would still be built, but, an investor rather than the occupant, would own the property.
The initial GOP tax plan eliminated the deduction for state income taxes.
But pressure from legislators in highly populated and highly taxed blue states like California, New York, and New Jersey forced the GOP to allow at least some continued deductions for state income taxes.
The critical issue of equity is not even discussed in the current debate. That is, labor is generally taxed at a higher rate than capital. There is really no reason for this except that it’s the way it has always been. There is, however, a plan that can resolve these issues, a plan that would be a first best solution instead of second best.
That plan is simply to impose a 15% single rate tax on all income above a livable minimum (twice the poverty level) with no deductions for anything. All income would be treated the same whether from wages, salaries, rent, interest, profit, dividends or capital gains. The corporate tax rate would also be 15%.
What does the GOP tax plan mean for families?
Suppose a family of four earned a total income of $60,000 annually. The livable minimum of $50,000 would be subtracted from that total leaving only $10,000 to be taxed. The family would owe $1,500 in federal income tax.
This plan would eliminate deferential treatment for any American. All Americans would be treated exactly the same instead of forcing citizens from states without a state income tax to subsidize those who live in states that enforce state income taxes.
This 15% plan would treat Americans who freely choose to rent a home just the same as Americans who freely chose to own a home. Some will complain that this does not encourage homeownership. But didn’t the government’s desire to increase home ownership significantly contribute to the disastrous 2007-2009 financial crisis?
An objective look at the GOP tax plan
An objective look at both plans would conclude that the 15% plan is equitable because those who earn more pay proportionately more in taxes. Under the current system and under the current GOP proposal those who earn more pay disproportionately more in taxes.
Yet while this single rate tax plan would accelerate economic growth to at least 4% annually and would eventually raise more tax revenue, it will never become a reality. Due to the never-ending machinations of special interest groups, their lobbyists and Democrats who are perpetually fixated on overtaxing the wealthy, the first best, single rate solution will never pass.
But the GOP tax plan is a good, second-best solution. We will just have to settle for that.
*Cartoon by Branco. Reproduced with permission and by arrangement with LegalInsurrection.