Parsing policy proposals – Revenue

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Well, we are off to the races for the 2020 elections. My hope against likely reality is that the media would focus on policy proposals by the candidates rather than personality, but so far the new year is starting on the latter trend.

This is the first post in a series that will look at my own process for parsing through the language of policy proposals from politicians to separate the wheat from the chaff. This first one will look at the top line for government, the proposals for generating revenue. The newly-elected progressives are pushing for going back to a 70% top marginal rate, and some economists like Paul Krugman have no problem with this. So, what can we look for in the candidate and administration positions? Here is my checklist for deciding how seriously to take revenue proposals.

Parse #1 – Residual Laffer cultism

Any rational analyst would look at the results of the 2017 tax cuts and see clearly that the famous Laffer Curve, if it ever existed before, is dead. One could make a case (maybe) at those proposed 70% top marginal tax rates that lower taxes could produce more total revenue, but effective tax rates on the rich have crashed so much that, as we have found, lower tax rates this time around now simply mean an out-of-control and ever-growing deficit. Any proposal that you see from this camp can be tossed out immediately as cultism. Its continued adherents are not fiscal conservatives. They are just plain wrong on the facts.

And on a related note, an interesting survey conducted in 2013 by the New York Times and USA Today showed widespread misunderstanding about how marginal tax rates work, with Republicans much more misinformed than Democrats.

Parse #2 – More government revenue through higher economic growth

This was the second rationale behind the 2017 tax cuts, and it has been equally disproven by subsequent events. Back in September I wrote about how the rush of stock buybacks following the corporate tax cut indicated that most of corporate America had not been holding back on investment projects waiting for tax relief. Economic growth is a complex thing. It is not just about the business-tax side of the equation. Purported fiscal conservatives consistently fail to take into consideration the fiscal health of the average American household in their analyses. The 2017 tax cuts did little to make that fragile condition much (or any) better.

Between the first two, this pretty much throws out most of the Republican proposals I have seen. It would be interesting to see one from fiscal conservatives that does not fall into one of these two sinkholes.

Parse #3 – Who gets the tax preferences?

Back in March of 2018 I wrote a piece called “A legislator’s guide to tax reform.” One key point there was that “any tax preference used by a small percentage of taxpayers is a parasitic special interest.” While Democrats have typically focused on the progressive rate structure of income taxes, Republicans know that “tax expenditures,” those special-interest tax credits and deductions, get much less scrutiny, even though economically they are pretty much the same as handing people money (i.e., welfare).

This includes the most popular deductions, such as the home mortgage interest deduction, which is a direct subsidy to the home-buying middle class, and an indirect subsidy to the residential construction industry. People purchase more, newer and larger homes under this tax provision than they would otherwise. Rich people do not need the incentive but benefit anyway. Poor people can only dream.

But there are hundreds, perhaps thousands more tax preferences, each with one or more lobbyists in Washington assigned to protect it to the death, and often just a tiny percentage of individual or corporate taxpayers taking advantage of the gift, a clear definition of “special interest.” You have to look at every tax preference and realize that there are winners and losers with each one, the losers being usually “the rest of the taxpayers,” who pay higher rates as a result. Most of these favors were quietly tucked into unrelated legislation over the years by clever lobbyists, and have never been challenged openly. Given any taxation proposal, you can easily list whose lobbyists are funding the politician’s campaign.

My long-standing proposal has been to establish a bipartisan “Tax Realignment and Closure Commission” similar to the mechanism used in the past to close obsolete military bases. All “tax preferences” that are used by less than one in 1000 taxpayers (or, by my preference, one in 100) would be “marked for sunset” unless a super-majority of the Congress publicly votes to “save” the tax preference. The injustice here is not the preferences themselves, but rather the inequity of widely-varying effective tax rates among people at the same basic level of income.

This is not an advocacy of a “flat tax.” The progressive marginal rate structure (which should be steeper, I would argue, and with more brackets to reduce the impact of the cut-off points) counteracts the reality that the overall tax burden outside of income taxes (e.g., sales taxes) has a strong regressive bias. A progressive rate structure balances this out a bit. But the real issue here is the wide variance in taxes paid by people at the same level of income, thanks to special-interest tax preferences.

Parse #4 – How many different definitions of income?

If you want lower taxes for yourself and have influence on tax law, the first place to go is to re-write how income itself is defined. You want your income to be somehow “special,” meriting a lower tax rate from the start, and different from the rest of the rabble.

I have a mantra that says, “Income is income.” For far too long lobbyists have tried to differentiate between labor and capital income, usually taxing the latter at a lower rate. Lobbyist-fueled special categories, like “carried interest” are invented to push for even-lower starting rates as well. All instances of treating a class of income as “special” raises the burden on those paying taxes for basic labor income, and are a critical cause of rising income inequality over the last thirty years. I wrote a series of posts on this topic in January of last year.

Likewise the rules on business income and foreign income have become increasingly complicated over the years. Recognize that they are complicated precisely because one set of lobbyists is saying that “my income” should be taxed at a lower rate than “your income.”

Assume every argument for favoring one group of taxpayers over another is an advocacy for political special interests. We are far better off, I would argue, by pushing back toward a rule of “income is income” rather than adding more revenue, tax credit, and tax deduction rules.

Parse #5 – Tariff revenue

Why in 2019 it needs to be said that tariffs are a tax on consumers and not on the exporting country I just don’t know. This shows the cowardice of Republican legislators who know better. For more on this subject, see my post from last February on the subject of free trade called “Assume everything is fungible.”

In my fantasy world, the 2019-2020 candidate debates would spark a serious discussion on raising government revenue. It probably won’t happen.

The second part of this series, on the topic of healthcare proposals, has now been posted.

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