Repeal and Replace the Tax Code

The Republicans’ tax bill would somewhat improve the existing revenue system that once caused Mitch Daniels (former head of the Office of Management and Budget, former Indiana governor) to say: Wouldn’t it be nice to have a tax code that looked as though it had been designed on purpose? Today’s bill, which is 429 pages and is apt to grow, is an implausible instrument of simplification. And it would worsen the tax code’s already substantial contribution to “moral hazard.”

Economists use that phrase to denote circumstances in which incentives are for perverse behavior. Today’s tax code is such a circumstance, and the Republican bill would exacerbate this by expanding the $1,000 child credit to $1,600 with an additional $300 “family credit” for each parent and non-child dependent, and by doubling the standard deduction to $12,000 for individuals and $24,000 for married couples. These measures would increase the number of persons not paying income taxes and would further decrease the percentage of income tax revenues paid by low-income earners.

Already 62 percent of American households pay more in payroll taxes than in income taxes. The bottom 50 percent of earners supply less than 3 percent of income tax revenues. Forty-five percent of American households pay no income tax, either because they earn too little or because they qualify for enough exemptions and credits to erase their liability. Sixty percent pay nothing or less than 5 percent of their income. Forty percent of earners are net recipients from the income tax because they qualify for refundable tax credits. All this means that an already large — and, if the Republican bill passes, soon to be larger — American majority has a vanishingly small incentive to restrain the growth of a government that they are not paying for through its largest revenue source.

These facts might be the results of defensible tax and social policies. They should, however, be discomfiting to those remaining conservatives — they are on the endangered species list — who dispute Dick Cheney’s notion that “Reagan proved deficits don’t matter.” Deficits matter for their political as well as — actually, even more than — their economic effects: Deficits make big government cheap, enabling the political class to charge taxpayers rather less than $1 for every $1 of government benefits dispensed. When the Bush-Cheney administration managed the last large tax cut, the publicly held national debt was 33 percent of GDP. Today it is 75 percent.

Today’s Republican bill, drafted in the aftermath of the failure to repeal and replace Obamacare, is supposed to demonstrate to the party’s Trumpian base that congressional majorities matter and must be extended. Rep. Mark Meadows (R-NC), chairman of the conservative House Freedom Caucus, has said (to USA Today): “If we had a whole bunch of wins on major items up to this point, would we perhaps be a little bit more deliberate in our negotiations? I think the answer is yes.” But the facts about participation in the income tax mean that the bill is unlikely to assuage the injured feelings of core Trump supporters, understood as downscale white working-class voters who supposedly are seething because they are not benefiting enough from burdensome government. They might have valid grievances, but not ones that can be addressed by income tax rate reductions for individuals. Payroll tax reductions would be another matter.

And all individual earners will benefit to some extent from cutting the corporate rate from 35 percent to 20 percent. The incidence of corporate taxation — who actually pays it — is fiercely debated by economists, a remarkably cocksure cohort with strikingly divergent views about the degree to which corporate taxation depresses the wages of the corporations’ workers, curtails shareholders’ dividends, and is passed on to consumers in the costs of corporations’ products. Suffice it to say that corporations do not pay taxes, they collect taxes. Uncertainty about the incidence of corporate taxation is one reason the Republican bill’s corporate tax rate is 20 points too high.

This year’s best tax bill, which Rep. Bob Goodlatte (R-VA) has introduced six times since 2006, is four pages long and contains fewer words (411) than the new Republican bill has pages. It could be titled The “What You Wished For, Mitch Daniels” Act. It is titled, with almost unprecedented accuracy, the Tax Code Termination Act. It would nullify the existing four million-word code as of Dec. 31, 2021, and require that by July 4 of that year it must be replaced by a new one, which would necessarily be one designed on purpose.

The Patriot Post® · Repeal and Replace the Tax Code