The United States continues to not be the highest taxed nation in the world, even though President Trump keeps saying otherwise. … Total US tax revenue was 26% of the GDP in 2014 vs. an OECD [Organization for Economic Cooperation and Development] average of 34.4% and the top share of 50.9% in Denmark, notes the Committee for a Responsible Federal Budget. (And the top US individual marginal tax rate of 39.5% [is] pretty far from the 52% of leader Netherlands.) Indeed … the US remains a relatively low-tax country overall.
On the corporate tax side, the picture is distorted by virtue of our byzantine tax code. Pethokoukis, pulling from a Tax Foundation report, reminds us that while the statutory rate is high (39.1 percent), the United States has “the third highest average effective tax rate (29 percent), and the fourth highest marginal effective tax rate (18.6 percent).”
As a matter of intellectual honesty (how quaint, I know!), tax cuts should not be based on the “we’re overtaxed” theory. There is also a great deal of question as to whether tax cuts will produce growth. The connection between the two is surprisingly weak. Indeed, the economy continued to boom after the 1986 tax reform, which increased taxes on corporations by closing loopholes and eliminating preferences to fund tax cuts for individuals. (1982 and 1984 tax measures closed loopholes and deductions with no offsetting tax cuts.)
If anything, the 1982, 1984 and 1986 tax bills argue that we should pursue reform but not cuts. Lowering the corporate tax rate and eliminating a barrage of tax expenditures, loopholes and preferences (for revenue neutrality) should make our economy more efficient. We should not be allocating capital because of the tax code, but rather be making judgments based on economic circumstances. At the same time, there is no serious rationale for lowering the overall tax burden on corporations.
There is even less justification for the sort of individual tax cuts the administration and Republicans in Congress are pushing. Do we really need to give disproportionate tax cuts to the very rich at a time of gaping inequality and gigantic debt? Republicans, if they really wanted help for the middle class, would leave high-tax earners exactly where they are and cut taxes for the rest. If that were the paradigm — the rich cannot pay less — I suspect Republican enthusiasm for tax cuts would vanish. If the proposition on the table were to make the code more progressive by cutting middle and lower taxpayers’ rates and/or eliminating tax breaks used by the rich, Republicans would throw a fit.
Micheal Strain at AEI has some other ideas on the individual tax code:
Conservatism (properly understood) believes public policy should build ladders of opportunity for low-income Americans, offering them a hand up out of poverty and into the workforce. One of the most successful programs we have to advance this goal operates through the tax code. The Earned-Income Tax Credit is a subsidy available only to households with jobs, and the amount of the subsidy rises with every additional dollar of earnings over an initial range. …
To increase employment among childless adults — many of whom are prime-age men, a group with troubling workforce participation rates — the EITC for childless adults should be expanded.
Strain also favors a tax credit for relocation. In his view (and mine), we should be concerned with how we allocate wealth through the tax code. (“The top 20 percent of households by income receive over half of the benefits from the largest tax expenditures. More than $4 of every $5 from the deduction for mortgage interest goes to households earning more than $100,000 a year. And more than $9 of $10 in deductions for state and local taxes goes to six-figure households.”) Whether you think reductions should be used to lower rates for the non-rich, finance worthwhile things (e.g. infrastructure) or reduce the debt, we need to think of reform as an opportunity to “to design policies that champion and illustrate core values of opportunity, empowerment, earned success, prudence, responsibility and dynamism,” as Strain says. The goal shouldn’t be to allow the rich to get richer.
If you have any concern about the debt, about minimizing the spike in economic inequality, or about allowing markets and not government to make economic decisions (which makes our economy more productive), the 1982/1984/1986 model makes more sense. Republicans seem only willing to relive 1981 — all cuts! — at a time when we are piling up the debt, have real spending needs (e.g. Harvey relief, infrastructure), aren’t in a recession and are feeling the social and political consequences of widening inequality. Somehow those conservative notions — fiscal sobriety, social cohesion, getting government out of making economic choices — no longer animates the thinking of GOP, which now amounts to talking like a populist (with a heavy dose of white nationalism, protectionism and immigrant-bashing) and governing like a robber baron. #NeverTrumpers accused of changing their ideological stripes should push back; they’ve adhered to conservative principles and the Reagan legacy. It’s the rest of the GOP that has become reckless and intellectually incoherent.