Treasury Secretary Steven Mnuchin and economic adviser Gary Cohn have sacrificed what little credibility they had left by falsely insisting that President Trump’s tax plan wouldn’t benefit the rich, would pay for itself and would create never-before-seen growth. (As to the last claim, Goldman Sachs — Mnuchin’s and Cohn’s former employer — says that its analysis found “a boost to GDP growth of 0.1-0.2 [percentage points] in 2018-2019 and smaller amounts in subsequent years, consistent with our existing estimates.” Trump, Mnuchin and Cohn can, I suppose, keep misleading the public and then blame Congress when the actual plan bears little resemblance to their promises. Alternatively, they might adopt plans from some intellectually defensible tax gurus.
Michael Strain has three of them. The first is to seriously cut back on deductions used extensively by the rich:
The deduction for mortgage interest payments, for example, which is explicitly kept in the framework, is a subsidy that encourages the purchase of large and expensive homes. The exclusion from taxation of employer-provided health insurance payments encourages firms to compensate workers by providing them with insurance, and drives up health-care costs. Getting rid of both would generate more than enough combined revenue to cut the corporate rate in half while reducing other rates as well.
Another idea would be to “leave all the current deductions and exclusions in place, but limit the total value of the tax reduction any individual could receive from them.” He explains, “Limiting the value of all itemized deductions, the exclusion for employer-provided health insurance and the child tax credit to 2 percent of adjusted gross income would finance a $350 billion tax cut in 2017 — more than enough revenue to cut the corporate rate in half while reducing other tax rates as well.”
A third option would be to set up a carbon tax to “finance a reduction in [businesses’] taxes that would increase the U.S.’s global competitiveness.” I’d want to look at the distribution of tax reductions, but it’s well-accepted by economists of all stripes that taxing consumption (fossil fuels in this case) has a less disruptive effect on the economy than taxing income or capital.
Strain’s last suggestion is a more minimalist plan that is fiscally responsible. Given how totally unglued the president has become, this option also may be more politically realistic. He recommends: “Republicans want to reduce tax rates for corporations, pass-through businesses and individuals. [Pursuing] individual cuts less aggressively — perhaps by keeping the top individual rate at its current 39.6 percent and leaving the estate tax in place — would reduce the cost of the plan, increase the likelihood of bipartisan reform and focus the plan on growing the economy over the long term.” In other words, stop giving so many tax goodies to the rich.
These ideas share some features and assumptions. First, one can be fiscally responsible and still get benefits from tax reform. The key is to pay for what you are cutting. Second, a tax scheme that distorts the economy less is an economic benefit in and of itself. If economic decisions are based on business conditions, not tax breaks, our economy is likely to be more productive. Third, we shouldn’t resort to a loopy analysis from this administration to justify creating a new mound of debt. “With policymakers contemplating whether they should rely on $1 trillion or more of dynamic revenues to justify tax cuts, it is important to note that such dramatic gains are not realistic or appropriate to assume,” says the Committee for a Responsible Federal Budget. “While one cannot predict the dynamic feedback of tax reform that is not yet written, $300 to $400 billion of feedback is a reasonable guess for the possible feedback from thoughtful and responsible reform. Irresponsible revenue-reducing reform is likely to produce significantly less revenue and would likely even lose revenue from dynamic effects over the long term.” And finally, we should not be worsening our income inequality problem in the name of growth. If you want to do middle-class tax reform and corporate tax reform, do those things. That essentially means scrapping the president’s plan and starting over.