THE REPUBLICAN tax plan enacted into law in December accomplished some useful reforms — limiting housing subsidies; a more competitive top corporate tax rate — at the expense of disproportionately benefiting upper- income Americans and blowing a large hole in the federal deficit. Over the next decade, the legislation will leave the U.S. government $1.5 trillion more deeply in debt than it would have been otherwise. Democrats quite rightly condemned this, but mostly without offering a specific alternative. Now the Senate’s Democratic caucus has come forward with a plan to correct the inequities of the Republican plan and to recoup roughly two-thirds of the lost revenue. Obviously, it has no chance of passage. As a conversation-starter, though, it has its virtues — with one large caveat.
The Democrats’ proposal would raise roughly $1 trillion over the next 10 years by restoring the top marginal rate on individual income to 39.6 percent, which it was before the GOP cut it to 37 percent; this would raise $139 billion of the $1 trillion total. It would repeal the Republican bill’s near-elimination of the alternative minimum tax (AMT) for high earners (raising $429 billion), restore the previous estate tax law ($83 billion), raise the corporate rate from 21 percent to 25 percent ($359 billion) and end the carried-interest loophole for investment firms ($12 billion). All of this would hit rich individuals and corporations yet would not significantly undo the growth-enhancing impact of the Republican bill. A 25 percent corporate rate is internationally competitive and not much higher than the 22 percent that Republican Sens. Marco Rubio (Fla.) and Mike Lee (Utah) were willing to accept at a certain point in the debate. Indeed, the Democrats could save several hundred billion dollars more, and reduce complexity, by repealing the new breaks for “pass-through” entities. That might even be preferable to Democrats’ restoration of the AMT.
In any case, the Democrats’ plan reminds everyone how much more fiscally responsible, and equitable, the Republican tax plan could have been without sacrificing its most important reform goals. That is, until you consider what Democrats propose to do with this additional revenue: spend it, all of it, on a massive new infrastructure program that would cover everything from roads to veterans’ hospitals. The Democratic plan, therefore, is not a true infrastructure “pay for”; it just shifts about $1 trillion in federal borrowing from the tax cuts to spending. The federal deficit would still be $1.5 trillion more 10 years from now than it would have been before the passage of the GOP bill.
No doubt the Democrats would argue that infrastructure spending spurs economic growth, and there’s some truth to that, just as there’s some truth to GOP claims that corporate tax cuts spur private-sector investment. Yet the case for a massive new fiscal stimulus is weak with the economy at full employment, whether it’s done through tax cuts or infrastructure spending. Democrats should adjust their proposals accordingly.