THE PURPOSE OF tax reform is to raise revenue more efficiently — with fewer loopholes and special breaks that distort economic incentives and necessitate higher marginal rates. In discussing tax reform since President Trump’s election, Republicans have promised to do just that: pass a bill with lower rates for both individuals and businesses, applied to an income “base” broadened by the elimination of deductions and credits.
If you listen very closely to what GOP leaders have been saying lately, however, especially in remarks last week by House Speaker Paul D. Ryan (R-Wis.) and Vice President Pence, what you’ll hear is the carefully chosen words of people planning something that’s not real tax reform at all.
Speaking to the National Association of Manufacturers Tuesday, Mr. Ryan pledged to take on “defenders of the status quo” — and then proceeded to defend many of the status quo’s worst aspects. He pledged to get rid of “special-interest carve-outs” except for those that “make the most sense” — such as the deduction for mortgage interest. Actually, this distortion of the real estate market is one of the tax code’s least sensible features, but it is politically sacrosanct due to the power of the real estate lobby. The only major individual tax break Mr. Ryan seemed to leave on the chopping block was the deduction for state and local taxes, which disproportionately favors states that send Democrats to Congress. Any GOP tax plan would eliminate the estate tax, Mr. Ryan insisted — thus entrenching the concentration of wealth in the United States.
Somewhat more plausibly, Mr. Ryan advocated a new corporate tax system, with a lower top rate, so as to discourage shifting production abroad. However, he gave few specifics and seemed to soft-pedal the means of paying for the plan he and his House colleagues had previously offered — a so-called “border adjustment” that would raise tens of billions of dollars per year, essentially by taxing the U.S. trade deficit. He referred to a “new, lower tax, specifically for small businesses,” which could translate into a costly new benefit for “pass-through” entities, such as sole proprietorships and S corporations.
Meanwhile, Mr. Pence repeated the Trump administration’s promise that the end result of any tax rewrite will be “tax cuts,” implicitly endorsing the dubious notion that the U.S. economy lags due to an excessive tax burden. And not just any tax cut, Mr. Pence said, but “the largest tax cut since the days of Ronald Reagan,” meaning even bigger than those enacted by President George W. Bush. So much for the idea that tax reform ought to be revenue-neutral. Given that Mr. Trump and Congress cannot — and should not — cut spending enough to offset such large revenue losses, what may be in the offing is “tax reform” that ratchets up federal debt.
Mr. Ryan, too, alluded to the need for “tax cuts.” That made the week’s GOP messaging unanimous and reinforced suspicions that, for all their talk of reform, slashing taxes, mainly for the wealthy and corporations, is the one policy that Republicans agree on and therefore the only policy they are actually going to enact.
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