Thursday, September 28, 2017

The Next Tax Bill Will Be Called Tremendous and Huge, Even If It Is Terrible and Small-Minded

by Neil H. Buchanan

"Trump Proposes the Most Sweeping Tax Overhaul in Decades," screams The New York Times.  Except he didn't.  Once again, Donald Trump has proved his lack of seriousness by promising a big tax plan and then delivering nothing more than a few talking points.

This has been Trump's pattern all along on taxes, from his campaign's multiple non-plans that did little more than express a desire to feed the rich to his advisors' release of a not-completely-filled page of bullet points this past spring.  Now, they have released a few more pages to distract the gullible political reporters who barely understand anything about taxes.  And it seems to be working.

As I pointed out in a recent column, there is a strangely non-adversarial relationship between the mainstream press and the Trump/Republican tax cutters.  Even though The Times and The Washington Post have reporters breaking story after story about hugely important matters like the Russia investigation and other impeachment-related inquiries, the two top papers in the country continue to be all but in the bag for Republicans on taxes.

That is not to say that the reporting takes a friendly tone.  There is plenty of discussion of the regressivity of the Republicans' tax dreams, but there is also far too much uncritical acceptance of the spin on taxes coming from Trump and his comrades.

We can start with the troubling fact that reporters are continuing to pretend that there are details to these plans that are simply not there.  And I really do mean that there is still nothing from the Republicans that one could call a tax plan.  As The Post's NeverTrump conservative columnist Jennifer Rubin put it, this is "another outline, a scheme, a failure of the most basic function of policy development."

How incomplete is it?  To take just one screamingly obvious example, Republicans want to replace the current set of seven tax brackets (running from 10% to 39.6%) with three brackets (12, 25, and 35 percent), yet we still do not know where the brackets would begin and end -- that is, when a person's marginal rate would rise from 12 to 25 percent and from 25 to 35 percent.

That is hardly a small detail.  Even so, a reporter for The Post asserted that Republicans have "proposed slashing tax rates for the wealthy, the middle class and businesses."  In this case, two out of three really is bad.

The Trump/Republican crib sheet does say that they want to cut the nominal tax rate on corporate income from 35 percent to 20 percent, and (even more egregiously) to allow wealthy self-employed people to opt into a 25 percent rate.  And the top rate would fall from 39.6% (which currently begins when taxable income passes about $420,000), so taxes for rich people would certainly fall.

But the tax bill for middle class people?  Not only do we not know whether their tax rates would be "slashed," we cannot rule out the possibility that their rates would go up.  For example, a person who is currently in the 28% or 33% percent bracket might end up in the new 35% bracket as easily as the 25% bracket.  The point is that we simply do not know.

This focus on the number of brackets, moreover, continues to mystify me.  As I noted in a column discussing Trump's non-plan in April of this year, there is an almost touching naivete among mainstream journalists that causes them to think that reducing the number of tax brackets is "tax simplification" and that regular people actually care about the bracket structure.

I noted, for example, that the editorial board of The Times (certainly no friends of Trump or the Republicans) somehow convinced itself that Trump's bullet points had "served up a few goodies for the average wage-earning family, among them fewer and lower tax brackets."

Again, we still do not know whether anyone (other than top earners) will actually end up with a lower rate.  But I have to ask again: Why does anyone think that the number of tax brackets matters to anyone other than right-wing ideologues?

Think of it this way: If Republicans passed a bill that did absolutely nothing but reduce the number of tax brackets, how would people respond?  My prediction is that they would not say: "Yesssss!!!  We finally live in a world with only three brackets."  What would they be more likely to say?  "How does that affect me?"

It is also worth noting that they would also be likely to ask how this affects the rich, because people -- contrary to what Republicans would have us believe -- genuinely do care about income inequality.  As one summary of a recent poll put it:
"Asked to identify some of the reasons for [America's deep political] division, poll respondents placed income inequality at the top of the list, with 23 percent naming the gap between the rich and the poor as one of the primary causes of strife in America."
Concerns about inequality are not, as Republicans endlessly claim, "class warfare" or jealousy of others' success.  And it is certainly not a matter of the Democratic Party being taken over by extreme leftism.  (Even Bernie Sanders and Liz Warren have espoused tax policies that are notably anodyne, even by U.S. standards.)  People understand that the increasing disconnect between the super-rich and everyone else is unjustified and harmful to our society.

In any event, there is nothing at all about the latest teasers from Republicans that should excite anyone but the rich.  Even people who only care about their own bottom lines -- that is, even those who are willing to ignore the fact that taxes are needed to do the things that Americans want their government to do, from disaster relief to improving schools to cleaning the air and water to improving transportation -- cannot possibly know what this new tax push might mean for them.

What about jobs?  Trump and the Republicans continue to assert that the key to economic prosperity is to enact business-friendly tax cuts, which is most likely how Trump is going to sleaze his way out of his promise that the rich will not benefit from any tax changes.  The "job creators," we will surely be told, need those tax cuts to expand their businesses to help "the forgotten people."

Trump and his enablers will continue to make that claim, but it will continue to be nonsense.  Economists who have taken an honest look at the evidence have concluded that the growth effects of tax cuts are essentially nonexistent.  (See, among many examples, here and here.)

Or, if you prefer, look at a recent op-ed by Bruce Bartlett, who was one of the architects of Ronald Reagan's "supply-side revolution."  Bartlett now tells us that "virtually everything Republicans say about taxes today is hogwash," and he adds:
"While I believe this theory played a useful role in economic theory and policy in the late 1970s and early 1980s, it has long outlived its usefulness and is now nothing but dogma completely divorced from reality."
I should add that I respectfully disagree with Bartlett about the usefulness of supply-side economics in its original incarnation, but what matters here is that Bartlett is reality-based and thus is willing to call out Republicans for being obsessed with tax cutting as their be-all and end-all, no matter what the evidence tells us.  (This is very much like their approach to climate change.)

Having said all of that, perhaps the most infuriating aspect of the coverage of the Trump/Republican tax circus is that this is surely going to be portrayed as a massive "reform" of the tax code.  Yes, if Republicans have their way, a laundry list of large regressive changes will be enacted into law.  But that is not necessarily anything more than bleeding money out of the Treasury.  It is not reform.

Another trusting reporter for The Post put it this way a few days ago: "In a matter of days, we’re supposed to get details about [Trump's] tax plan, which is shaping up to be the biggest overhaul of the nation’s tax code since 1986."

Ah, 1986.  For tax geeks, that year is as significant as 1964 is to pop music fans (The Beatles on "The Ed Sullivan Show") and as 1958 is to football super-fans ("The Greatest Game Ever Played").  In 1986, Congress passed a series of changes in the tax code that have been lauded ever since (excessively so, for my money) as the very model of tax reform.

Notably, the 1986 bill was not a tax cut.  It created winners and losers, and it involved eliminating a large number of tax dodges in the name of cleaning up the system.  It also happened to involve a reduction in the number of tax brackets, but that was again utterly incidental to the real reform.

Nothing that the Republicans are talking about today constitutes anything close to a 1986-style rethinking of the tax code.  Notwithstanding The Times's breathless "sweeping tax overhaul" hype, which I noted at the beginning of this column, all the Republicans are doing is figuring out ways to shovel money to rich people and businesses.

There have been plenty of large tax bills that do not qualify as sweeping reforms.  Bill Clinton's 1997 tax bill, both of George W. Bush's tax cuts, and Barack Obama's 2013 bill (negotiated by Vice President Joe Biden and Senate Majority Leader Mitch McConnell on New Year's Eve 2012) were big tax bills with significant implications for the economy.  No one likens them to 1986, and rightly so.

But because Trump insists on over-hyping everything, he will claim that any tax legislation that comes out of this non-plan is "tremendous, the best ever, the best ever."  And because too many reporters think that changes in tax brackets are a huge change, they will go along with polishing whatever turd comes out of Congress and calling it a big deal.

Unlike health care, there is no reason to think that the Republicans will fail to pass some kind of tax bill.  John McCain will not have procedural objections, and Susan Collins is plenty conservative when it comes to taxes.

When, at the end of the day, the Republicans pass some bill -- any bill at all -- we will surely be told that they have fundamentally reformed the tax code.  That will just as surely be utterly false.


Joe said...


I don't know. Figure McCain might be serious about this sort of thing now. I don't think he cares too much policy-wise about taxes any more than he did about health care. IDK, but probably believes the usual conservative bona fides here but his passion tends to be found elsewhere. We shall see.

Unknown said...

Most notable aspect of Trump tax proposal is the so-called "double taxation" on state and local income and property taxes. This is the biggest upheaval that I can see--and it is in fact a massive change to taxation (possibly an unconstitutional one). This double taxation would punish blue states like NY and Cali, and would leave unaffected red states like Texas. For example, NYC residents have 6-8% state income tax, plus an additional 4% NYC income tax. Under Trump's plan, NYC residents could no longer deduct that combined 10% state/local tax from their federal income taxes. That's why it's a double taxation: you have to pay taxes on the money you use to pay other taxes. Similar tax schemes implemented by states have been struck down by SCOTUS as unconstitutional under the Commerce Clause, such as in the 2015 SCOTUS case involving Maryland. Also note that many residents in blue states (such as in Westchester County NY) pay huge property taxes to fund their public schools--in some instances upwards of $50,000 per home even where the household is not earning in the top income tax bracket. Under Trump's plan, those property taxes would again no longer be tax deductible for federal taxation purposes. Losing that deduction would threaten the already fragile housing market and could trigger a huge economic backlash were home prices to fall due to their increased net effective taxation burdens. Would really like to hear Prof Buchanan's thoughts on this.

David Ricardo said...

The media is even worse than what Mr. Buchanan describes, primarily because the people writing on taxes are essentially tax illiterates. They just don't know what they are assigned to report on.

One example, the doubling of the standard deduction. Increasing the standard deduction is a real tax reform measure, it simplifies the system, and takes away for many people a bunch of minor deductions. It can lower taxes for lower middle income families and others. Much of the media just reports this uncritically. And that is journalism malpractice

See what is forgotten is that the proposal is also to eliminate the personal exemption. So for a family of three the increase in the standard deduction is a wash. A family of four or more is worse off, the gain in the standard deduction is more than offset by the loss of personal exemptions. And for people who did itemize but would now take the standard deduction the impact of the increase in the standard deduction is lessened to the amount by which the new standard deduction exceeds the old itemized deductions, which will be below the nominal increase in the standard deduction.

If any reader does not understand this that's okay. If any reporter does not understand this he or she should be denied the right to report on tax issues. Sadly only a few reporters would pass the test. Look, this is complex stuff, and the GOP can easily fool some of the people all of the time if the media is lax. Which they are.

Shag from Brookline said...

Let's not jump too heavily on the media, many members of which have stressed that Trump's plan is not really a plan, rather only a plan in quotes. It is difficult pointing out all of the pitfalls of such a "plan" as the devil (or angel) would be in a detailed plan, such as a tax bill working its way through Congress. If the Joint Committee on Taxation's staff performs as in the past there should be detailed analysis of the plan being considered by Congress. Tax law is complex stuff. David's points on the Trump "plan" standard deduction increase and eliminating the personal exemption are good ones. There are more points to be made on the Trump "plan" and I have one that is unclear from what has been revealed in the Trump "plan," to wit, the elimination of the Estate tax.

The Trump "plan" to my knowledge does not seem to address the tax basis of assets passed on by a decedent to beneficiaries. Will there be a new date of death tax basis or will beneficiaries takes the decedent's tax basis? If the former, then this would be a major benefit for beneficiaries of the wealthy. If the latter, not so much. And this tax basis issue might negatively impact those estates that would be exempt from the current Estate tax. There's quite a bit of highly appreciated assets out there. But if the IRS is not properly funded to audit returns (which is currently the case), the wealthy can continue to play the tax audit lottery game.

The media is continuing to report on the Trump "plan" as incomplete, including some claims that Trump himself would benefit personally to the extent of $1 Billion. The point is this is not a real tax plan but Trump's "plan." Both reporters and pundits are reacting and so far it seems that they agree that the Trump "plan" benefits the wealthy, despite what Trump and Gary Cohn say.

David Ricardo said...

We all wish we could count on the JCT/CBO giving a detailed analysis as they have in the past, but then there is this from Bloomberg about the Senate budget resolution.

"The budget would erase a Senate rule requiring a full Congressional Budget Office estimate of the cost of the legislation at least 28 hours before a vote."