What If We Were Only Trying to Improve the Tax Code?

by Neil H. Buchanan

Imagine a world, not at all like our own, in which the Republican majorities in Congress had decided to update the tax code in a way that truly deserved to be called "reform."

Rather than proceeding from the firm commitment that they must cut taxes on large corporations and the superrich (especially the "lazy rich"), Republicans instead could have approached the tax code realistically and productively, noting that it must necessarily be complicated -- because life is complicated, and people want the tax code to take into account life's realities -- but doing everything that they can to repeal or change tax provisions that simply do not make sense.

Again, that is most definitely not what Republicans are actually doing.  They have proposed a melange of unrelated changes to the tax code that will hit various groups of taxpayers, but this is only happening because Republicans imposed restrictions on themselves that required them to offset some of the huge revenue losses that their dearly desired regressive tax cuts will create.

Even so, there is an interesting -- if entirely coincidental -- possible overlap between what Republicans have proposed and what responsible legislators might have proposed.  It is thus useful to think about a few Republican proposals from the standpoint of whether they are defensible ideas on their own merits, ignoring the undeniable fact that these changes are up for debate only because Republicans are hellbent on delivering huge windfalls to their mega-patrons.

In a recent column, I noted that only by redefining the word reform to mean "change in various uncoordinated and unprincipled ways" could we describe the Republicans' tax proposals as reforms.  One could try to argue that punishing blue states and rewarding red states is a "principle," I suppose, but that would again be mere wordplay that tries to put an absurd spin on shameless political opportunism.

One of the results of this Republican desire to find sources of revenue while inflicting maximum pain on people who are not hard-right true believers is that they have targeted tax provisions that benefit upper-middle-class people (the denizens of comfortable suburbs and exurbs who are turning in increasing numbers against the Republicans).

In turn, those people are understandably worried that they are the ones who will ultimately pay for the Republicans' attempt to (as Senator Lindsey Graham has described it) use this tax bill to prevent Donald Trump from being impeached.  (It is all very complicated, you see.)

Speaking as one of the people whose taxes would rise under any imaginable final version of the Republicans' plans, let me be clear.  There are plenty of good reasons to raise taxes on plenty of people, very much including me.

There are, most importantly, unmet and neglected needs that only the federal government is capable of addressing.  If someone told me that my taxes were going to go up, and the money would be used to rebuild Puerto Rico or to bring back the Children's Health Insurance Program or make college affordable to more young people, I would say, "Paying more is never fun, but that sounds like a good plan."

What the Republicans are proposing is, of course, nothing like that.  They have found various ways to increase taxes above where they would otherwise be for many people, all for the benefit of the richest people and the largest corporations.  If you said to me, "You must pay more taxes in order to allow heirs of estates worth more than eleven million dollars to be even more comfortable," I might become a bit irate.  Republicans are, in fact, saying that to me.  I am a bit irate.

But as I noted above, perhaps the Republicans have -- for all the wrong reasons -- blundered their way into a few good ways to save money.  The tax geek in me is always tempted to analyze proposed policy changes for their economic and behavioral effects, so I will indulge myself here by temporarily focusing on the trees rather than the forest.  (Given the reverse-Robin Hood nature of everything that Republicans stand for, I guess that the forest in question is the bizarro world version of Sherwood.)

Consider three proposals that might arguably be good policy in the sense that they could eliminate tax provisions that provide benefits to the already comfortable -- not the richest of the rich, but people who could be thought able to afford a tax increase if doing so were otherwise an improvement in the tax code.

First, Republicans have proposed eliminating tax deductions for the expenses of attending college.  Given that university educations are mostly sought out by upper-middle- and upper-class kids, one could imagine that federal education incentives might be well-meaning but misdirected.

Again, even if that were true, that would not be a reason to take these benefits away from the children of $250,000-per-year professionals in order to reduce tax rates for millionaires and billionaires, but the game here is to ask if there is a prima facie argument for eliminating a tax provision.  What to do with any saved money is a related but separate debate.

The fact is, however, that the changes that Republicans are discussing in the area of higher education would be truly perverse.  The prior congresses that provided, for example, a deduction for student loan interest were actually quite parsimonious and careful, limiting those tax benefits only to truly middle class people, completely phasing out the deductions for joint filers with $160,000 of income or more.  Also, the interest deduction is limited to $2500 annually (saving a family in the 25% tax bracket $625 per year).

Even in the immediate term, then, eliminating these tax benefits does not target the upper-middle class.  Unless one believes former Senator Rick Santorum -- a man who decided that losing his reelection bid in a landslide was the perfect opportunity to become a permanent presidential also-ran -- who once said that the desire to send more American kids to college made Barack Obama a "snob," there is nothing good about this.

In fact, this is exactly the opposite of good policy.  We should be expanding both tax-based and direct-spending support for higher education, especially for those people who are currently least likely to attend college.  I realize that Republicans love to hate universities, but higher education continues to be the only plausible path forward for improving the lives of lower- and middle-class Americans.

So the Republicans' proposals to save money on higher education fail even to pass the initial test of tax policy, which is whether the current policy is misdirected toward people who do not truly need it.  Swing and a miss.

Another surprising proposal from Republicans is to eliminate the deduction for medical expenses.  Again, this provision has already been restricted by previous legislation.  A taxpayer can deduct only those medical expenses that exceed ten percent of her income.  This means that if a person whose income is $50,000 has $5700 in medical expenses, she can deduct only $700 (the amount by which her expenses exceed $5000, which is ten percent of her income).

Even then, such a person is likely to be in the 15% tax bracket, so her tax savings would only be $105.  That would surely be devastating to lose for someone whose life has been turned upside down by a serious medical problem, but it seems fair to describe it as the very least that the government could do to help -- as opposed to, say, creating a health care system where such out-of-pocket expenses simply never happen.  (See, for example, all other advanced countries in the world.)

Even so, there is a way that this provision might have ended up being more of a boon to upper-middle- and upper-class taxpayers than to people further down the distribution.  The fact is that a person who makes $50,000 per year might not even be able to pay $5700 for extraordinary medical expenses, because she simply does not have the money.  In other words, maybe this tax deduction is not useful to the middle class because high medical expenses are literally killing them.

One consequence of the current tax debate is that policy analysts and journalists are looking more deeply into the evidence regarding the Republicans' proposals, which means that we do not need to rely on supposition to determine whether a tax provision is good for middle-class people.

And it turns out that the medical expense deduction is a literal lifeline for middle class people.  A recent New York Times article put it in stark terms:
"According to an analysis in January from the Joint Committee on Taxation, most taxpayers who claim the deduction have incomes below $100,000, with about 40 percent below $75,000. More than half of those who claim it are older than 65, according to AARP, the lobby for older Americans. They often face staggering medical and long-term care costs."
That article also noted evidence from AARP that the average Medicare recipient has $5680 per year in out of pocket costs.  In total, people deduct almost $90 billion per year in medical expenses and only receive about $10 billion in reduced taxes.

So the "only upper-middle-class people benefit from this deduction, so it's not immoral to eliminate it" story again goes out the window.  Repealing the medical expense deduction would be both regressive and inhumane.

Finally, what about the proposal to change the tax treatment of alimony?  This might be a perfect example of an improvement in tax policy even for people who were not desperately looking for ways to pay for tax cuts for the Koch brothers.

Currently, alimony is a deductible expense for the payor spouse and taxable as income to the payee spouse.  Almost always, the spouse who is receiving alimony is in a lower tax bracket (which is why she is the one who receives the alimony).  A monthly $2000 alimony payment saves $700 in taxes for a payor spouse in the 35% tax bracket, but it brings in only $200 in tax revenues from a payee spouse in the 10% bracket.

What would happen if we eliminated this $500 net revenue loss to the federal government?  The simplistic answer is that the upper-middle-class payor spouse is $700 worse off, and his ex is $200 better off (while the federal government now has $500 to send to a corporation as a tax subsidy).

But is this really what would happen?  Would the payor spouse -- who has more money and presumably good legal representation, especially compared to a spouse who cannot afford a good lawyer -- really just sit tight and agree to the same alimony deal?  Or would he say that he is only willing to pay $1300 in alimony, leaving the lower-middle-class ex-wife to be the person who effectively refunds $500 to the federal government?

It is possible that some divorce negotiations could turn out better for the payee spouses, but at the very least it seems likely that those vulnerable parties would bear some significant amount of the brunt of the Republicans' proposed change in the tax code.

That is not to say, of course, that the current approach is the best way to handle alimony.  I am merely pointing out that what looks like a policy that would help the weaker party at the expense of the stronger party can do the opposite in real life.

In short, even if we limit ourselves to assessing the Republicans' tax policies on the basis of whether they are progressive in the sense of hitting the upper-middle class rather than the middle class, the changes to the tax treatment of college and medical expenses are truly bad, and the change to alimony is also very likely to have perverse consequences.

Maybe the better approach would be to start at the top, where the real growth in inequality has taken place since 1980 (which was, not coincidentally, the beginning of the Reagan era).  Republicans' pretense that they are concerned about the middle class and are thus taking aim at the people a bit further up the scale is a misdirection play.  For Republicans, it is always about helping the very rich, first and foremost.