Was I Wrong About the 'Sweeping-ness' of the Tax Bill?

by Neil H. Buchanan

Last Fall, as the tax debacle was playing out, I frequently mocked the media for adopting the Republicans' spin that the tax system would be fundamentally changed by the bill that Republicans  eventually rammed through Congress (without hearings).  Republicans talked as if they were going to change the very nature of the tax system, but it seemed obvious that they were going to muck around with the system simply to shovel ever more money to rich people and corporations.

That is, indeed, what happened.  The final bill was a mess, and its regressivity is breathtaking.  Even so, it seemed that reporters had received a memo ordering them to use the word "sweeping" whenever they talked about the Republicans' tax bill.  As early as September, this was already a tired description, but "sweeping" reform is what the Republicans said they were providing, and the mainstream media obediently played along.

Despite the horrible final legislative product, the press is still uncritically repeating even the most absurd Republican talking points.  For example, a Washington Post reporter wrote this week that "GOP leaders and lawmakers used the opportunity of this week’s tax deadline to make the point repeatedly that this is the last year that Americans filed their taxes under the old tax code and that next year they will encounter a new, simpler and more favorable set of tax rules."

Whatever other virtues one might be able to imagine in the Republicans' bill, being simpler is not one of them.  The evergreen promise to "put it all on a postcard" was once again dropped when convenient, and the system is even more complicated than it was before.  Yet a reporter at a major newspaper cannot even be bothered to note that when GOP leaders "make the point" that next year's rules are "new, simpler and more favorable," their point is not true.

But my concern today is not with the continued free pass that Republicans have received from the press.  Instead, I want to ask whether I was too quick to reject the idea that Republicans were doing something "fundamental" or "sweeping" when they passed their stroke-the-rich tax bill.  It is possible that they made some de facto fundamental changes that were not immediately obvious -- and that the bill is even worse than than it initially seemed.

The Republicans have long tried to sell the notion that their tax proposals were not merely about how much in taxes people and businesses pay but were also about the complexity or simplicity of the system.  They constantly compared their work to the 1986 tax reform, a bipartisan effort that truly changed the way the tax system worked by eliminating a wide range of tax preferences.  In the argot of tax policy wonks, the 1986 bill "widened the base and lowered the rates."

As I wrote back in September, the 1986 bill was not all that it was cracked up to be, but it was arguably the most fundamental change in the income tax system since the Sixteenth Amendment made the modern income tax possible in 1913.  Republicans in 2017 could have followed the 1986 example and passed a revenue-neutral reform, but they decided that they wanted both fundamental restructuring and regressive tax cuts.

They certainly achieved their regressive goals, but their tiny tax cuts for middle-class people, which were supposed to provide political cover for their grotesque regressivity, have so far provided no popular payoff: "A Wall Street Journal and NBC News poll published this week found that 27 percent of respondents thought the tax law was a good idea, while 36 percent said it was a bad idea."

In any case, it is possible that a regressive bill -- even one put together in a slapdash manner -- could also represent a fundamental change in the way our tax system is structured.  As I noted above, my attitude all along has been that the 2017 bill did not fundamentally alter the tax system but simply used the same basic structure and added more complications and lower business tax rates to achieve the Republicans' goal of worsening inequality.

And there is still a solid argument that they did not do much to the basic structure of the tax system, especially on the non-business side of things.  Yesterday, I completed teaching my basic Federal Income Taxation course under the new law.  I needed to make surprisingly few changes to my coverage, because the basic structure of the tax system -- what to include and exclude from gross income, what can be deducted, concepts such as "realization" and so on -- have not changed.

Arguably, only a few noticeable (but not apparently important) things had changed, such as the move in 2019 to make alimony nondeductible to payors and non-includible to payees.  Medical expenses are still deductible above a certain threshold (a threshold that was actually temporarily lowered, allowing more people to take that deduction), charitable contributions are still deductible, gifts are still not subject to the income tax (while the gift and estate tax has been eviscerated even further), and on and on.

There were, of course, some changes that represented a more serious break from past practice.  The Republicans unconstitutionally targeted Blue States by limiting the state-and-local tax deduction, and they eliminate the per-family-member personal exemption and replaced it with a bigger standard deduction.  But these changes were not structural.  They merely changed some numbers in ways that would change tax outcomes.

It was thus possible for me to say at the beginning of the semester that even those larger changes were no different from changing a tax rate from 35 percent to 32 percent.  Obviously, a person would want to use the current numbers (and the currently available deductions), but a person who had learned about the tax system pre-2018 would not be at a disadvantage in terms of understanding how the tax system is set up.  Nothing was simplified, and the system still looked basically the same.

Even so, changing numbers within the same basic structure can have a huge impact on the way a tax system affects people.  For example, the Republicans nearly doubled the standard deduction, the effect of which is to substantially reduce the number of people who will find it worthwhile to itemize their deductions.  (If you have $15,000 worth of itemizable deductions, you will itemize if the alternative is to use a $12,000 standard deduction, but you will not bother to itemize if the standard deduction is increased to $24,000.)

In the extreme, one could imagine increasing the standard deduction to, say, $250,000.  Even if all of the deductions that used to be available remain on the books, almost no one will use them.  (In fact, almost no one would pay income taxes at all under such a system, because the first $250,000 of income would be ignored.)  That the charitable deduction was not formally repealed, for example, would not change the reality that virtually no one would use it, which amounts to de facto repeal.

Is the large, but less extreme, doubling of the standard deduction enough to count as a stealth change to the system that has the same effects as a fundamental change in the tax structure?  Possibly.  Under the old system, about 30 percent of taxpayers itemized -- putting the lie to the idea that typical Americans needed a postcard-sized tax form, because they were in fact already able to use Form 1040-EZ, which allows filers to determine their tax liability in 12 lines.

Under the new system, however, only about five percent of taxpayers are expected to bother itemizing, meaning that about one-fourth of all taxpayers will stop availing themselves of medical expense deductions or charitable deductions -- or even mortgage interest and state-and-local tax deductions.  That is arguably a big change, and since there is no bright line to determine when a tax change should be called "fundamental," it might even qualify for that label.

In that spirit -- seeing how the tax system can be changed in fundamental ways even when the basic tax structure seems not to have changed -- Temple University tax law Professor Alice Abreu has recently written an important new article to be published in the Loyola-LA Law Review, "Tax 2018: Requiem for Ability to Pay."

I will draw from the abstract of the article, where she argues that "almost no attention has been paid to analyzing whether the income tax system has been transformed in any fundamental way. But transformed, it has been ... significantly undermining one of the bedrock principles of our tax system — horizontal equity — and ignoring ability to pay."

Taking ability-to-pay out of the U.S. tax system would indeed be huge, certainly much more important even than my extreme example of radically increasing the standard deduction.  After all, at least my imagined system would only tax people who earn more than $250,000 per year, which is still progressive.  But Abreu shows how a system that does not seem to have been fundamentally changed can in fact have been truly transformed:
"First, the TCJA eliminates consideration of a taxpayer’s support obligations in determining the tax base, thereby creating a situation in which two taxpayers with wildly differing ability to pay will nevertheless face equal tax burdens."
This is in some sense the smallest change, but support obligations (especially alimony) certainly do reflect ability to pay.
"Second, it unmoors the zero bracket — the amount of income that will never be included in the tax base — from the poverty level so that taxpayers with income significantly below the poverty level may nevertheless face positive tax liabilities."
That is enormous.  Even though Republicans have sometimes disingenuously said that all taxpayers need "skin in the game" and thus must at least pay some small amount of taxes, they have in fact almost always acknowledged that low-income people should not be subject to taxation.  (That is, for example, why so-called Flat Tax proposals always have a large standard deduction.)
"Third, it creates a distinction between types of income from labor, reserving for employees the highest possible tax rate and making that rate dependent on the form in which personal services are rendered.
This was noted by a few liberal activists and commentators at the time.  It is no longer what one earns but how one earns it that determines a person's tax treatment.
"Fourth, it rejects the principle of capital export neutrality, thereby creating a dramatic difference in the tax burden placed on income as a result of its source: henceforth, much foreign source income received by some U.S. persons, in the U.S., will not be subject to U.S. income tax, ever."
Again, this is a big deal, but it is not widely understood because of the complexities of international tax rules.  Americans who can earn their income abroad do not have to pay U.S. taxes.  That is another regressive element of the new system.

Finally, Abreu notes that, "of all the changes, only the last was widely anticipated (at least in part), and long debated and analyzed by tax scholars and professionals prior to enactment."  And this raises the question of whether Republicans even knew how they were changing the system.  After all, only a few Republicans have ever argued forthrightly that the tax system should actually be regressive from top to bottom.

Did a "big, beautiful tax cut" take even most Republicans by surprise in taking ability-to-pay out of the U.S. tax system?  I suspect that it did, but I also suspect that they would rather ignore that fact than undo their rushed handiwork, even though it is not a political winner for them.  They are the party of tax cuts, and they are staying in their comfort zone -- no matter how much discomfort they inflict on America.