WESTCHESTER COUNTY, NY — Prof. Oren M. Levin-Waldman Prof. Oren M. Levin-Waldman will discuss his most recent article: The GOP Tax Bill Still Does Nothing for the Middle Class By Dr. OREN M. LEVIN-WALDMAN, Ph.D., on Wednesday, November 8, 2017th at 10am EDT on the Westchester On the Level radio broadcast. Listen “Live” or “On Demand”. This segment from 10-11am. http://tobtr.com/s/10369907
The GOP tax plan is finally here. Seven tax brackets are being collapsed into four, many tax deductions are being eliminated, and corporate taxes will be reduced. Although tax rates for many will go down, the loss of deductions, especially state and local tax deductions in high tax states could leave many in the middle class in the same place, if not slightly worse off. Is this really tax reform? Or is it simply another version of tax cuts to corporations masquerading as tax reform?
Democrats are already claiming it will hurt the middle class with the elimination of popular deductions. And yet, every time we fail to eliminate a deduction, we only drive up tax rates. So where is the reform? The problem is that tax policy is partly guided by a principle of fairness that holds that those who earn more should pay more. This is the idea that tax rates should be progressive. A regressive tax, by contrast is a flat tax which typically represents a bigger bite for a worker at the bottom end of the distribution than for a worker at the top. An example of a regressive tax is the current Social Security payroll tax.
The other problem with tax policy is that it is based on social engineering. Unless we build certain incentives into the tax code, people won’t behave according to how they are supposed to. Unless we maintain a mortgage interest deduction, people won’t purchase homes. Unless we maintain the charitable deduction, people won’t give to charity. Unless, we allow for the depreciation of plants and equipment, firms won’t invest in new plants and equipment. And on and on it goes.
Although taxes should be about raising revenue to fund government operations, taxes have become more. Because the tax code allows for a multitude of deductions, all aimed at affecting either personal or corporate behavior, it opens the door to interest groups and lobbying activity aimed at getting their wares through the tax code. In other words, much of the Washington Swamp lives in the tax code.
Real reform would consist of simplifying the code and making taxes nothing more than raising revenue. Real reform would consist of even lower rates than the GOP is proposing and the elimination of all deductions. Four flat taxes at 5 percent, 10 percent, 15 percent, and 20 percent, with absolutely no deductions might accomplish the same result as the GOP proposal. In fact, it might accomplish more.
Not only would it be simpler, it might actually go a long way towards draining the swamp that bothers many Americans. And by draining much of the swamp, it might be a more effective response to the problem of money in politics than the typical campaign finance proposal.
By simplifying the tax code, many of the interest groups that live through the tax code will disappear.
Still, given the proposal from House Republicans, one seriously wonders whether simplification and serving the interests of the middle class is really the goal. We hear a lot of talk about how failure to achieve a tax bill will spell the end of the Trump presidency and make it more difficult to retain control of Congress in the 2018 elections. And yet, what has been proposed falls short of serious reform and looks more like a corporate tax cut plan masquerading as reform. In other words, it is another Republican business tax cut. Nevertheless, if Democrats were smart they would promote serious reform rather than continuing the politics of resistance.
The GOP talks about low tax rates, but there cannot be low tax rates with all the deductions that will remain. Politicians from high tax states like California, New York, and New Jersey will oppose efforts to eliminate state and local tax deductions. To keep them, of course, means raising the rates. In truth, politicians from either party representing wealthy constituents have no problem with higher marginal tax rates because they know their constituents have enough deductions that their effective tax rates will always be considerably less.
The current bill still maintains relatively high tax rates while eliminating many deductions. While the very wealthy will fare well from this bill, the upper middle class will not do nearly as well. If politicians were to truly reform the tax code they would have much lower flat tax rates and absolutely no deductions. True reform would make it much more difficult for certain groups to evade paying their taxes, thereby allowing the bulk of the burden to fall on the middle class.
That this is the best bill the GOP could come up with only demonstrates that they don’t really care about the middle class. That the Democrats are not willing to seriously work with the other party to craft a serious reform bill only suggests that they too are no more concerned with the middle class than the Republicans.
Arguably, if there really was concern for the middle class other ideas might be explored as well. Why not simply jettison the income tax and replace it with a consumption tax? Instead of paying taxes on earnings, taxes would be paid on purchases. Of course, this would raise prices, but consumers would be starting out with more money in their pockets because they would be keeping more of their earnings.
Many economists believe this would foster more growth. It wouldn’t necessarily be simpler because the first $20,000 or so of purchases would still have to be exempted so as not to disproportionately harm the poor. There would still need to be an accounting for purchases and most likely a need to file yearly returns.
The consumption tax is often referred to as a Value Added Tax (VAT) where each stage of production is taxed. It is essentially a national sales tax. The chief problem with this approach is that many politicians like the idea of a VAT as an addition to the income tax, rather than its replacement. Many European countries have adopted VAT taxes in addition to income taxes to pay for a more expansive welfare state. What typically happens, however, is that VAT taxes are increased.
Because there are too many well entrenched interests, it is highly unlikely that we will get serious tax reform. Perhaps there never was a goal to achieve tax reform. After all, promoting corporate tax cuts is a hard sell unless they can be couched in the language of overall tax reform. This bill, however, falls short.
Dr. Oren M. Levin-Waldman, Ph.D., Professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School. Direct email to: email@example.com