Tax Reform

Maybe Not Libertarian, But There Are Some Things to Like in This Tax Reform

The House and Senate still refuse to consider cutting government spending.

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The Senate and House produced tax reform bills in the last few weeks, similar in important ways, but different enough that they could be lethal to the tax reform efforts. The House passed its version and we are waiting on the Senate to either pass or reject their own version.

Before breaking down these proposals, it is worth remembering that our current system is horribly complicated, making compliance costs exorbitant. It is incredibly unfair, extending privileges to some at the expense of others. There is no equality before the taxman.

Genuine tax reform would expand and simplify the tax base by getting rid of the thousands of loopholes to special interest groups. It would lower the top marginal rates and end the double taxation on saving and investment. It should restore some horizontal equity (two people making the same income paying the same taxes). It would also make as many provisions permanent—and predictable—as possible.

Good tax reform would require the federal government to make adjustments in spending, the way states and the District of Columbia operate, so the amount of tax collected more or less covers spending for a given year.

The Simpler Tax Code

The House version goes after a large number of tax exemptions, breaks, credits and deductions that make our code so complicated and unfair. It takes some significant steps to reduce the mortgage interest deduction. It also gets rid of most—with the exception of a $10,000 deduction—of the state and local tax deduction (SALT). Pretty impressive moves considering ending tax deductions is usually where tax reform goes to die.

The House plan doubles the standard deduction, meaning dramatically fewer taxpayers will itemize their taxes.

The Senate plan also doubles the standard deduction. (an estimated 90 percent of filers making under $200K would now claim the standard deduction). It gets rid of SALT entirely, but is more timid on the mortgage interest deductions. Moreover, it preserves many of the tax breaks with which the House dispenses. And rather than making the tax changes permanent, it includes a sunset date of 2025 reverting the standard deduction, the estate tax, the child tax credit, SALT, the pass-through deduction, and individual tax rates to 2017 levels.

Middle Class Tax Cuts

President Trump's intention to give a real tax break to the middle class is counter-productive considering the middle class barely shoulders any of the income tax as it is. The top 10 percent of income earners—households making $133K, not $1 million as most assume—currently pay more than 70 percent of all income tax revenue. The middle quintile pays, on average, 2.6 percent of the federal income tax.

And yet, in both the House and Senate plans the middle class receives the largest tax relief by reducing their marginal tax rates, increasing the child tax credit and doubling the standard deduction. The result is fewer taxpayers would be paying income tax at all, problematic from a small government perspective. It also means a more progressive income tax code than it already is.

The House plan also effectively jacks up the top marginal rate for some high earners by using a 39.6 percent bubble rate on the first $90K earned by single taxpayers making $1 million and married taxpayers making $1.2 million and a 12 percent rate like everyone else. This is a perfect example of Republicans caving in to political pressure and implementing bad policies. Not that it will stop Democrats from calling it a tax cut for the rich.

Lack of Spending Cuts

Senate and House tax writers have been trying to pour two pounds of sugar into a one-pound bag to comply with reconciliation rules. Budget rules require that tax reform not cost more than $1.5 trillion over ten years and be deficit neutral outside of that time window. Because the $1.5 trillion tax reform is scored on a static basis and assuming that many current tax breaks and spending provision will sunset in a few years, the Senate has much more room than it seems. A little economic growth could go a long way (though far from going all the way) to help pay for this. This still imposes a real budget constraint on the tax writers.

They could, of course, have made their lives much easier by cutting government spending. But they refuse. Our current public debt is $14.6 trillion or 78 percent of our GDP and moving at a pace to be 102 percent of GDP by 2033 according to CBO. This massive debt, which will be paid for in higher taxes and slower growth by future generations, was apparently not enough to convince them to be fiscally responsible.

As a result, lawmakers rely heavily on revenue raisers (some good, like the elimination of SALT, and some bad, like base erosion provisions or taxing endowments of private universities) and budget gimmicks (like sunsetting dozens of provisions that will likely be extended in 2025). It is fiscally irresponsible and doesn't address the most important aspects of tax reform: simplicity, transparency and stability.

Cutting the Corporate Tax Rate

Both plans cut the corporate income tax rate from its current 35 percent level to 20 percent. The Senate version implements the cut in 2019, the House version in 2018. Both have the good sense to make the change permanent. This is the most pro-growth/wage change. This is a measure worth passing to make the country's tax environment more competitive.

Two questions I most often get are: Will tax reform be considered before the 2018 elections, and are either of the plans worth supporting? The honest answer to both questions is I don't know.

This is no libertarian tax reform. Far from it. Many aspects of either bill are awful (lack of fiscal responsibility, increased progressivity, enhanced child tax credit, sunset provisions just to name a few). But there are also provisions I really like, the corporate tax cuts, the elimination of SALT and other loophole terminations. Plus, it will be pro-growth (how much is the question) and certainly beats the alternative.

Not a ringing endorsement, but that's all I've got.

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55 responses to “Maybe Not Libertarian, But There Are Some Things to Like in This Tax Reform

  1. Be fiscally responsible? Who would want a world like that?

    1. Well being fiscally responsible means either a) cutting spending or b) raising taxes.

      At this point Democrats are the most fiscally responsible, because they’ll gladly raise taxes by 1.1x while raising spending by 1.0x. And that will reduce the deficit. Of course, they are always trying to push for automatic Federal spending increases, which means in the long run you have a larger government, smaller private sphere and less economic growth.

      Republicans will generally work to cap, or at the least slow down the rate of growth of Federal spending. However, they also love to cut taxes while leaving spending alone, leading to higher deficits. And while this will increase the rate of growth, they usually cut taxes far more than the Federal government’s percentage of economic growth.

      The heart of the matter is too much spending for an income tax, and neither party is willing to address that issue. If we want a large government we need a broad based consumption tax. If we don’t we need to reduce the size of government.

      1. In the Republican’s defense, they do allocate a lot of money towards the war machine. When the debt finally comes due, we can almost certainly wipe out our creditors.

        1. Yes. What’s the good of having a kick-ass navy and air force if we don’t use them?

          1. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this – 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link,

            go? to tech tab for work detail,,, http://www.onlinecareer10.com

      2. Raising taxes stops raising revenue once you get to a certain point, though. Only twice since the end of World War II have tax receipts exceeded 20 percent of GDP (1945, 1999).

        In the meantime, spending is pushing 25 percent of GDP. There’s no tax hike in the world that can cover that gap.

        1. An income tax probably can’t do it, but adding a consumption tax would. That’s how European governments manage to capture so much GDP (among other reasons).

      3. Ye gods, cut spending or kill the fucking economy. And we can damned well cut taxes at the same time as cutting spending–what difference does it make with all of the deficit spending?

        Grow up, humanity.

  2. It would be nice if all these metrics describing the middle class took into account cost of living. Hell, the tax brackets should take cost of living into account as well. Is it really fair that because I live on Long Island I have to pay a higher tax rate than someone living in a comparable home and with a comparable lifestyle in Alabama? I’m not rich, but I sure as hell get taxed like I am. A family making $113k here isn’t rich by any stretch of the imagination. Not when our property taxes are $15k/yr and the state takes their pound of flesh too. This is also why Veronique will never be forgiven for advocating the destruction of SALT deductions.

    1. You are arguing for vastly reducing the federal government. There is no ‘fair’ allocation of anything across a country as enormous and diverse as the USA.

      1. Isn’t that the main purpose of libertariamism?

        But no, my argument is based on Federalism. In my mind, my loyalties are first to my town, then to my state and finally to the federal government. The local government is what funds my schools and pays for my roads to be paved and hires my cops and firefighters and EMS. My state government is mostly useless, but they take care of the highways when they’re not getting indicted for corruption.

        I’ve seen the argument made that the Feds are saving us from ourselves, by forcing our local taxation to hurt more. That we’ll all rise up and denounce our state politicians and demand lower taxes. Why is this something that Republicans in the federal government feel that they can dictate to the States? My level of taxation here is between me and my local politicians and is none of their damn business.

        The argument for the elimination of the SALT deductions rests on two notions antithetical to libertarianism: 1) that your money belongs to the federal government and that whatever they allow you to keep is a gift and 2) the federal government is of greater importance than local government.

        You can’t sit there and complain about double taxation in regards to the death tax or investment income and then advocate in favor of literal double taxation.

        1. No.

          You are (1) free to live where you choose in the US without any immigration restrictions, and (2) promote any level of local taxation to pay for desired state and local spending. These choices do not change your federal “liability” and thus should not be calculated in your federal tax.

          People in high tax states and counties presumably live there because they want to enjoy what those local taxes provide. So unless we include those “benefits” in your income, you do not get to shift more of the federal burden to those who choose to live in low tax states, and get fewer local benefits.

        2. My level of taxation here is between me and my local politicians and is none of their damn business.

          Then stop asking the rest of the country to pay for it with SALT deductions. Pay your own damn high taxes.

          1. Not giving is taking, eh comrade?

        3. No, it’s not the Federal government’s fault that your state has high taxes. And the rest of us shouldn’t have to pay higher base rates to subsidize your local tax rate.

          That being said, I still think Congress is taking the wrong approach. They should have put a broad cap on total deductions, instead of targeting a specific deduction.

          1. Let’s say my income is $150,000 here. For simplicity’s sake, lets remove all deductions etc. My federal income taxes would be $21,753 or 14.5%. If I instead made $75,000, my federal income taxes would be $3,983 or about 5.3%.

            Now, in a lot of the country, I could maintain a comparable standard of living on $75,000 vs $150,000 here. Who is subsidizing who?

            The income tax brackets are broken as long as they don’t account for cost of living. Adjust them and I’ll happily give up my SALT deductions.

            1. Your cost of living is hugely affected by your local level of taxation.

              Eliminating SALT could very well reduce your cost of living. If it doesn’t, you really need to bite the bullet and move, because living surrounded by fiscally challenged people can’t be good for you.

            2. Bullshit. Why should the rest of the country subsidize your cost of living?

              1. Right now I’m subsidizing the upper middle class in poor states by paying a much higher federal tax rate.

                1. Bullshit. You choose to live where you do. You choose to accept the cost of living. In your world you think you should be rewarded for an overpriced house and mortgage.

            3. So people living in a trailer in the swamp have to pay more while you get a break to help you pay for your house by the beach that will double in value by the time you pay it off, that kinda thing?

            4. The federal government and people who live in other states didn’t decide to make your property taxes ridiculously high. I live in SC and know a lot of people who lived in NY and NJ who moved down here because they got tired of the high cost of living (and long winters, but that’s another topic). Two solutions: vote for people who will repeal the taxes or move somewhere else. Your high local and state taxes aren’t our problem.

              I’ve moved around a lot in this country, and the one thing I’ve learned is that high cost of living doesn’t necessarily mean high quality either.

            5. Simplicity is good. Your proposal is fiendishly complex.

          2. Those of us who can itemize shouldn’t have to pay for your increased standard deduction. At least my deduction is an elimination of DOUBLE TAXATION, yours is just a number pulled out of the air.

          3. No, it’s not the Federal government’s fault that your state has high taxes. And the rest of us shouldn’t have to pay higher base rates to subsidize your local tax rate.

            That’s like voting for a child predator … because he’s not a Democrat.

            Or a crazy psycho pussy-grabber and liar, because he’s not Hillary.

    2. It would be nice if blue states couldn’t subsidize their state government through SALT. Your property taxes and other state taxes are a problem between you and your state. You will never be forgiven for foisting your bad local decisions on the rest of the country. If you want lower cost of living, move.

    3. Is there a limit to how much state/local taxes should be deducted? If a state decided to mirror the federal tax brackets, would it still be acceptable for all of those taxes to be deducted?

      1. Yes. FedGov can have 25% of whatever’s left after the state and locals takes their share, even if that ends up being 25% of 75%.

    4. Fuck SALT. How is it fair for that guy in Alabama to subsidize your high taxes in New York? You don’t want to pay those high taxes? Then move or convince your fellow New Yorkers to vote for people who will lower taxes.

      1. He’s not subsidizing anything. The implied arrangement here is that every service that locals and states provide (and levies taxes to pay for) is one that the federal government does not and will not be asked to provide. That this is now an issue is due to a combination of the usual shitty tribalism and the feds having their hands in everything anyway. The Republicans are trying to use the tax code to engineer changes in voter behavior (something we typically frown upon), but it’s being supported by many because they support the changes being encouraged.

        There’s a reason why SALT has been present in the federal income tax since its inception. It’s fair, especially when you consider that it clearly establishes a bottom-up approach to income tax priority and prevents the possibility of double taxation of income. It’s rare for self-described conservatives and libertarians to support a naked power grab by the feds, but here we have it.

      2. I don’t get it. I thought the general opinion here was that taxes should be lower by any means necessary? If that means someone can lower their taxes by making tons of deductions, shouldn’t that be a good thing from a libertarian standpoint? At any rate, I don’t see how, in effect, raising taxes on some people is good at all. If you’re going to decrease deductions, then you also need to severely decrease tax rates all around so that no one ends up paying more in taxes. Yes, that also means vastly reducing the size of the federal government, but that is also a good thing.

        1. Simplicity is good. Feeding the tax preparation industry isn’t. I would actually accept a higher tax rate in exchange for simplicity. Don’t like high taxes, but let’s not make it such a time sucking puzzle each year.

      3. But it’s okay that the rich pay HALF your federal income tax … and subsidize your parents’ Medicare!
        So sucking on the teat is okay, depending on who is sucking it?

        Memorized slogans are no substitute for knowing what you’re talking about,

    5. Is it really fair that…
      Is it fair that you, a human who voluntarily lives in a place, has to pay the taxes that you know are required to live in that place without government incentive to do so? Yes. Alabama has fuck all to do with that.

      No libertarian is against you personally paying less taxes. However they are against government using tax incentives to attempt to reward particular behaviors. That could be owning a home. That could be buying an electric car. That could be living in Long Island.

    6. You should consider removal of SALT a good thing for those living in New York state. Your state taxes are higher _because of_ SALT. They can jack up local taxes, knowing it is actually the fed that is taking the hit (via a SALT deduction). If you can no longer deduct local taxes, maybe the tax payers of NY we train their sights on Albany looking for cuts to local spending instead 😉

  3. This is no libertarian tax reform.

    Did anyone expect it to be?

    And what exactly would libertarian tax reform entail? Certainly you would have to repeal the income tax to qualify. That has about as much chance as Gary had in the last election, and that was supposed to be our best shot. To me this seems like a pretty good tax plan that both has a chance to pass and should be supported by libertarians. If the only real negative of tax reform is that it doesn’t cut spending, well, I say save that debate for the next day and get what you can right now.

    1. Agreed. Improve it now how we can. Spending cuts are their own separate fight.

    2. And what exactly would libertarian tax reform entail?

      THREE flat taxes
      9% on income over $30,000 or so.
      9% on consumption.
      0.9% on capital transactions (to the purchaser)
      Copyright 1994

      That’s at current spending. Then we need a mechanism for cutting spending. NO elected politicians will EVER do that .. so UNdelegafe some powers to voters directly, with competing governments (from the glory years of libertarianism)

      Certainly you would have to repeal the income tax to qualify

      Why?
      That’s too extreme for even Ayn Rand!

    3. That has about as much chance as Gary had in the last election, and that was supposed to be our best shot.

      It SHOULD have been our best shot,.
      At least we saw the total, thorough and absolute humiliation of what Gillespie calls “libertarianism 3.0” — the notion of spreading ideas — a/ka slogans and soundbites — instead of POLICY SOLUTIONS.

      Americans are ready for even radical change, which happens only once or twice per century.
      We had 50 years to prepare.
      We had …. nothing … not a fucking thing.

      What if Johnson /Weld had a comprehensive platform, actual policy solutions, targeting the entire top-half of the Nolan Chart — which is over 60% of Americans? Then again, 91% of THOSE libertarians REJECT the libertarian label, per a long-buried survey by Cato.

      Why? Well, search the entire libertarian establishment, and you won’t find a single policy solution for ANY major issue. Not one. A few — like Medicare vouchers — are bat-shit crazy.

  4. I’ve come to the conclusion the only hope to a reasonable outcome is to push the idiocy of an oversized public sector past the limit.

    Cutting taxes without addressing spending will someday result in bad outcomes for the the public sector.
    We need to get back to a point where public employment really is ‘public service’ and not ‘extra compensated’.

    Reducing the number of people who directly benefit from big government will reduce the number of people voting for it.

  5. I wonder if Trump will get credit for signing this tax code reform into law.

    1. You give him credit enough for the rest of us.

      1. Just where its due.

        With all the TDS around here, its hard to convince guys like Matt Welch that Hillary would have been a million times worse than Trump.

        1. Hillary would have been a million times worse than Trump.

          (lol) That’s like saying that raping a 14-year-old is not as bad as raping a 4-year-old
          That’s how the goobers justify voting for Moore.
          He honest. You HATE the Constitution (if you even know it)

  6. Not a ringing endorsement, but that’s all I’ve got.

    This is a fair summary of the attitude held by people who “don’t get outraged” over Trump.

    Which you’d think would be familiar to libertarians in general: when is the last actual piece of legislation you can remember that DID get a ringing-endorsement from libertarians?

    Try hard. Most times, it wasn’t legislation at all: it was probably a SCOTUS decision, like Heller or Kyllo, Lawrence vs. Texas (if you’re into that sort of thing), etc.

    getting “1/3 of a loaf” has always been the best we ever get. And its exactly this sort of 1/3 of a loaf sort of progress that I set as the actual *high bar* for the Trump admin.

    Soft bigotry of low-expectations, maybe. Consider what the alternative was.

    1. Consider what the alternative was.

      Shudders

    2. Good summary GILMORE (said at the risk of trademark infringement)

    3. You’d think you’d simply not want to be on Trump’s side, at least in time for the history books to get written.

  7. The final bill smothering all the actual reforms to death with a dreadful sunset provision will be a tragedy, but it’s sorta where we are in an age where a party simply opposes all landmark legislation from the other party on principle and everything has to be passed with reconciliation.

    I think the House bill is interesting. I think the Senate bill, which I assume will win out because the Senate is the narrower choke point, is barely tolerable.

    In the end I expect months of fighting to haggle this shit back down to “GREAT NEW WINNER TAX PLAN”, “TRUMP DESTROYS AMERICA AND SUCKS PENISES OF RICH”, and “meet the new boss, same as the old boss” respectively depending on whether you are a Republican, Democrat, or libertarian. It will not do bad things but it will probably do very few good things.

    1. I don’t recall Bush Jr.’s 2000 tax reform, with a 10 year sunset (and passed by House at 3AM), getting this much push back for having a sunset provision.

      1. That entire bill had a sunset provision – not a sunset on everyone but the rich.

  8. Still treating breeders as a special interest group. Do we have an aging population problem or what?

  9. It’s “interesting” that Dr. de Rugy gives a thumb’s up to abolishing SALT, which is obvious “double taxation”, banned in the original income tax legislation and maintained ever since. Also interesting is her discreet silence regarding the abolition of the estate tax, which she had previously applauded on the grounds of, you guessed it, double taxation, even though at least half of inherited wealth consists of never-taxed, unrealized capital gains on real property, securities, etc. All of this wealth should be taxed. Of course, a tax like that would cost people like the Kochs billions. Perhaps Dr. de Rugy believes that discretion is the better part of valor. Who can blame her?

  10. Aw geez, why is the libertarian establishment so totally ignorant on tax policy? This one is Suderman’s, so he also screws up health care!

    The tax fuckup is blatant. I’ll use boldface.

    , and reduces taxes on income earned by pass-through businesses, a tax structure in which corporate profits are taxed as individual income

    Does that say pass-throughs are corporations who are exempt from the corporate income tax? Yep. A GOP crony loophole in the Tax Reform Act of 1986, as a windfall for a major GOP donor base. Eliminated the double-taxation of corporate profits … which ALSO freed corporate dollars for candidate donations (otherwise illegal)

    Got it? Now apply it.

    those changes could create an incentive for many businesses to restructure as pass-throughs as a form of tax arbitrage, which is what happened when the state of Kansas attempted a similar change

    Did you see the MASSIVE screwup?
    I’ve already explained why the Kansas example is total bullshit. But …. think now … how many businesses restructured as pass-throughs when their corporate rate was cut to ZERO? ? thirty years ago!

    Conservative bullshit argues that businesses convert when the personal rate is lower than the corporate rate!!! (Hides their cronyism) If the corporate rate becomes zero ? and you pay same personal rate anyhow … duh. (Not stated here, merely implied.)

    (continued)

    1. Part Two of Reality

      PS. Trump’s business is a pass-through corporation, already loopholed out of the corporate income tax and … get this … he campaigned on a maximum tax rate of 20% on HIMSELF (from today’s 39.6% max!) Imagine that, a billionaire paying a lower marginal tax rate than …. YOU (probably).

      On healthcare, repealing the mandate will INCREASE the death spiral on premiums — which is caused by too few younger folks signing up, to offset the sickies forced to be insured at a loss. So what happens if FEWER healthy folks sign up? It’s not the mandate, it’s guaranteed issue (sick people at normal rates, which the gutless GOP ignores, along with libertarians) The mandate was demanded by the INSURANCE INDUSTRY, as the deal for guaranteed issue

      Sudeman’s latest. version, people will switch from the exchanges to Medicaid, How does THAT save money?

      Did you donate to Reason? (lol)
      .

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