Donald Trump has declared "with tax reform, we can make it morning in America again" and that "revising our tax code is not just a policy discussion — it is a moral one, because we are not talking about the government's money – we are talking about your money, your hard work."
The Republican tax plan, which would cut rates for individuals and small businesses, sounds like good policy, but it's not. Before we get lost in details and political infighting, it's worth laying out what effective tax reform actually looks like.
The hallmark of a good tax code is that it doesn't attempt social engineering via revenue collection.. It's our money and the government shouldn't be telling us how to spend it or what to spend it on. And yet our tax code is larded up with all sorts of incentives for certain types of purchases—such as the mortgage-interest deduction, which is defended on the grounds that owning a home is morally and culturally superior to renting. It's not by the way, and the result is market distortions that saddle families that would be better off renting with mortgage debt. Trump's tax plan keeps the mortgage interest rate deduction–and the one for charitable giving, which is another example of social engineering.
Another distortion in the tax code is that individuals can deduct the cost of their state and local taxes from their federal bill, effectively allowing jurisdictions like New York and California to get away with charging their residents more than they would otherwise. To its credit, the Trump plan at least attempts to do away with this practice, although it's doubtful this idea will survive the legislative process..
The most important principle for tax reform is that revenue should cover the actual costs of government so that citizens can actually make an informed decision about what services they're willing to pay for. On this score, Trump's plan is sadly business as usual.
First, it would take even more people off the tax rolls. There are already over 40 million households that pay no federal income tax at all and the president brags that his plan would add another 31 million to that total. As Chris Edwards of the Cato Institute writes, "taking more people off the tax rolls is not a good way to keep the government limited. If something is 'free,' people will demand more of it."
And the problem is much bigger than that. For decades now, the feds have been spending far more in any given year than they take in via taxes. Last year, for instance, the government spent 20 percent more than it took in and between 2009 and 2013, it spent 33 percent more than it brought in. Hence annual deficits and ballooning national debt. This is like government by Groupon: Every year, we're getting such a great deal, of course we want more and more stuff. We'd be stupid not to.
Where does Trump's plan land on this topic?
Every tax reform promises to either be revenue neutral or to increase the government's haul. In many cases, neither outcome is close to being truthful. More to the point, after years of accumulating debt we need to focus on government spending first and foremost. In 2016, the feds took in about $3 trillion in taxes. That should be the absolute spending limit—instead of the nearly $4 trillion Congress is talking about.
Taxes aren't the price we pay for civilization—they're the price we pay for government. And until we bind the two together, we'll be spending more and more money that we don't have on things we almost certainly wouldn't want if we had to pay full price for them.
Produced by Todd Krainin. Written and narrated by Nick Gillespie. Cameras by Jim Epstein.