If there’s one thing that’s critical to the continued health of the U.S. economy, it’s getting the tax reduction and expansion package through Congress and to the president’s desk as soon as possible. There’s nothing more important.
The problem with that, of course, is that no one can agree on what it should look like. The best option, politically and economically, would be to start from the current baseline and reenact everything that was in the original 2017 legislation. That doesn’t provide room for eliminating the tax on tips, Social Security payments, or any of the other new deductions the president has talked about, but it does allow legislators to bypass the damaging, time-consuming debate over how to pay for them.
Moving forward, we must decide what we want. The best tax reform would just lower the rates. Period. The government can’t spend on public items what it does not extract one way or another from the private sector. The economy needs to grow. Washington needs to go on a diet.
Politically, that’s almost an impossibility. The people who would as soon divide the American people by class and economic strata would just as soon raise rates as not. They’ll demand the money come from somewhere to ease the pain they’d argue would be caused by reducing rates because the government would have less to spend.
We expect the politicians to find cuts, or as it is now, deductions and special interest exemptions that can be eliminated, to buy down marginal rates or, in this case, keep them down. That’s harder to do, often because the spenders can portray it as favoring the rich over working Americans and the poor.
On its face, that’s nonsense, and the data proves it. A recent study by the Illinois-based Heartland Institute found that the 2017 Tax Cuts and Jobs Act reduced the tax burden at all income levels, with those earning between $5000 and $15,000 ending up with tax bills that dropped by more than 80 percent.
The best idea would be to begin eliminating all deductions, credits, and exemptions on the personal side. Most people don’t itemize anyway. High-income earners would, no doubt, gladly swap every loophole available to them if the top marginal rate were made low enough. That would promote savings and investment, leading to growth, which is what we should all want rather than sheltering and husbanding resources for a rainy day.
Aside from that, Congress ought to avoid messing further with deductions on the business side, especially those that can be explained as favoring Wall Street over Main Street. One proposal up for consideration involves what are known as pass-through entities or PTETs, which allow millions of small businesses like partnerships, S-corporations, and even some LLCs to deduct state and local taxes from their federal tax bill.
This policy was adopted during Trump’s first term, after the TCJA was enacted. Some in Congress argue it should be repealed, bringing the business side of the code in line with the treatment of state and local taxes on the personal side of the ledger.
It would also mean increasing taxes on millions of businesses by $200 billion, which, to put it candidly, would be foolish at a time when we need all the growth we can get. Pass-through businesses represent over 90% of American businesses and over 50% of private sector firms, employing 65 million workers. Their tax bill is often higher than that of what we think of as corporate America’s.
There are plenty of other deductions out there to be picked over. Just about each of the ones that are supposed to promote the involuntary transition Joe Biden tried to push on us to make America green is crying out for repeal. If the politicians had more guts, it would happen. Some of them, as they’ve signaled lately, don’t.
No one, least of all me, likes the way the federal tax code protects the politicians in high-tax states like Illinois, New York, and California. Their budget-busting ways ought to have the voters tossing them out on their ears. Instead, the deductibility of state and local taxes on the federal return helps cushion the blow their profligate policies inflict.
That’s a distortion of the political and economic marketplace of the worst kind, and it makes it harder to fix. The focus of tax reform right now ought to be on helping job creators keep their earnings because it supports growth. That’s the objective, now and frankly, always.
Steve Moore is an economist and co-founder of Unleash Prosperity.