The Republican tax plan looks like a left-wing caricature of conservative tax reform. It cuts rates for businesses and high incomes, leaves poor Americans worse off and explodes the deficit in the process.
Yet it will probably pass.
Why the tax plan is so bad
Criticism from the left is about what you would expect: the plan makes the rich richer, the poor poorer and does nothing to shrink the deficit.
The trouble for Republicans is that conservative policy experts say the same thing.
Ezra Klein of the Vox interviewed several of them and lists their complaints:
- The bill isn’t paid for. Republicans would add around $1.5 trillion to the national debt over ten years.
- More than 75 percent of the benefits go to the top 5 percent of incomes. More than 60 percent of the gains go to the top 1 percent. So much for a “middle-class tax cut”.
- It creates a loophole for businesses to file taxes under the individual tax code — for no good reason at all. There is no economic argument for this. But it’s probably not a coincidence that the sort of company that could benefit from this rule is President Donald Trump’s.
- There is also a shortcut for businesses that make less than $100 million and want to shelter their profits overseas as well as what Klein describes as a “bizarre” allowance for businesses to deduct both their expenses and the interest on the debt they take on, leading to potentially negative tax rates on new investments.
- It repeals the individual insurance mandate from Obamacare to save $330 billion. Thirteen million Americans could lose their health insurance as a result.
- In order to avoid a filibuster in the Senate, Republicans are using an arcane legislative instrument to enact the cuts, which means that most will expire in ten years. Future Congresses may extend the lower rates, but that is uncertain and uncertainty means businesses and individuals can’t make long-term plans, which is a drag on growth.
Yet it will probably pass
Jonathan Chait nevertheless gives Republicans a close-to-80-percent chance of enacting the reforms, writing in New York magazine that they have three reasons to:
- The downsides are tolerable. Millions of low- to middle-income Americans may end up paying higher taxes, but only a little and most won’t see any change.
- The tax cuts are a huge boon to the constituencies that clearly matter the most to Republicans: their donors.
- Republicans need a win. They failed to repeal Obamacare. They aren’t building a wall on the Mexican border. They haven’t come up with an infrastructure plan. Midterm congressional elections are only a year away. They need something to show for their “unified Republican government”.
There is a better way
What makes this so exasperating is that it’s not difficult to imagine a sensible, effective conservative tax plan:
- Bring down corporate tax to 25 percent, which is what Mitt Romney proposed in 2012. That would align America’s rate with the rest of the developed world.
- Expand the child tax credit and cut the lowest income tax rates to help the poor.
- Pay for it by eliminating deductions that are mostly used by the rich, which would simplify the code at the same time.
“A bill like this would bring more benefits, cause fewer problems and might even get some Democratic votes,” writes Klein.
But that’s not what Republican donors are interested in.