The Next Phase of Tax Reform Requires One-Party Control - OZY | A Modern Media Company

WHY YOU SHOULD CARE

Because the next election has huge implications for your tax bill.

What comes next for tax reform?

And when is that future? It was a 31-year wait between the bipartisan tax reform act of 1986 and the Republican-only Tax Cut and Jobs Act of 2017.

Will America wait another 30 years?

Both parties have strongly held and public positions on “what is to be done,” but neither party can enact their vision until they win the trifecta — one-party control of the House, Senate and White House. Even a narrow majority in the House and Senate suffices as budget reconciliation rules allow a simple majority in the Senate to enact tax reform without the threat of a filibuster. The limit placed on reconciliation legislation is that after a stated period of time — Republicans picked 10 years in 2001 and 2017 — any tax cuts vanish unless they are “paid for” with real budget reductions or real tax hikes.

Republican tax reforms in 1981, 1986, 1997, 2001 and 2003, and 2017 focused on reducing tax rates. The next Republican tax cut/tax reform will be more of the same.

One cannot fund much of the Democratic Party’s announced spending plans by just taxing the rich.

A Republican Congress would make the Trump tax cuts permanent, lower the corporate rate to 15 percent per Trump’s original plan and index capital gains to inflation to increase the value of stocks inside everyone’s IRA and 40l(k) — the target audience is the 100 million Americans with such savings accounts. (It polls off the charts for undecided voters.) The Republican focus will be on increasing economic growth to reduce the demand for welfare spending and increase revenue through higher employment and higher wages. They will point to the new census data that shows the real median household income has increased $4,144 since Trump’s election (compared with a $400 gain in the eight George W. Bush years and $1,000 in the seven-and-a-half post-recession Barack Obama years) and the falling unemployment numbers. September’s 3.5 percent unemployment is the lowest in 50 years.

The Democrats have also telegraphed their punches.

Their stated goals are to tax energy to discourage its use, tax wealth to reduce inequality and increase total tax take to pay for their plans to dramatically increase federal spending.

Every major Democratic 2020 presidential candidate has promised to repeal the entire Republican tax cut of 2017. Immediately. And to impose a carbon tax with an automatic increase that allows the tax to be low pain at first and then ramp up without any annoying public votes on each jump in the tax.

How high will the carbon tax go? If it has to pay for Alexandria Ocasio-Cortez’s Green New Deal, that could add up to more than the entire current federal budget of $4.4 trillion.

If one paid only for “Medicare for All,” it requires $32 trillion over a decade, almost doubling the cost of the federal government.

Nineteen times in television interviews, Elizabeth Warren has refused to answer if her plans would raise any middle-income Americans’ taxes. Can the rich be made to pay for her plans? Confiscating 100 percent of the income of anyone earning more than $500,000 would raise $14.3 trillion over a decade. That projection does require a questionable assumption that those so expropriated would continue to work after year one.

One cannot fund much of the Democratic Party’s announced spending plans by just taxing the rich. So why the focus on a (possibly unconstitutional, considering the income tax required by the 16th Amendment) wealth tax?

Magicians refer to it as misdirection or legerdemain. Talk all day about taxing the rich so that the middle class will object less when they are saddled with an energy tax. This is the European model.

European nations have much larger public sectors than we do in the United States. They fund it with the value-added tax as high as 20 percent of almost everything one buys. This is a dramatically regressive tax. The energy tax is a VAT on training wheels. Over time the energy taxes being discussed would not raise enough revenue to fund Medicare for All or the Green New Deal or any significant part of them. The “base” of the tax will inevitably be widened to all products — possibly keeping the energy tax higher than the tax on “everything” to maintain the sense that it is an environmental project.

Warren’s wealth tax of 2 percent on those with $50 million in their lifetime savings and 3 percent on those with more than $1 billion in assets would raise $2.75 trillion over a decade. This could be a more significant revenue generator if the government reduced the thresholds. The personal income tax was introduced in 1916 with a top rate of 7 percent hitting those earning more than $11 million in today’s dollars. The threshold was soon reduced and the rate increased dramatically and permanently.

The Washington Post highlighted Warren’s twin to the wealth tax — the exit tax to keep those who have created a great deal of lifetime savings from leaving the nation. Twelve European nations have imposed an exit tax in recent years and eight have repealed them. There were also exit taxes in Weimar Germany, Rhodesia and South Africa.

And what happens if there’s a continuation of divided government? Nothing moves, maybe for 30 years.

Sign up for the weekly newsletter!