After failing on three separate occasions to fulfill campaign promises and replace the Affordable Care Act, Congressional Republicans have moved on to tax reform. Their current framework, while somewhat vague on specifics, calls for eliminating the state and local tax deduction, a new (lower) tax rate for “pass-through” businesses, and lowering the corporate rate from 35 percent to 20 percent (offset in part by the elimination of some tax breaks for these businesses). The plan would also reduce the federal income tax brackets from seven to three with rates of 12 percent, 25 percent, and 35 percent and for the most part increase the standard deduction, which is based on the number of taxpayers and dependents claimed on a return.
It’s all a lot to take in, and I recommend reading a more in-depth description of what each initiative does, but let’s jump straight into the analysis. According to the nonpartisan Tax Policy Center about three-quarters of the savings would go to the top 20 percent of earners, those with incomes above $149,000, and more than half would go to the top one percent. The discrepancy gets worse as time goes on with an estimated 80 percent of savings going to the top one percent by the 10th year of the overhaul. Analysts at the center have acknowledged that the plan presented is still a framework and they had to make assumptions based on previous Republican tax plans, but it is unlikely that the overall picture will greatly change.
Supporters of the bill have claimed the middle class is the real beneficiary of the bill by emphasizing speculative gains that will result from induced economic growth, i.e. increases in jobs and wages. This effect has long been the center of Republican tax gospel, but has been refuted by people such as Bruce Bartlett, a Republican who helped design Reagan’s tax cut in 1981. Bartlett points out that strong growth in the 1980s was a product of several factors, including a reduction in interest rates by the Federal Reserve and government investment in a defense buildup and highway construction.
Reagan ended up raising taxes several times in the 80s, as many forget, and the cumulative revenue loss from the cut in 1981 was $264 billion. In a move similar to the current proposal, Republicans lowered the top income tax rate to 28 percent from 50 percent and slashed the corporate tax rate from 46 percent to 34 percent in 1986. There is no evidence that these cuts led to growth; in fact wages fell and a recession began in 1990. Bill Clinton raised taxes in 1993, and aggregate real GDP growth in the 1990s ended up exceeding that of the 1980s. George Bush later imposed huge tax cuts which cost the Treasury trillions in revenue as growth collapsed in the 2000s and real GDP rose just 19.5 percent. Tax cuts don’t really have the best track record.
One of the key aspects of the plan, a lower tax rate for pass-through businesses, has already been proven to be a monumental failure in Kansas. These are sole proprietorships and partnerships that currently pay taxes at the individual rate of their owners. Kansas cut rates for these to zero, and high earners ended up funneling pay through these organizations so they wouldn’t pay taxes on them. Kansas’ whole conservative tax experiment cost the state $700 million dollars per year and the pass-through loophole was responsible for up to $300 million of this. A similar nationwide policy would drop government revenues immensely and concentrate wealth in the hands of the rich.
There is no concrete evidence that cutting taxes will create jobs or spur wage growth, but there is evidence that the plan will add $2.4 trillion to the national debt over the next decade. If government is getting less money there will almost certainly be spending cuts to various programs. Any cuts to government programs would obviously have a greater impact on poorer Americans who generally rely on them. So, while their taxes might go down a bit, this would likely be offset by spending cuts instigated by the loss in revenue.
This regressive tax plan will likely not accomplish anything Trump and conservatives are promising. The rich will see immense gains, the debt will balloon and they’ll probably end up crashing the economy for the third straight time. Then we’ll elect another Democrat to clean up the mess and do the whole thing again.
Jacob Kowalski is opinion editor for The Daily Campus opinion section. He can be reached via email at email@example.com.