Thoughts on GOP Tax Reform / by Todd Yarbrough

Let's get this out of the way first. The GOP tax plan, unveiled last week, isn't reform. While the plan cuts a bunch of taxes, reduces the number of brackets, and strikes numerous deductions and credits, it does very little to reform the way in which the government collects tax revenue. With that being said, what the GOP tax plan does do is significantly alter the taxation landscape of the American economy. 

 Source: Tax Foundation

Source: Tax Foundation

It does so mainly in two ways: 1) large tax cuts that primarily benefit the wealthy and large businesses and  2) removal of many deductions and credits that many Americans utilize. Reducing the number of income tax brackets from 7 to 4 does almost nothing to either the complexity or way in which citizens pay taxes. I discussed this at length previous on the blog. By cutting taxes and reducing available deductions, the GOP tax plan further tilts the tax landscape in favor of the already wealthy and big business. The plan is almost striking in how little it does to actually reform our tax code. For all intents and purposes, this is just tax cuts with a tiny bit of "reform". 

Here are some highlights:

  1. cuts corporate income tax rate from 35% to 20%
  2. cuts pass-through rate for businesses from 39.6% to 25%
  3. doubles standard deduction and repeals personal exemption
  4. repeals alternative minimum tax
  5. increases child tax credit
  6. repeals state and local tax deductions, but only for individuals
  7. lowers cap on mortgage interest deduction
  8. repeals many other deductions, including student loan interest and business expense
  9. moves to use chained-CPI for inflation measurement

So, what does this all mean? Well, the rich will pay less, big business will pay less, low income families will pay less, but middle income outcomes are far less certain. One particularly odd thing about the GOP tax plan is that it cuts taxes on the wealthiest and seeks to pay for those cuts by removing deductions that many middle income families take each year. This isn't to say that repealing some deductions are not founded in some logic. The mortgage interest deduction for example is a tremendous windfall for the very rich, but also does give some extra cash in the pockets of middle income families who have recently purchased a home. The state and local tax (SALT) deductions are also typically viewed as giveaways to the rich, but again many middle income families who live in high tax states and localities are being asked to pay for tax cuts for the wealthy. This tax plan's priority couldn't be more clear. The GOP have crafted a tax cut plan that is simply a giant giveaway to the already very wealthy, to be partially paid back on the backs of middle and upper-middle income families. I say partially because the cherry on top of this sundae is that the tax plan is likely to balloon the deficit by more than $1.5 trillion over ten years, and in all likelihood cause an even greater increase in government debt

But what about growth? Does this tax plan grow the economy? I'm very, extremely dubious on this point. Some analyses suggests that tax plan is likely to lead to greater than 3% GDP growth and that this will help soothe the large revenue hit the government will take from the tax cuts. I'm just not sure if I buy that. They said the same thing about growth in the 1980s, but if you look at the growth in the 80s compared with the 1970s, you see very little difference, despite there being gigantic tax cuts in the 80s. Further, the economy is currently sitting at 4.2% unemployment. I just don't know how much further the economy can go, and fear that this tax plan will do what the Bush tax cuts did, fuel a bubblicious economic expansion that ends in a recession and a dramatic buildup of government debt. Some analyses show that the tax plan will help create about 1 million new jobs. But at a cost of $1.5 trillion, that's not the best return on investment. In fact, it's terrible!

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Not to put too fine a point on it, but the GOP tax plan is simply another attempt at trickle down economics. I have essentially zero belief that such will create the ever expanding economic growth that is always promised alongside such tax cuts. Our taxes are already low, so the marginal impact from continuing to lower them is falling. If we keep cutting taxes, we'll keep getting less and less from these cuts in terms of economic growth. Meanwhile, government deficits and debt will continue to rise and rise. There is certainly a level of economic growth that the U.S. could achieve to make a $1.5 trillion tax revenue reduction worth it, but our ability to get to that level is not founded in empirical economic analysis. We would literally have to experience more growth, given economic conditions, than we ever have. It's more than a pipe-dream, it's an incredibly inefficient and cost-ineffective pipe dream. Further, it is very regressive, as it pays for tax cuts for the wealthy primarily with deduction removal for the middle class. I'm not sure what I expected from the GOP tax plan, but I am disappointed to say the least.