Cutting taxes for the rich doesn’t count as tax reform

Congressional Republicans and the Trump administration claim to be intent on pursuing tax reform, but all the plans offered by Republicans in recent years have been simple tax cuts for the rich, and there’s no indication that the plans they release this time will be any different.

Were they actually interested in addressing the real fiscal policy challenges facing the United States in coming years, Congress would be looking to raise more revenue from the rich, not less.

Real tax reform should tackle our country’s three most-pressing fiscal challenges. First, fiscal policy should help, not hinder, the economy’s still-incomplete recovery.

When this recovery is complete and the economy sits at full employment, the next fiscal challenge to tackle is the rising costs of federal healthcare spending (Medicare, Medicaid and the Affordable Care Act) that drive all the increase in projected deficits in the coming decades.

Yes, we should look for ways to slow this cost growth, but we should also commit to pay for these programs without shifting costs onto families.

After all, the federal government has shown far greater ability to constrain healthcare costs than private payers. If private healthcare costs had grown at the same rates as Medicare, a family healthcare plan that today costs $15,000 would cost just $10,000.

Finally, fiscal policy must do its part to reverse the decades-long march of inequality that has held back the pay of the typical worker.

Only progressive revenue increases thread the needle of paying for federal healthcare commitments and pushing back on inequality without hindering the incomplete recovery. There are plenty of policy options to choose from to raise revenue progressively and efficiently.

The corporate tax code is riddled with loopholes and ripe for improvement. Big multinational corporations are dodging $767 billion in taxes on $2.6 trillion in profits they’ve stashed offshore. The reason they do so is a loophole called deferral.

The deferral loophole allows multinational corporations to defer indefinitely paying their taxes, provided they make their profits show up overseas.

By funneling those profits through tax havens, they can get away with paying next to nothing in taxes while they wait for Congress to give them a tax “holiday,” which last happened in 2004.

Tax reform should make the big multinational corporations pay what they owe and should close the deferral loophole so multinational corporations pay their taxes in the year their income is booked, just like every other taxpayer.

This would also have the advantage of leveling the playing field for small businesses that can’t afford the tax lawyers that allow big multinational corporations to choose when or if they’ll be paying their taxes.

Tax reform should also include a financial transactions tax. For decades, Wall Street has made money by charging typical savers high fees for excessive, unproductive trading on 401(k)s and other financial accounts.

A financial transactions tax could stop this socially inefficient redistribution from Main Street to Wall Street. Further, top tax rates themselves should be raised significantly. This will both raise revenue and usefully change incentives facing those at the top.

For example, CEOs might not want to deal with the outrage from continuing to siphon money from workers and shareholders if more of this money ends up with the IRS.

A further reform could tackle tax deductions, which reduce progressivity in the tax code because the value of tax deductions actually increases with income. Typical households only get to keep between 10 and 25 cents for each dollar claimed as a deduction. Households making over $500,000 get to keep about 40 cents for each dollar deducted.

According to the Congressional Budget Office, 38 percent of the benefits from the deduction for charitable contributions goes to the top 1 percent. Thirty percent of the benefits from the deduction for state and local taxes go to the top 1 percent.

Fifteen percent of the mortgage interest deduction goes to the top 1 percent. We shouldn’t be naïve. These deductions have powerful constituencies, and any change to them would be politically challenging.

But capping their value at 28 percent would lead to no change at all in the value of deductions for a single filer making up to $191,650 or married couples making up to $233,350 — a group that includes more than 95 percent of taxpayers.

The rationale for these deductions is encouraging socially useful behavior like home ownership or charitable giving. But there are far more effective policies for achieving these goals. Refundable tax credits or direct spending can provide encouragement without disproportionately benefitting the rich.

Those worried about encouraging charitable giving would be wise to push for more progressive inheritance or estate taxes. Since charitable bequests aren’t taxed, increased inheritance or estate taxes can motivate more giving.

The most glaringly unequal tax preference is the lower tax rates faced by capital income: 68 percent of the benefits of the preferential rates on capital gains and dividends go to the top 1 percent. The bottom 90 percent see just 12 percent of the benefits. Closing this loophole is a no-brainer.

Importantly, it’s not like these tax changes have never been discussed before. The Congressional Progressive Caucus’s fiscal year 2018 budget contains a laundry list of these reforms that should have attracted much more attention.

Sadly, our upcoming tax debate will likely not face up to any of these fiscal challenges. Instead, it will focus on how best to cut taxes for the rich and big corporations by offering up new and improved loopholes for both.

Blair is a budget analyst for the Economic Policy Institute, a think tank that emphasizes the needs of low- and middle-income workers in economic policy discussions. Blair specializes in tax, budget, and infrastructure policy analysis.