Hunger after past, keep on hankering. Running behind the times fast as only you can get a clue. Take my hands or my coattails. I’m still falling, and I hit the ground struggling. Midnight’s doubt just keeps on bubbling up. Still falling and I’m trying to say the words, but my thoughts run away with me. 100 days -such a long road – 100 days. These lyrics were written by the members of the Austrian band, Sofa Surfers and the song 100 Days was released in 2010 on their album Blindside. It seems in many ways that the administration of President Trump has been blindsided during its first 100 days.
I don’t say this out of malice and I have very high hopes for the Administration, as I admittedly did as well when President Obama took office. I know many of the President’s advisors very well – I’ve known Kellyanne for at least 20 years, and worked closely with her in the past. I served as a consultant for Secretary of Energy Perry during his Presidential bid, and on Small Business Administrator Linda McMahon’s Senate campaign as well. I know these people and have a lot of respect for them, and there are many things that the Administration has done during the first 100 days, particularly related to regulatory reform, that I believe will have very beneficial effects on the economy in the coming years.
I do; however, think that this Administration has hit the ground struggling when it comes to its legislative agenda. This is not unusual, legislation is hard. As I pointed out in the last blog post (https://guerrillaeconomics.com/2017/03/im-a-loser/), it takes a lot to pass any bill, and it is a huge lift to pass something comprehensive like a repeal of Obamacare, or something controversial like the funding of a border wall, or something that actually impacts someone in a negative way, like eliminating funding for the National Endowment for the Arts or the National Endowment for the Humanities. Change does not happen fast in Washington and 100 days is just a speck in legislative time.
But today, I am disappointed in the Administration. What was unveiled today as a massive tax reform plan was not only simplistic, but it was not tax reform. For a very rare moment I actually agree with the Senior Senator from New York who said, That’s not tax reform. In fact, the Administration released a simple list of principles, most of which are simply tax cuts. In short, the plan announced by the Administration would:
· Reduce the number of individual income tax brackets to 3, setting them at 10 percent, 25 percent and 35 percent;
· Double the standard deduction to $15,000;
· Add a deduction for child care expenses;
· Repeal the Alternative Minimum Tax;
· Repeal the Inheritance Tax;
· Repeal the 3.8 percent investment income tax;
· Reduce the base Corporate Tax rate to 15 percent;
· Set up a territorial tax system so that all income corporate income generated in the US is taxed;
· Provide a one-time reduced tax amnesty provision on corporate earnings being held overseas.
While many of these provisions – particularly territorial taxation, and the repeal of the alternative minimum tax – would be beneficial as part of an overall tax reform package, a one page memo is not a legislative proposal or even a legislative outline to reforming a 74,600 odd page long tax code.
The goal of tax reform is not tax cuts. Actually, tax reform could conceivably lead to tax increases. The goal of tax reform should be to simplify the tax code and eliminate incentives against economic growth, investment and productivity. Simply cutting the personal income tax rate and ensuring that even fewer people pay income taxes (and therefore fewer people have any skin in the game of paying for government) will not increase productivity and could actually be detrimental to economic growth as a larger share of the population become dependent rather than contributing. I would argue that corporate taxes as a whole are counterproductive, and a system based on taxing income should tax income at its final source be that the worker, the rentier or the shareholder, simply lowering the base rate does little to encourage productivity. In fact, the corporate tax code is so littered with loopholes and incentives that the actual rate paid on profits is closer to 9 percent than the headline level of 39 percent.
Tax reform is not simple, and it should not be simplified into a page of talking points. It also does not need to be grossly complicated (read Border Adjustment Tax). But tax reform is a heavy lift and could have meaningful effects long into the future. I would take a first step by applying some advice that I received from my mother, who was an editor for many, many years. Mom used to say that everyone likes to hear themselves write, so the first step in editing anything was to go through it and remove unnecessary and spurious stuff. Most of the 74,600 pages of the current tax code are not necessary, and hundreds, maybe thousands, of provisions can be removed with only modest effects on revenue. Start there – simplify first. People and companies don’t mind paying taxes but they do mind having to pay thousands of dollars just to figure out what they have to pay.
After that it is easy to figure out what tax rates should be.