“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” — Jean-Baptiste Colbert, French Minister of Finance (1665 – 1683)
Far-reaching tax reform – especially the simplification of our tax code – is becoming increasingly unlikely this year. Congressional Republicans have managed to zip themselves into a policy straitjacket which dictates that all tax cuts are good, and tax cuts for the rich are especially good.
What about tax increases? Very, very bad. Unless, of course, we can get foreigners to pick up part of the tab.
Let’s look at some of the taxes that Congress will consider cutting.
Lower the personal income tax
Despite the widespread belief that we pay much higher income taxes than the citizens of other economically advanced nations, our tax rates are actually on the low end. But few nations have such a complex tax code. Not only do we need to employ some three million accountants, tax attorneys, and tax preparers to help us with our tax returns, but Americans must spend another six billion person-hours working on their taxes. This comes to an average of a week’s work for every taxpayer.
So rather than a tax cut, most of us could really use a far-reaching tax simplification. Regretfully, President Donald Trump’s proposal to shrink our seven tax brackets to just three – 10%, 25%, and 35% — is a creative solution to a non-problem. What confounds taxpayers is not the seven tax brackets but calculating deductions and interpreting all their accompanying rules and regulations. And then too, the alternate minimum tax imposes an entire second set of mind-numbing instructions, rules, and regulations.
Nearly doubling the standard deduction and possibly eliminating the alternate minimum tax and the deduction for the payment of state and local taxes would do much to simplify filing tax returns. It would indeed be a good start to meaningful tax reform.
But almost any change in the tax code will hurt some groups of taxpayers, who will immediately start hissing. So, the more simplification, the more hissing.
Keep in mind that “tax reform” cannot get through Congress without pretty solid Republican support. If the deduction for state and local taxes is eliminated, you can just imagine the hissing among the citizens and elected representatives of New York, Connecticut, New Jersey, Wisconsin, Illinois, California, and other high-tax states. Finally, simplifying the tax code would cause a great deal of consternation among the three million Americans who earn their livelihood preparing tax returns.
Lower the corporate income tax
American companies arguably pay the highest corporate income tax rates in the world. In addition to the 35% federal tax rate paid by large corporations, many states also impose substantial corporate income taxes. Congressional Republicans are talking about cutting the federal tax rate to perhaps 20%. A cut of just one percentage point would result in an annual tax revenue loss of about $10 billion, so a cut of fifteen percentage points would slash federal tax revenue by $150 billion.
On the plus side, reducing corporate income taxes would make American goods and services more competitive in world markets. But one could also argue that the big winners would be the very wealthy individuals who own the lion’s share of corporate stock. Still, the beneficiaries would include Americans who are employed by these companies, and more broadly, our entire economy.
Eliminate the Federal Inheritance Tax Most Congressional Republicans have long been calling for abolishing this tax, which they call “the death tax.” It currently raises about $30 billion a year, and taxes individual estates of over $5.5 million and $11 million on the estates of married couples.
According to the Tax Policy Center, the tax falls on just 0.2 percent all deaths, and just 5,400 estates per year are affected by this tax. The main argument against “the death tax” is that it forces the sale of many family-owned small businesses and farms. In fact, just 50 farms and small businesses pay this tax each year.
The federal inheritance tax not only raises about $30 billion dollars a year relatively painlessly, but it is our nation’s primary defense against the perpetuation of a hereditary plutocracy.
Cutting taxes will have consequences, not all of them good. Among the consequences will be massive federal budget deficits and a huge redistribution of income from the lower 99 percent to the upper 1 percent. We also need to consider what other fiscal policy measures can be taken to hold down the deficits resulting from massive tax cuts.
Steve Slavin has a PhD in economics from NYU, and taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) due out in August.