A tax reform bill built on broken promises

Published 9:59 am Thursday, December 21, 2017

Modern politics is a steady process of lowering standards, eroding norms and peddling fictions. The so-called tax reform that passed Congress this week is the latest disappointing result of that decline.

President Ronald Reagan is remembered for the big changes he helped bring about in our tax system — and for good reason. Under him, the top individual income tax rate plunged from 70 percent to 28 percent. On Tuesday, House Speaker Paul Ryan celebrated the new Republican overhaul. It will take the top rate from 39.6 percent to 37 percent.

I’ll pause while you pick yourself up off the floor.

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Ryan claimed the measure will ensure that we “recapture our destiny for generations to come.” Judged by Reagan’s standards or by the speaker’s past promises, the claim is a mammoth exaggeration. It brings to mind the time when Abraham Lincoln said a rival’s doctrine was “as thin as the homeopathic soup that was made by boiling the shadow of a pigeon that had starved to death.”

The puny cuts are just one of the ways in which Republicans have fallen short. Reagan simplified the system by cutting the number of tax brackets from 15 to two. Ryan promised last summer to “consolidate the existing seven brackets into three.” The bill approved Wednesday will consolidate the existing seven brackets into… seven.

Ryan pledged to “simplify things to the point that you can do your taxes on a form the size of a postcard.” But simplification requires eliminating deductions, particularly those used by millions of taxpayers — for mortgage interest, state and local taxes, charitable donations, and more.

The GOP measure leaves the big ones in place. The charitable deduction is untouched. The mortgage interest deduction is limited, for new purchases only, to a generous $750,000. The state and local tax deduction remains, with a $10,000 cap.

This approach makes the tax code more complicated, not less. Maya MacGuineas, head of the Committee for a Responsible Federal Budget, says, “The bill might actually increase the number of tax breaks.”

The main gesture toward simplifying is the near doubling of the standard deduction, which will give fewer people a reason to bother with itemizing. But not itemizing doesn’t mean a hassle-free experience.

Only 30 percent of taxpayers itemized deductions under the current tax code — and 90 percent of all taxpayers nonetheless required a professional preparer or online service. Under the new system, you may have to undergo a complicated process to find out whether the simple option is right for you.

In June, Ryan cited an estimate by the Tax Foundation that tax reform ultimately “would create 1.7 million new full-time jobs.” What does the Tax Foundation say about the final plan? It predicts a gain of just 339,000, down 80 percent from what Ryan envisioned.

The truly significant change is the cut in the corporate income tax rate from 35 percent to 21 percent. This has the economic merit of making the U.S. a more attractive location for businesses in a mobile world. But cutting the corporate rate so far below the top individual rate will also invite tax gaming on a massive scale.

An analysis by 13 tax law scholars on the academic site SSRN noted that many high earners will be able to reduce their liability by setting up corporations “and having their income accrue in the form of corporate profits.” Lower rates for “pass-through” income will induce mobs of well-paid employees to set up partnerships so they can pay less on their earnings.

Congressional Republicans used to masquerade as deficit hawks, but Congress’ own Joint Committee on Taxation estimates that their plan will add $1 trillion in deficits over the next decade — unlike the tax reform signed by Reagan, which was designed to be revenue-neutral. The tax scholars say that because of new “tax-planning opportunities, it is likely that the actual cost of this legislation will exceed the current projections of over $1 trillion.”

The speaker said the gist of the measure is simple: “Today, we give the people of this country their money back.” Wrong again. When Congress decides to spend an additional $1 trillion or more with borrowed money, it’s not cutting taxes. It’s just running up bills that will have to be paid by future taxpayers.

The push for tax reform was a rare opportunity to fulfill big promises. A lot of promises got broken on the way to squandering that opportunity.

Steve Chapman blogs at http://www.chicagotribune.com/news/opinion/chapman. Follow him on Twitter @SteveChapman13 or at https://www.facebook.com/stevechapman13. To find out more about Steve Chapman and read features by other Creators Syndicate writers, visit the Creators Syndicate website at www.creators.com.