Those Were the Days

The editors of the Wall Street Journal are unenthusiastic about the Republicans’ template for tax reform, characterizing it as “half a tax reform”. The reforms to the corporate income tax are adequate but they’re dissatisfied with the changes to the individual income tax:

The dispiriting news is on the individual side. The House would double the standard deduction to $12,000 for individuals and $24,000 for married couples. This would improve simplicity for millions, and it compensates for the bill’s elimination of the personal exemption. But nearly half of American filers already owe no income taxes, and the larger deduction would make the federal fisc even more dependent on a smaller pool of taxpayers.

This is far better than the House bill’s new “family credit,” which increases the child credit to $1,600 from $1,000 in a forlorn attempt to appease the income redistributionists of the right like Senators Mike Lee and Marco Rubio. The credit would also offer an additional $300 for each parent and another $300 for each “non-child dependent.” The credits would phase out for married couples at $230,000 of income. Does anyone think a mid-level manager at J.P. Morgan deserves a subsidy to raise children?

The House also gradually makes more of the $1,600 credit refundable. In other words, this will be a check in the mail for those who owe nothing in taxes, which discourages work. The family credits cost $640 billion over 10 years in lost revenue with zero growth payoff. To make up the difference, the House keeps the top personal rate at 39.6%, on top of the 3.8% ObamaCare surcharge that Republicans failed to repeal. This would become the fourth tax bracket and kick in at $1 million for couples—half that for individuals—with 12%, 25% and 35% brackets below.

This top rate is a surrender to Democratic class warriors, though Republicans also fear that President Trump would sandbag them. No Members want to vote for a lower top rate and then have Mr. Trump tweet that they’re “mean,” as he did on health care. This is where presidential flightiness and lack of principle have a policy cost. Ideological surrender also gets Republicans nothing politically as Democrats are still attacking the House plan as a sop to the rich.

Here and there the House plan includes some good news on individual loopholes, such as eliminating the state and local deduction. The bill carves out an exception for property taxes, capped at $10,000, to win over New York and California Republicans, if the House can hold that cap. Another good move is a $500,000 cap on mortgage interest for new homes, and no more tax breaks for second residences. The Realtors will go thermonuclear, but then they refused to support the House blueprint that left the deduction untouched.

The overall impact of the individual tax changes is little reform but more income redistribution. The long-term damage to the tax-cutting cause will also be considerable. Adding credits and deductions for individuals makes rate-cutting that much harder since the affluent pay the vast bulk of all income taxes. The divorce of “pass through” and personal income rates will also make it even harder to reduce individual tax rates below 39.6%—ever.

They need to get their minds around the modern globalized economy. Nostalgia for economic growth through tax-cutting is all well and good but the same tax cuts today wouldn’t have the effects they did 35 years ago.

The benefits of any cut in the personal income tax will go overwhelmingly to “the rich” because that’s how the income tax is structured. They pay most; cuts mean they’ll get the most benefit. What will “the rich” do with the money? They may buy a few more Mercedes-Benzes, Audis, BMWs, or Maseratis, none of which are made here in the United States, or more French wine or single malt Scotch, neither of which are made here in the United States, and they may buy a few more expensive houses, something being discouraged by reforms in the mortgage interest deduction. What they’ll mostly do is buy financial instruments which do nothing do produce economic growth until and unless they’re sold and the money leaks into the real economy.

Don’t delude yourself into believing that giving more money to the less-than-rich will produce lots of domestic economic growth, either. The consumer goods that they buy are overwhelmingly produced somewhere else, mostly in China.

The reality is that the tax code is about tapped out as a way of producing economic growth and that more growth will require much more basic reforms. We need to produce more goods and services here in the United States and even that won’t produce the kind of economic growth we need for reasons you can probably figure out for yourself.