Ross Douthat: How to fix the Republican tax reform proposal
By Ross Douthat
The New York Times
Thursday, November 16, 2017
Back when congressional Republicans were rolling out one unpopular health care bill after another, it was a challenge to come up with constructive advice on how to fix their efforts. That’s because Republicans had set themselves an impossible task with health reform: They were trying to do something sweeping enough to be called “repeal,” modest enough to keep most of Obamacare’s beneficiaries on the insurance rolls and also money-saving enough to provide some extra budget room for the eternal dream of tax cuts. No plan could satisfy all three requirements; as they say in Susan Collins’ Maine, you can’t get there from here.
With the tax reform that the House and the Senate are now considering, though, the task of advice-giving is easier. For one thing, this time there is no long-standing “repeal” promise that the base demands Republicans fulfill; there’s just the generic promise to cut taxes that every Republican politician makes. For another, the party has decided not to even try for deficit-neutrality (taking my advice, so send your angry deficit-hawk missives to my address in, ah, Manitoba), giving themselves $1.5 trillion over 10 years to play with and no inherent requirement to offset any of their cuts.
Sadly, despite this simplifying improvidence, the GOP has still ended up with a pair of bills that look, once again, like the caricature of Reagan-era Republicanism the party has become: heavy with tax cuts for corporations and the heirs of millionaires, lighter on relief for the middle class, lighter still for the working class, with a complicated slew of provisions and score-gaming expiration dates that make it hard to discern whether lots of nonrich Americans (including the plan’s supposed model beneficiary, a family making $60,000 with multiple kids) even get a tax cut at all.
But if the House and Senate bills as written are flawed, it’s very easy to see what would make them better. The Republicans seem to be trying, in their none-too-competent and ideologically straitjacketed way, to cut taxes for two major constituencies, employers and middle-class families, while paying for some of these tax cuts by goring well-off professionals in high-tax liberal states.
This would not be a bad way to design a right-of-center tax bill. There’s nothing wrong with going after the other party’s constituencies if those constituencies enjoy unearned privileges, which professionals in blue states (this columnist included) emphatically do. Yes, in an ideal world there would be a grand bipartisan tax reform that gores everyone’s ox, but that world ain’t this one, and the fact that the Republicans are trying to cut the home-mortgage deduction and the state and local tax deductions is a good thing because those deductions are bad – subsidies for the rentier class, benefits that flow overwhelmingly to the affluent, an obvious place for a limited-government egalitarianism to seek reform.
The (much more modest) Republican proposal to tax the richest university endowments is admittedly more of a targeted culture-war jab – but it’s also a good idea, notwithstanding the complaints from some conservatives that it’s a tax on academic excellence.
This complaint might be fair if there were clear evidence that enormous endowments were a sign of excellence, rather than a case of a small cartel profiting on their entrenched position in an educational “marketplace” that never seems to feature any new competitors. But as long as the best-endowed universities are running billion-dollar tax-free hedge funds while facilitating privilege, elite conformity and self-segregation, a small tax is entirely reasonable; a larger one would be just.
So making the elite of blue America pay more into federal coffers is a fine and good and necessary thing; the problem is what the Republicans are doing with the money. Specifically (and entirely predictably), they are plowing way too much of it into tax cuts for their donors, and not enough into tax cuts for everybody else.
Yes, Kevin Hassett, the head of the Trump administration’s Council of Economic Advisers, has a model that attempts to justify this tilt, on the grounds that more of a corporate tax cut sluices through to workers than the professional-economist consensus suggests. But the underlying motivation for the tilt isn’t an intellectually rigorous devotion to Hassett’s model. Rather it’s donor service and the dead hand of Wall Street Journal editorial page dogma, which condemns tax favoritism toward workers or families as dangerous social engineering – as opposed to tax favoritism toward the investment income of Wall Street Journal readers, which is just the level playing field Almighty God intended. (The influence of this dogma also probably explains why the House draft abolished the adoption tax credit, a proposal the pro-life movement seems to have beaten back.)
The power of donorism and supply-side dogma are clearly difficult for Republicans to shake off. But the path to a better bill is nonetheless quite obvious. All you need to do is scale back the corporate tax cut to something more reasonable (making the new rate 28 percent, let’s say, instead of 20 percent), limit the proposed tax deduction for pass-through businesses, and use the savings to make the child tax credit larger and reduce the bite that the home-mortgage and state-and-local-deduction changes take from the not-quite-affluent in blue states.
For Republican lawmakers who have criticized the outline on distributional grounds – including Collins and child-tax-credit champion Marco Rubio – changes like these seem like a natural price to set for their support. They would rebalance the legislation, expand the ranks of beneficiaries and hedge against the weaknesses of Hassett’s corporate-tax-cut theory with more direct help for wage earners. And they would be far less complex than the health care bank-shot scheme Senate Republicans seem to be considering this week, which requires a deal with Democrats on stabilizing Obamacare’s exchanges and a party-line repeal of Obamacare’s individual mandate to free up a little bit more money for middle-class tax relief.
The idea behind this bank-shot is that reducing the business tax cuts instead would make too many interest groups angry, too many donors stingier in their support. But at some point the party’s moderates and would-be reformers have to take a stand for the wild-and-crazy proposition that the Republican Party should pass legislation that has some chance of being popular. And with a Congress desperate to pass some kind of tax cut, a White House desperate to claim an achievement, and the midterms looming up, what better time to take that stand than now?