For tax reform worthy of the name, make it pro-employment

Whether you view tax reform that just passed the House through a conservative or progressive lens, rethinking sacred cow deductions and revenue raisers is healthy, even necessary.  There is, or should be, consensus that the tax code is unfair, not conducive to growth, and ripe for disruption.  

In principle, everything ought to be on the table. Tax expenditures (special breaks in the tax code) now cost a record $1.6 trillion a year — roughly what the GOP tax cuts are projected to add to the deficit. Reducing even a few of the bigger ones could pay for broader reforms. But they include many sacrosanct items we’re attached to, like the mortgage interest deduction, or energy subsidies ranging from the oil depletion allowance to renewable energy credits (though note the latter were already scheduled to sunset between 2019 and 2021, and the Senate tax plan leaves them unchanged). Rethinking tax expenditures is politically divisive, but not inherently heinous. They’re a major part of the budget and we should be able to change them in equitable ways.

The main problem with current tax reform isn’t targeting popular tax breaks; it’s punting on the chance to reframe the tax code so it lives up to reformers’ stated goals of making it fairer, providing relief for those who need it, and boosting job and economic growth.

The GOP plan makes no credible attempt to pay for tax cuts, which will balloon the deficit and hamstring growth. Plenty of analysis, including by the Congressional Budget Office and the Joint Committee on Taxation, shows the cuts overwhelmingly benefit corporations and the wealthy. There’s scant evidence they will use those benefits to create jobs. So far hyper-profitable corporations amassing cash hasn’t translated into hiring more workers or paying higher wages — on the contrary.   

Remember sequestration?  In 2011, conservatives supported the requirement we pay for new spending (and/or tax cuts) as we go. As recently as a year ago, many if not most Congressional Republicans thought tax reform should be revenue-neutral and pay for itself. There was a short-lived flirtation this spring with a new border adjustment tax that might have raised about a trillion dollars. After it failed, Republicans fell in line with the specious claim they could finance tax cuts by tripling the federal deficit and grow our way out of the hole.

But sequestration is still law, and CBO warned recently that if Congress passes its tax reform plan without a credible way to pay for it, it would trigger automatic budget cuts of $136-150 billion a year starting in 2018, including hacking $25 billion off Medicare.   Some claim there are procedural ways around sequestration, but GOP leaders are already signaling cutting entitlements is the other big part of their reform agenda.

There ought to be a more fundamental approach to tax reform that would actually deliver tax relief, fairness and job opportunity for a majority of Americans. Fortunately, there is: it’s called payroll tax shifting, proposed by my organization, the bi-partisan policy group Get America Working! It would phase out the employer and the employee portions of payroll taxes, providing relief for companies and workers, and paying for it as we go by reducing tax expenditures and raising new tax revenue. Those tax changes would grow jobs by shifting the tax burden from employing people to consuming stuff. 

Payroll taxation raises $1 trillion annually by increasing hiring costs and undercutting on job creation. It is also the largest tax most Americans pay. It’s therefore the biggest and best opportunity for job growth and tax relief for consumers whose spending drives economic growth. The trillion dollars in offsets needed to cut it would come from taxing and/or ceasing to subsidize resource consumption, in other words, from non-labor taxes and tax expenditure reductions.   

Examples might include a non-labor VAT (which might fare better than the border adjustment tax did), various taxes on waste, pollution and inefficiency, or some of the same reductions in tax breaks Congress is contemplating now. Non-labor revenue sources could actually strengthen rather than skewer the financing basis for Social Security and Medicare. 

Using non-labor revenues to eliminate payroll taxation would provide stimulus without raising net taxes or deficits a dime. It would lower labor costs and end effective subsidizing of non-labor inputs to business (energy, materials, land). That would send a powerful price signal telling employers to hire more workers and consume fewer resources, resulting in tens of millions of full-time equivalent jobs.

And make no mistake: We need those jobs. Low official unemployment masks the fact that a high percentage of Americans aren’t considered participants in the labor force. Of 255 million adults in the U.S., 6.5 million are officially “unemployed,” but over 100 million aren’t working. 

Tax reform worthy of the name needs to change that. The current tax plan can’t. But it could actually prepare the way for payroll tax shifting, which could. 

The current debate shows that if tax cuts lack offsetting revenue, they feed deficits and/or starve spending, hurting growth and threatening Medicare and other needed programs. That’s an argument for revenue-neutral tax shifting, which avoids both problems. It’s now more feasible politically to propose trillion-dollar shifts in the tax code, a hurdle we need to clear to replace trillion-dollar payroll taxes with offsets. There’s now precedent for grappling seriously with reducing big tax breaks like mortgage interest deductions and energy credits, which we’ll need to pay for tax cuts. And it’s no longer taboo to propose replacing sacred cows in the tax code with something better. That new willingness should be extended to payroll taxation itself.

These are potential steps forward towards true pro-employment, pro-growth tax-reform, where a majority of Americans get greater job opportunity and a fairer share in greater prosperity. We aren’t there yet, but if we’re serious about these stated goals of tax reform, that is where the debate will head.  

Stephen Kent is president of the public interest PR firm KentCom LLC, and a consultant to the employment policy group Get America Working! These are his own views.