The outlines of the Republican tax plan released last week represent a much better start on major legislation than the president and Congress have had in other areas. But the stated principles behind the outline are likely to come into conflict. Between revenue neutrality, distributional progressivity, lower rates, fewer deductions, and fudged details, the Republicans are going to make some enemies.
The tax plan is coherent, plausible, and enjoys support both from Republicans in Congress and from movement conservatives whose support is crucial. This gives it much more momentum than the failed push for health reform. The emerging consensus among influential conservatives is that the framework is a good start, but the devil will be in the details.
{mosads}The biggest question is which tax deductions will be eliminated. Most itemized deductions are slated for elimination, and the standard deduction is set to double. The most obvious path to revenue neutrality will be through an elimination of the state and local tax deduction, which primarily benefits middle-to-high income earners in blue states with high local taxes. This isn’t exactly the GOP base, but it could have an effect on some Republican members of Congress from blue states such as California and New York.
Both the mortgage interest deduction and the charitable deduction are said to be preserved. This benefits a lot of taxpayers, but is also for political expediency. Ending the charitable deduction would be both bad optics and disincentivize charitable giving. Ending the mortgage interest deduction would make it harder for many Americans to afford their houses, as well as anger the politically powerful interests that support it, such as homebuilders and realtors. (As it is, the realtors are already unhappy with the proposal, which is inconvenient because their political action committee is one of the biggest spenders.)
The problem with committing both to revenue neutrality and to progressive rates is that the proposal will need to make tradeoffs within tax brackets. The current tax code supports things such as childcare, college savings plans, retirement accounts and more. If all of those deductions are up for negotiation, it’s going to create a lot of winners and losers — and loss aversion is a powerful political force. If tax credits are threatened for millions of Americans, there will be a backlash.
Progressives are already assailing the reform outline as a tax cut for the wealthy, but some of the fill-in-the-blank details are still to come. In addition to the 12 percent, 25 percent, and 35 percent brackets that the plan proposes, there would be a higher rate that “may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” Considering the details of the plan, this may need to be shockingly high in order to preserve both progressivity and revenue neutrality, because the outlines of some parts of the plan point to large, regressive cuts.
Republican tax plans have worked in the past because they haven’t committed to revenue neutrality. A net cut, adding to the federal deficit, creates enough winners that it’s politically palatable to shift tax burdens elsewhere. Republicans will need to work out that snafu, or they will need to abandon their commitment to progressivity and revenue neutrality.
Kevin Glass is a policy advisor for the nonprofit Heartland Institute, an Illinois-based think tank aimed at promoting limited government.