The Trump administration recently released the long-awaited GOP tax reform proposal — a 9-page document entitled “Unified Framework for Fixing Our Broken Tax Code.”
The plan details what was agreed to by the administration and the GOP leadership in the House and Senate in an effort to repeat the success of the 1986 Tax Reform Act enacted during the Reagan administration. The plan promises to “deliver fiscally responsible tax reform by broadening the tax base, closing loopholes and growing the economy.”
{mosads}Presumably, “fiscally responsible” means not adding to the deficit, but that remains to be seen — the GOP Senate budget proposal calls for increasing deficits by $1.5 trillion over the next 10 years in the name of tax reform.
The “framework” is short on details, but a Tax Policy Center analysis finds it offers the largest tax cuts to those at the top of the income distribution. It offers no guidance, however, on how to broaden the tax base or which loopholes to close.
In the absence of any base-broadening, it is estimated the plan will reduce tax revenue by $2.4 trillion of the next 10 years ($240 billion per year on average) — mostly through reduced business income tax revenue. The big issue is how to broaden the tax base to close this $2.4-trillion gap in tax revenues.
Each year, Congress’s Joint Committee on Taxation (JCT) provides a list of tax provisions it deems are tax expenditures, i.e., loopholes. In the latest report, JCT lists nearly 200 tax expenditures (about 160 affect taxpayers under the individual income tax system).
JCT estimates that the sum of tax revenue losses will amount to $1.6 trillion in fiscal year 2018 — $1.36 trillion under the individual income tax and $276 billion under the corporate income tax. (The amount of tax revenue potentially available from eliminating tax expenditures will be much less than $1.6 trillion because the GOP tax plan proposes to reduce tax rates.)
On the corporate side, I figure that eliminating tax expenditures would at best increase income tax revenues by $30 billion per year given the proposed changes to the corporate income system. Consequently, lost revenue from business income tax reductions will have to come from eliminating tax expenditures under the individual income tax system.
The GOP tax plan mentions keeping a handful of tax expenditures that account for over 60 percent of the revenue losses from all tax expenditures, thus making base-broadening much harder.
Economic and social goals are often met through the tax code via tax expenditures. Tax expenditures may not be the most efficient method for meeting these goals, and some of the goals may not be particularly laudatory.
Nonetheless, tax expenditures are in the tax code for a reason and an understanding of those reasons is necessary for an informed debate over broadening the tax base. Disagreements over how to broaden the tax base have ended many tax reform discussions over the past 30 years.
In a 2012 Congressional Research Service report on broadening the tax base, Jane Gravelle and I identified four issues surrounding tax expenditures that are often ignored at the start of tax reform discussions:
- Some tax expenditures are designed to change the economic behavior of taxpayers, usually to correct a perceived market failure. The tax benefits for retirement saving, for example, fall into this category and account for almost 20 percent of the revenue loss of all individual income tax expenditures.
- Eliminating some tax expenditures will change the distribution of after-tax income. Tax expenditures are said to have an “upside-down” subsidy because many of the benefits go to high-income taxpayers. Two exceptions are the Earned Income Tax Credit and Child Tax Credit, which benefit lower- and middle-income taxpayers.
- Some tax expenditures are designed to ease the administrative burden on taxpayers, their employers and the IRS. Some employer-provided benefits, such as health insurance and traditional pension plans, are excluded from income because of the difficulty of determining an accurate and fair value of the benefit.
- Many tax expenditures are popular among taxpayers and voters. Some members of Congress could lose in the next election if they voted for elimination of some tax expenditures, and they could lose campaign contributions if they voted to eliminate others.
Fiscally responsible tax reform looks like a long shot under the best of circumstances, which are nowhere to be seen: presidential leadership, bipartisanship and presidential cover to members of Congress for their support.
The tax reform plan consists of nine pages, which is arguably nine-times better than the one-page tax reform guide issued a few months ago but still offers few specifics and no analysis. The difficult task of broadening the tax base will be left up to 535 Member of Congress with little or no executive guidance.
The proposal was agreed to by just six people, all members of the president’s party; no Democrats were apparently consulted. The president, based on past experience, is likely to throw members of the opposition party as well as his own party under the bus for perceived slights.
True tax reform will likely have to wait for another day with another Congress and another president. What we may end up with is tax cuts for the rich that expire in 10 years: the Bush tax cuts redux, and the outcome will likely be the same: anemic economic growth and growing national debt.
Thomas L. Hungerford is a Washington, D.C.-based economic consultant. He was a specialist in public finance at the Congressional Research Service until 2013 and the associate commissioner for retirement policy at the Social Security Administration until Jan. 20.