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Weekly Standard

Don't Cut Taxes—Reform Them

Trump and the Republicans should be focused less on cutting taxes than fixing the tax system itself

I am an admirer of Larry Summers. And of Kevin Hassett. Which is why I mourn Larry’s descent from civility into dismissive name-calling, and Kevin’s ill-considered attack on the Tax Policy Center, an organization with which I often disagree but is staffed by what Larry calls “highly respected former civil servants”—which I take to be intended as praise.

The debate over tax policy is going to be unpleasant enough without two very good economists descending to the level of, shall we say, Chuck Schumer and Donald Trump.

Let’s start by listing areas of relative agreement (emphasis on “relative”): A reduction in corporate taxes will stimulate growth. Hassett believes there will be a considerable increase from the lackluster rate of recent years, while Summers says such growth will be “attenuated” by the current full-employment situation in which the economy happily finds itself.

Hassett believes a corporate tax cut will mostly end in the pockets of workers; Summers believes that only a small portion will trickle down to working families.

Hassett believes that the current corporate tax rates are making our businesses uncompetitive. Summers knows that the 40 percent rate is merely nominal, and the effective rate is closer to 29 percent, per the Congressional Budget Office, not all that far from the average statutory rate in industrialized countries of 24 percent.

So who’s right? My own view is that we do not even need a corporate tax cut. Corporations are awash in cash and interest rates are still low enough to make borrowing possible if there are investment opportunities to be exploited. But neither do we need a cut in income tax rates endured by the middle class, a cut Summers favors as a demand-stimulant to create new investment opportunities. If anything, the middle class needs relief from the regressive payroll taxes, not income taxes. (But that is a discussion for another day, when such discussions are back in vogue.)

Surely it is obvious even to Republican politicians desperate for a “win”—meaning any legislation that 50 of their senators find acceptable, regardless of its content—that now is not the time to abandon the party’s long-held aversion to increasing the already staggering national debt. Which the tax-cut proposal would do, the only question being by how much. Surely it is obvious that even without a tax cut the deficit is mounting in response to the need to offer assistance to Houston, Miami, and Puerto Rico (the latter a more complicated case by virtue of the long history of spending that had the island on the brink of bankruptcy and its infrastructure starved for funds even before the recent storm). Also to fund the multiple missions assigned to our military. Also to meet the growing needs of an ageing population (especially now that society has decided that people with pre-existing medical problems are entitled to subsidized insurance).

No, instead of a tax cut, we need a tax increase — but not on our corporations or our working families. Heaven help us (unlikely), but Steve Bannon is onto something when he says he would like to see the 39.6 per cent top tax rate raised to 44 percent on those earning more than $5 million.

Forget the specifics: The idea that top earners should pay higher taxes is a thought not easily dismissed. But raising the top rate is only one way to accomplish that objective.

It might better be achieved by eliminating capital gains treatment for “carried interest,” a benefit enjoyed by hedge fund and private equity managers, which benefit that great egalitarian Chuck Schumer has promised his Wall Street donors he will defend with all of his considerable powers. We also might end the deductibility of interest paid on business borrowings (which distorts investment incentives to favor more debt) to the advantage of real estate moguls such as you-know-who, a new part-time resident on Pennsylvania Avenue. And we should abandon the foolish plan to end the tax on inheritances by the winners of the sperm lottery, among them the families of you-know-who, newly resident in Washington. And while we’re at it, let’s end the ability of rich New Yorkers, you-know-who and Schumer’s donors as well as California’s moral exemplars, to deduct the high state income taxes they pay.

Those measures would properly be called “tax reform.” They would address a problem even more serious than the state of the nation’s fisc.

For whatever reason, faith in free-market capitalism has been shaken in recent years. An avowed socialist who only five years ago said, “These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela, and Argentina, where incomes are actually more equal today than they are in the land of Horatio Alger,” has attracted the fervent support of America’s leftish voters, and not only the young. And it is tugging the Democratic party further left. A Harvard University poll of young adults (18-29) finds that 51 percent do not support capitalism, while only 42 percent say they do.

Both the left and right of American politics and the president (who is too devoid of a coherent philosophy to be positioned on such a spectrum) believe the system is “rigged.” And in a sense, it is.

The Federal Reserve Board’s monetary policy succeeded in its stated goal of enriching owners of assets (such as shares and homes) while shriveling the incomes of small savers. The nation’s tax system is riddled with advantages won by those able to secure the assistance of lobbyists; have the ability to buy a home and deduct the interest on your mortgage, rent an apartment and pay with before-tax dollars; make stuff in a factory and face competition from imports made by dollar-a-day foreign workers while “free trade” enriches the beneficiaries of globalization. The list goes on.

While the political class, which in the past was able to develop policies that preserved faith in the fundamental equity of the system that has done more than any other to end poverty (until now, Xi Jinping would add), is unable to do more than engage in partisan, left-right, pro- and anti-Trump slanging matches. Which leaves the field open to faux populists, whose mixture of sensible reforms and nonsensical proposals is heavily weighted with the latter.

Summers and Hassett might make a real contribution by focusing the debate on tax reform rather than tax cuts. It’s a reasonable guess that their areas of agreement would far outnumber any disagreements they might have. Even if the prospects for sensible reform—or sensible anything—are not glowing just now, such a discussion would inform the second round, when the inevitable rise in our national debt begins to be reflected in growth-subduing increases in interest rates, and the hunt for new sources of revenues resumes in earnest.