Better than expected, but will it survive?
By Scott Sumner
Just a quick reaction now, but I’ll have much more to say later. This is based on a brief news article, not a detailed reading of the proposed tax bill.
1. There is more tax reform than I expected. I’ve argued we need tax reform more than tax cuts.
2. The bill would eliminate the AMT and radically reduce the share of people who itemize. These two tax provisions are incredibly wasteful–almost perfect examples of what economists mean by a “deadweight loss”. If we can’t reform the tax system it would be a major failure of our political system. I’m thrilled to see them being targeted.
3. My taxes would probably rise, as the plan hits dual income upper middle class people, especially those in high tax states like California. However I strongly support tax changes that would raise my taxes, as long as they make the tax system more efficient. You should too!
4. They will also phase out the inheritance tax, but I expect the Dems to add that back in when they retake power. In contrast I believe the changes described in point #2 might endure, if they pass Congress (a huge if).
5. The cut in the corporate rate was inevitable, even if the Democrats had won the election. It is a worldwide trend and thus it was inevitable that we’d feel the need to catch up for international “competitiveness” reasons. (Yes, “competitiveness” is a meaningless term, but it matters to policymakers.)
In a perfect world we would have simply eliminated the various loopholes for mortgage deductions and state and local taxes. But this proposal is cleverly designed to come pretty close, and would allow them to be totally eliminated in a future reform. Again, if it survives.
Also, in a perfect world the reform would have been closer to revenue neutral and more progressive. Perhaps including a dramatic increase in payroll taxes for the rich to make up for lost revenue. Wage taxes are identical to consumption taxes, they are easy to collect, and they are easy to make progressive.
My dream tax system has three parts, a progressive VAT (exempting the first $X of consumption), a steeply progressive payroll tax, and a progressive property tax. (The current property tax is regressive.) If people work for a company, then all the income they get from that company would be treated as labor income. This would prevent people from incorporating their business to avoid (higher) wage taxes.
When I say “steeply progressive payroll tax” I mean a subsidy for low wage workers, and relatively high rates for high wage workers. My dream system has no personal or corporate income tax, and no inheritance tax, but would still be quite progressive.
I believe the switch to a network/information economy makes the need for tax progressivity greater than in the old commodity economy, where people’s productivity was based more on how hard they worked. At the same time, I believe the current obsession with “inequality” is way overdone. America’s middle class is doing fine.
PS. I forgot to mention one other useful tax—a carbon tax.