Tax reform and the press

I have written several articles about the need for serious tax reform in the U.S. and set out the basic principles of good tax law accepted by most economists. “US Federal Tax Policy”, Cayman Financial Review, Issue 16, Third Quarter 2009. “The Principles of Tax Reform” Cayman Financial Review, July 2013

Taxing consumption is best, but if income is taxed, it should be broadly defined and taxed uniformly. Income tax reform should follow the mantra “broaden the base and lower the rate” for the revenue needed to finance whatever the government spends. The main dispute tends to focus on whether and how progressive the tax rate should be. I favor a flat rate as the fairest and simplest regime. This means that a person with twice the taxable income would pay twice the tax. Many others favor a progressive rate—a marginal tax rate that increases with income—, which means that someone with twice the taxable income might pay 3 or 4 times as much in taxes. In 2016 the “top 1%” by income paid over 50% of all federal income tax revenue collected and the top 20% paid 84%.

I raise this issue because any judgment of whether a reduction of the top U.S. marginal tax rate from its current 39.6% to 38.5%, as currently proposed by the U.S. Senate, increases or decreases the fairness of the system depends on whether you consider 39.6% fair or too high or too low. I consider it too high and a reduction to 38.5% too little, so I would say that the tax reform is unfair to the top income groups by not lowering the top tax rate enough. The press almost uniformly refers to any cut in the top rate as favoring the rich (rather than reducing discrimination against the rich).

But what prompted this note was the blatant bias reflected in the following Washington Post article that claims to report the winners and losers in the current Senate tax reform proposals. Winners-and-losers-in-the-Senate-GOP-tax-plan   In the losers column the article states the following for the poor:

“The poor. More than 70 million Americans don’t make enough money to have to pay federal income taxes. Many of those people currently receive money back from the government because they qualify for refundable credits. Under the Senate plan, those credits aren’t going away, but they also aren’t growing. On top of that, the plan raises America’s debt, which will likely require cost cuts somewhere down the line. Republicans have proposed sizable cuts in the past to some safety net programs used by the poor.”

According to the author of the article, Heather Long, the poor lose because they don’t gain anything!!! Seventy million of them don’t pay taxes to begin with so there is not much that tax reform can do to lower their taxes. The existing tax credit paid to these people will remain but is not increased. Thus Heather concludes that the poor are losers because they didn’t gain anything. I agree with Heather’s implicit objection to the plan’s increasing the federal government’s debt, but avoiding that would require higher taxes for someone and has nothing to do with making the poor worse off that I can see.

Any tax reform that is revenue neutral (unfortunately this one will increase the debt by 1.5 trillion dollars over ten years.) necessarily increases taxes for some while lowering them for others.  It should not be judged by whether it will result in President Trump paying more taxes or less, as some press would have it.  It should be judged by whether the resulting realignment of tax obligations is fairer and economically more efficient (neutral). Sadly it is rarely discussed in these terms.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
This entry was posted in Economics, News and politics, taxes and tagged , , , , . Bookmark the permalink.

1 Response to Tax reform and the press

  1. MARY SHELL says:

    Thanks, Warren. Sounds logical.

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