Steve Mnuchin, Secretary of the Treasury, Photo by Алексей М, via Flickr

August 7, 2017 Logan Kolas 0Comment

Tax reform may be more difficult than healthcare reform.

Just last week the GOP healthcare bill’s roller coaster came to a screeching halt at the fingertips of an unlikely candidate – Sen. John McCain (R-AZ). While President Trump’s attempts to clutch the remnants of the bill as it quickly dissipates – threatening to end bailouts for insurance companies and Congressmen – many GOP leaders are signaling that it is time to move on to other legislative priorities.

One of the most likely directions for the nation’s most deliberate body to pivot is away from healthcare and toward tax reform. However, reforming the tax code remains a deceptively tricky challenge. Republicans remain united that something must be done with the 74,608-page Federal Tax Code – similar to the unanimity on an abstract reform of the nation’s healthcare system. Unfortunately, a tax system as large and as complex as the United States breeds an avenue of dissent for every avenue of agreement.

If conservatives wish to pass tax reform, Republicans – in both the House and Senate – must attack complexity with simplicity. Two of the most commonly discussed planks of the tax system, for conservatives, tend to be middle class tax relief and a reduction in corporate tax rates. If Republicans choose to be united on these two propositions, then revenue-neutrality – and a balanced budget – stay a long sought after, yet never attainable goal. This leaves conservatives in an unfortunate quagmire; when faced with the idealistic goal of attaining a significant reduction in the corporate tax, significant middle-class tax relief, and striving for revenue neutrality, one can only successfully pick two. In this paradigm, the impossible trinity of conservative tax reform emerges.

Revenue Neutrality

Questions of revenue neutrality – the ability for the government to keep tax revenue constant while adjusting tax rates and regulations – are often paired with critiques of the flat, or fair, tax. This notion should not be confined to this piece of legislation, rather to tax cuts as an entity framed within time restrictions of the business cycle. These conservative-backed claims are typically associated with economic theories such as the Laffer Curve, which posit that tax revenue can be increased by cutting taxes if the government is on the downward sloping point of the graph. The theory is contingent on taxing more people as they become employed or taxing the same person at lower rate as they become more financially lucrative.

The problem: the American government, and economists, differ on the nation’s corresponding location on the curve and many believe the curve itself to be fallacious. Liberals point to the loss in inflation-adjusted revenue in the Reagan administration while conservatives point to its successes under Harding, Coolidge, and, surprisingly, John F. Kennedy. The results are mixed, inconclusive, and historically perplexing.

Achieving revenue neutrality is complex – some of the nation’s most notable economists have struggled with the concept– but one thing is certain: if Republicans intend to back their promises of tax cuts and a balanced budget, revenue-neutrality is essential. Surprisingly, the proposition of revenue neutrality presents political flexibility for a party that has long been painted by Democrats as lethargic and obstructionist. The opportunity yields a latent dichotomy where  conservatives can prioritize either a balanced budget or prolonged spending cuts with a reduced tax burden.

While Republicans favor a balanced budget on paper, accusations of budgetary hypocrisy by the further right members of the party – namely Sen. Rand Paul (R-KY) – against its own more moderate members have swelled as recently as 8 months ago. Factions within the party have – and will continue to – debate deficit reduction timeliness and effectiveness. While most Republicans are aligned in the belief that spending decreases (exception: the military) are beneficial, the attempts could be politically toxic as they would target politically popular programs such as Medicaid, Medicare, or Social Security in an attempt to move past healthcare’s failure. Referendums such as these often require momentum – something Republicans have yet to acquire this fiscal year.

Middle Class Relief

Passionate debates about growing income inequality (the left) and the disproportionate tax expenditures by the 1% (the right) often dominate the tax debates while the tax plight of the middle class remains neglected. Ironically, many pieces of legislation drafted to help the middle class – such as Obamacare – have induced major tax hikes on those it was designed to protect. The middle class is struggling and the graph above is a big part of why. Much of the political rhetoric has been dominated by the wealthy either not paying enough or accusations of the wealthy inequitably shouldering the burden of runaway government spending.

While the wealthiest Americans are paying astronomically high tax rates (nearly 50% of the income tax total revenue) the middle class continues to pay a higher, aggregate, proportion of their total income in taxes,  yielding a higher tax burden. The solution to the dilemma should not be yet another inequitable increase in the rate the wealthy pay, rather a decrease in the amount the middle class pays. After all, paying 30% of your total income is an astronomical percentage for those struggling to put food on the table or gas in the car to get to work. .

With both major parties fighting to become the party of the middle class, middle class relief may be the option with the most room for compromise making it politically enticing. Of course, after its success and popularity the fight for accreditation will ensue.

Corporate Tax

Fiat Chrysler, Nabisco, Burger King, UTEC, and Carrier have either moved overseas or announced their intentions to do so soon; their jobs are going with them. The world’s greatest free market mogul suffers from the world’s 3rd highest corporate tax, just behind Puerto Rico and the UAE, and feigned attempts to economically restrict their movement or publicly lambaste them into profitability loss have been largely ineffective (especially under the Obama administration).

Corporations hold the power in price-setting leaving governments nearly powerless. They have the inherent ability to pass along financial repercussions of a tax to the consumer while retaining the ability to  move away from the burden entirely. The former results in price elevation and the latter in job loss.  Any attempt of government profitability gain is often met with the taxation of a displaced corporation. Corporate taxes should be modest and globally competitive.

A reduction in the corporate tax could potentially paint Democrats as “in bed” with corporations – making them very unpopular in the far-left crowd. This is an unfortunate phenomenon as trade restrictions and corporate taxes are rather regressive and aimed at the middle class. Again, taxing a corporation yields a higher price to the consumer buying their product (which is often the middle class). A reduction in the corporate tax to a competitive rate should be bipartisan, but could be defeated at the hands of the far left and disparaging prioritization methods of conservatives. If Republicans value meaningful middle-class relief and a balanced budget over a reduction in the corporate tax, then the United States may continue to see losses in productivity, jobs, and a steady rise in prices.

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