There are two things we can say about Republican plans: 1. There are a lot of them, 2. Thank God they are rarely implemented.
This is especially true of Republican tax plans.
Now, it is certainly true that the U.S. tax code is a vague, complex monstrosity that punishes success and transfers money from “the rich” to “the poor” via refundable tax credits. But the tax code doesn’t need to be reformed, fixed, simplified, made flatter, made fairer, or replaced with something else—it needs to be repealed. And this is the root of the problem with all Republican tax plans.
Republicans in Congress have introduced a number of comprehensive tax reform plans over the past few years. The five major ones are:
- The Tax Reform Act of 2014 of Rep. Dave Camp.
- The Progressive Consumption Tax Act of Sen. Ben Cardin.
- The American Business Competitiveness Act of Rep. Devin Nunes. King James, His Bible,... Best Price: $15.50 Buy New $19.95 (as of 03:25 EST - Details)
- The “A Better Way” Tax Reform Blueprint of House Speaker Paul Ryan.
- The “Simplifying America’s Tax System” Plan of Rep. Jim Renacci.
I will spare you the minutia and just point out the highlights of these plans.
The Camp plan establishes two tax brackets with rates of 10 and 25 percent, with an additional 10 percent surtax on income over $400,000. It consolidates the standard deduction and personal exemption into a larger standard deduction of $11,000. It adds an additional deduction of $5,500 for single taxpayers with at least one child. It eliminates several personal credits and itemized deductions. It expands the child tax credit and modifies the parameters of the earned income tax credit. It taxes capital gains, dividends, and interest as ordinary income, with a 40 percent exclusion. It lowers the corporate tax rate to 25 percent over 5 years.
The Cardin plan establishes three tax brackets with rates of 15, 25, and 28 percent. It replaces the standard deduction and personal exemption with family allowances of $50,000 for singles, $75,000 for heads of household, and $100,000 for joint filers. It eliminates several deductions, but preserves most major itemized deductions. It eliminates most personal credits and creates a comprehensive earned income rebate similar to the current earned income tax credit. It taxes long-term capital gains and qualified dividends as ordinary income. It eliminates the net investment income surtax. It lowers the corporate tax rate to 17 percent.
The Nunes plan mainly focuses on businesses. It lowers the corporate tax rate to 25 percent. It moves to full expensing of capital investment and allows businesses to carry back unused deductions up to five years or carry them forward with interest.
The Ryan plan establishes three tax brackets with rates of 12, 25, and 33 percent. It consolidates the standard deduction and the personal exemption into a larger standard deduction of $12,000. It adds an additional deduction of $6,000 for single taxpayers with at least one child. It eliminates all itemized deductions except the mortgage interest and charitable contributions deductions. It increases the child tax credit. It taxes capital gains, dividends, and interest as ordinary income, with a 50 percent exclusion. It lowers the corporate tax rate to 20 percent.
The Renacci plan establishes three tax brackets with rates of 10, 25, and 35 percent. It increases the standard deduction to $15,000 and the personal exemption to $5,000. It eliminates all itemized deductions except the mortgage interest and charitable contributions deductions. It eliminates most personal credits, retains the child tax credit, and expands the earned income tax credit. It taxes capital gains and dividends as ordinary income. It eliminates the corporate income tax.
All of these plans would also eliminate the alternative minimum tax. The Ryan plan would eliminate the estate tax. The Cardin and Renacci plan would institute a VAT. The Camp, Nunes, and Ryan plans would shift to a territorial tax system. War, Christianity, and... Best Price: $4.99 Buy New $9.95 (as of 03:10 EST - Details)
Then there are the plans that were proposed by the Republican presidential candidates.
Some Republican candidates wanted a system of three brackets while others preferred a flat tax. Many proposed eliminating all itemized deductions except for the charitable and mortgage-interest deductions. Some wanted a cap on the amount of the mortgage-interest and other deductions. A few called for increasing the standard deduction or personal exemption. Some wanted to eliminate all credits except for the earned income tax credit and the child and dependent care credit. Many wanted to expand the earned income tax credit. Some proposed lowering the tax rate on capital gains and dividends. Others wanted to tax capital gains and dividends as ordinary income. Many called for eliminating the net investment-income surtax, the alternative minimum tax, and the estate tax. Some said they wanted to eliminate the corporate income tax. Most talked about lowering the maximum rate from 35 percent to 25 percent or less. Two Republican candidates wanted to eliminate payroll taxes for older workers. Two others just wanted to eliminate the additional .09 percent Medicare tax on high incomes.
And then there is the latest tax reform plan of Republican presidential nominee Donald Trump. According to the Tax Foundation, Trump’s plan to change the individual income tax:
- Consolidates the current seven tax brackets into three, with rates on ordinary income of 12 percent, 25 percent, and 33 percent.
- Adapts the current rates for qualified capital gains and dividends to the new brackets.
- Eliminates the head of household filing status.
- Eliminates the Net Investment Income Tax.
- Increases the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly.
- Eliminates the personal exemption and introduces other childcare-related tax provisions.
- Makes childcare costs deductible from adjusted gross income for most Americans.
- Offers credits (“spending rebates”) of up to $1,200 a year for childcare expenses to lower-income families, through the earned income tax credit.
- Caps itemized deductions at $100,000 for single filers and $200,000 for married couples filing jointly.
- Eliminates the individual alternative minimum tax.
Trump’s plan to change the corporate income tax:
- Reduces the corporate income tax rate from 35 percent to 15 percent. War, Empire, and the M... Best Price: $16.00 Buy New $9.95 (as of 03:10 EST - Details)
- Eliminates the corporate alternative minimum tax.
- Allows firms engaged in manufacturing in the U.S. to choose between the full expensing of capital investment and the deductibility of interest paid.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 10 percent.
Trump’s plan would also eliminate estate and gift taxes. His plan differs from the one he released about a year ago. It has higher rates and a broader individual income tax base, resulting in a smaller tax cut. The Tax Foundation believes that the Trump plan would boost GDP, raise wages, increase jobs, reduce the cost of capital, substantially reduce federal revenues, and enable Americans keep more of their money out of the hands of Uncle Sam. The opposite would be sure to happen should the tax reform ideas of Hillary Clinton be enacted.
Now, although decreases in tax rates and increases in tax deductions and credits are always good, all Republican tax plans suffer from the same underlying flaws.
- Republican tax plans are progressive. With their multiple tax brackets, they seek to punish “the rich” with the Marist idea of “a heavy progressive or graduated income tax.” But it is not just progressive tax brackets that punish “the rich” and favor “the poor.” There are also the phase-outs and eliminations of tax deductions and credits as one’s income rises. And having a flat tax rate doesn’t change anything since all Republican flat tax plans contain generous exemptions, deductions, and credits to ensure that “the poor” pay little or no taxes.
- Republican tax plans talk about achieving some level of revenue neutrality. But any revenue-neutral tax-reform scheme can, by definition, only shift taxes, not lower them. So, even though Republican tax plans all focus on lowering certain tax rates, they also contain provisions for broadening the tax base in some way. Plans that are not revenue neutral talk about having to “pay” for the lost revenue or “finance” the tax cuts, as if it is a bad thing that overall government revenue is reduced.
- Republican tax plans include some form of refundable tax credits. A regular tax credit is a dollar-for-dollar reduction of the amount of income tax owed. Tax credits may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. However, a refundable tax credit is treated as a payment from the taxpayer like federal income tax withheld or estimated tax payments. If the tax credit “payment” is more The Other Side of Calv... Best Price: $23.98 Buy New $29.95 (as of 03:00 EST - Details) than the tax owed after the regular tax credits are applied, then the taxpayer receives a refund of the money he never actually paid in. The money is simply taken from actual taxpayers and transferred to him. Refundable tax credits are simply another form of welfare.
- Republican tax plans view with disdain certain tax credits and deductions. They decry that the tax code contains too many exemptions, credits, loopholes, shelters, exclusions, and deductions. In the name of simplifying the tax code, they propose to close loopholes, reduce credits, or eliminate deductions to ensure that everyone pays their “fair share.” But of course, the elimination of, or reduction in, tax credits and deductions is the same as an increase in taxes.
- Republican tax plans presuppose that the government has a right to a certain percentage of every American’s income. They may disagree on what that percentage that should be, whether “the rich” should pay more than “the poor,” and how the government should collect the money, but they all agree that the state says to its subjects, as Old Right stalwart Frank Chodorov wrote in The Income Tax: Root of All Evil (1954), “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide…. The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.”
Republican tax plans are Republican tax scams. As Chodorov concludes: “There cannot be a good tax nor a just one; every tax rests its case on compulsion.”