October 3, 2017
The GOP Tax Reform Plan: A Preliminary Libertarian Analysis
The Republicans have released their latest tax-reform plan. “Unified Framework For Fixing Our Broken Tax Code” is a simple, 9-page document that leaves the reader with many unanswered questions.
Back in 2015, I subjected the tax proposals President Obama made in his State of the Union address to a libertarian analysis. Earlier this year, I did the same for President Trump’s tax plan. It is only fitting that I now do the same for the Republicans’ framework.
The “unified framework” developed by “the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance” claims to be a “pro-American, fiscally-responsible tax reform” that delivers “a 21st century tax code that is built for growth, supports middle-class families, defends our workers, protects our jobs, and puts America first.” It delivers “fiscally responsible tax reform by broadening the tax base, closing loopholes and growing the economy.”
The framework includes:
- Tax relief for middle-class families.
- The simplicity of “postcard” tax filing for the vast majority of Americans.
- Tax relief for businesses, especially small businesses.
- Ending incentives to ship jobs, capital, and tax revenue overseas.
- Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes.
The framework will serve “as a template for the tax-writing committees that will develop legislation through a transparent and inclusive committee process.” The committees will also develop unspecified “additional reforms to improve the efficiency and effectiveness of tax laws and to effectuate the goals of the framework.”
At the core of the framework are President Trump’s four principles of tax reform:
- First, make the tax code simple, fair and easy to understand.
- Second, give American workers a pay raise by allowing them to keep more of their hard-earned paychecks.
- Third, make America the jobs magnet of the world by leveling the playing field for American businesses and workers.
- Finally, bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.
As I said in my analyses of the Obama and Trump tax plans, a libertarian analysis is based on certain libertarian axioms of taxation. A libertarian analysis of any tax-reform plan is concerned with only one thing: to what extent does it allow Americans to keep more of their money in their pockets and out of the hands of Uncle Sam.
The Republicans’ “united framework” can be divided into two parts: individual tax reforms and business tax reforms.
Individual Tax Reforms
The current tax brackets of 10, 15, 25, 28, 33, 35, and 39.6 are consolidated into three brackets of 12, 25, and 35 percent. However, “An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” And the income ranges for the three brackets aren’t specified. The framework also “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”
The standard deduction is increased from $6,350 ($12,700 for married filing jointly) to $12,000 ($24,000 for married filing jointly). The personal exemption is eliminated. The nonrefundable portion of the child tax credit is “significantly expanded” and the phase-out thresholds are increased, but no dollar figures are provided. A credit of $500 for non-child dependents is instituted “to help defray the cost of caring for other dependents.” In the name of simplicity, the framework “eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.” Tax benefits that “encourage work, higher education and retirement security” are retained, which most likely refers to the earned income tax credit, education credits, and the current tax treatment of 401(k) and IRA plans. Other unspecified “exemptions, deductions, and credits” that “riddle the tax code” are repealed.
The alternative minimum tax and the estate tax are eliminated.
The tax treatment of capital gains and dividends is not mentioned.
Business Tax Reforms
The maximum corporate tax rate is reduced from 35 to 20 percent. A new maximum rate of 25 percent is instituted on pass-through business income (sole proprietorships, partnerships, and S corporations).
The corporate alternative minimum tax is eliminated.
Full expensing of capital investment is allowed “for at least five years.” The net interest expense deduction for corporations will be “partially limited.” However, “the committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.”
The section 199 manufacturing deduction is eliminated. Unnamed “numerous other special exclusions and deductions will be repealed or restricted.” The research and development and low-income housing credits are retained. However, “While the framework envisions repeal of other business credits, the committees may decide to retain some other business credits to the extent budgetary limitations allow.”
Moves to a territorial tax system in which U.S. companies would generally only pay tax on profits earned in the United States. Enacts a one-time tax on previously accumulated foreign-source earnings.
Unnamed rules regarding the tax treatment of unnamed “certain industries and sectors” will be modernized “to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”
Let me mention again that a libertarian analysis of any tax-reform plan is concerned with only one thing: to what extent does it allow Americans to keep more of their money in their pockets and out of the hands of Uncle Sam
First, regarding individual tax reforms.
The elimination of the alternative minimum tax and the estate tax is a great thing.
Because any increase in exemptions, deductions, and credits is a good thing and any decrease in them is a bad thing, the increase in the standard deduction, child tax credit, and phase-out thresholds is a good thing, as are retirement security benefits, the nonrefundable portion of the earned income and education credits, deductions for home mortgage interest and charitable contributions, and the new credit for non-child dependents. However, the elimination of the personal exemption, most itemized deductions, and unspecified “exemptions, deductions, and credits” that “riddle the tax code” is a bad thing.
The consolidation of the seven current tax brackets of 10, 15, 25, 28, 33, 35, and 39.6 into three brackets of 12, 25, and 35 percent looks, on the surface, to be a good thing since the maximum rate would be 35 instead of 39.6 percent. However, the increase in the minimum rate from 10 to 12 percent is not good, and the possibility that “an additional top rate may apply to the highest-income taxpayers” is a terrible possibility. Without knowing what the income ranges for the three brackets are, it impossible to render a judgment. The use of a “more accurate measure of inflation” appears to be a good thing as long as it results in decreased bracket creep.
Second, regarding business tax reforms.
The elimination of the alternative minimum tax is a great thing.
The reduction in the maximum rate is a good thing, as is the new maximum rate on pass-through business income.
Full expensing of capital investment is a good thing, but why just “for at least five years”?
Once again, because any increase in exemptions, deductions, and credits is a good thing and any decrease in them is a bad thing, the retention of the research and development, low-income housing, and “some other business credits” is a good thing just as the limiting of the net interest expense deduction, the elimination of the section 199 manufacturing deduction, the repeal of “other business credits,” and the repealing or restriction of “numerous other special exclusions and deductions” is a bad thing.
The move to a territorial tax system is good but a deemed repatriation of currently deferred foreign-source income is a bad thing, although it may be better than the alternatives.
The New York Times opines:
The tax plan that the Trump administration outlined on Wednesday is a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest.
Of course tax cuts benefit the wealthy! The bottom third of the population not only don’t pay any taxes, they get money back from the government thanks to generous refundable tax credits. This is why the article goes on to say: “The plan would not benefit lower-income households that do not pay federal income taxes.” Correct. How could it? They already have the maximum benefit possible in that they don’t pay any income taxes.
There are too many unanswered questions about the GOP’s tax-reform plan to offer more than this preliminary libertarian analysis. Are any of the Obamacare-related taxes repealed? What will be the tax treatment of capital gains and dividends? What are the tax bracket thresholds? Are the refundable tax credits (which are a form of welfare) retained, decreased, or increased? What is the amount of the child tax credit increase? What are the unspecified “exemptions, deductions, and credits” that “riddle the tax code” that will be eliminated?
A tax-reform plan that doesn’t result in Americans keeping more of their money is a tax-reform scam.
And assuming that the new maximum rate ends up being 35 percent, I still have a question: Why should any American, no matter how much money he makes, have to pay 35 percent of his income to the federal government on top of the 1.45 percent he pays in Medicare tax on all of his income and the 6.2 percent he pays in Social Security tax on the first $127,200 of his income?
Indeed, why should any American even have to pay the new minimum rate of 12 percent when the vast majority of what the government spends its income on is in direct violation of the Constitution, decency, and common sense?