Republicans Turned the Tax Code Into a Weapon
There is something to like about the new House Republican tax bill. Note that I did not say “a lot to like.” It looks very expensive, which Republicans will find challenging to pay for, and if they do not pay for it, it will expand the government budget deficit to dangerous levels. But gosh darn it if the Republicans have actually made some effort to eliminate deductions.
Deductions are the Cheez Doodles of tax policy: Everyone likes them; everyone who studies the matter knows they are not good for us; and nonetheless, most people will get very indignant if you attempt to replace them with something more wholesome.
This is why deductions rarely go away, no matter how stupid and detrimental to the fiscal and economic health of the republic. For example, virtually every wonk in Washington, from radical libertarian to fervent socialist, can agree upon at least one thing: the tax deductibility of employer-sponsored health insurance is a terrible idea. On the one hand, it costs the government a packet of money every year, money that has to be raised by higher taxes on someone else. On the other hand, it encourages employers to load as much compensation as possible into the health benefit package, which distorts our economy and contributes to ballooning costs. There is nothing nice to be said about this particular tax deduction, except that it undoubtedly seemed like a good idea during World War II.
And yet, when it comes time to, say, pass a major health-care reform, or reform the tax code, do our nation’s legislators start with the obvious, and get rid of this egregiously stupid deduction? I regret that there is no way to convey my hollow, despairing laugh in pixel form. Of course they don’t touch it. The very egregiousness of its immense costs, the massive distortions it has induced in American consumption patterns, mean that getting rid of it would be far too disruptive.
President Ronald Reagan, bless him, actually went after deductions wholesale. We ended up with a system that had lower marginal rates and nonetheless patched up some of the gaping holes his earlier tax cuts had opened up in the federal budget, simply because it was no longer so easy to shelter income in a million little loopholes.
But those Cheez Doodles sure are tasty, aren’t they? The Clinton administration couldn’t resist sneaking out for a bag or two, and passing them out liberally. The Bush administration had no interest in pulling the bowl away just when the party was getting going again … and here we are, 30 years later, with a tax code once again grown fat with ugly, distortionary tax breaks.
So give Republicans this much credit: they have gone after some deductions that are, if not quite as stupid as the health insurance boondoggle, nonetheless quite silly.
The proposed bill caps the tax deduction for mortgage interest, which does not benefit the economy, does cost the government a lot of money (which again, must be raised some other way, such as through higher marginal tax rates), and pushes up the price of housing, particularly in more affluent areas.
Republicans have also gone after the deduction for state and local taxes. As with the home-mortgage interest provision, they are not getting rid of it entirely. They limit it to property taxes, and cap it at $10,000.
Now, this will be bad for me personally, as a resident of a high-tax locale. I am wincing as I contemplate what this will do to my bank account come April 15. Nonetheless, it’s the right thing to do, and the only problem with the proposal is that it does not go far enough; if I had my druthers, we’d get rid of it entirely. It is effectively a transfer from low-tax states to high-tax ones. And given that the high-tax states tend to be richer than the low-tax ones, it is morally as well as economically indefensible.
These two proposals are complemented by a number of equally salutary, though less well-known, reforms on the business deduction side. So why am I not smiling?
Well, there is the aforementioned budget problem of paying for all this reforming. But there is also the political problem of doing so. It is hard not to notice that this bill is designed to spread benefits among Trump supporters, particularly the Republican donor class, while laying most of the costs on a single group of people: six-figure professionals living in blue states, a group known as the HENRYs (High Earning, Not Rich Yet). One can make a principled justification for levying high taxes on the rich, who can most easily spare the money. One can make a principled justification for taxing everyone equally, share and share alike. But what is the principle by which almost all of the pain of this tax bill should be borne by affluent, but not rich, people who happen to live on the coasts? Other than “we don’t like them.”
Deciding who should benefit and who should suffer cannot be the start and end of a policy discussion. The 2008 bank bailout indubitably saved the bankers who had just gotten us into a big mess, but I supported the policy because it also saved the rest of us. 1 Lessening our economy’s dependence on coal, on the other hand, would be very bad for a lot of nice people living in West Virginia, but a very good idea nonetheless.
But while cui bono should not be the only consideration, it always is at least one. Republicans are trying to sell this tax package as a fairer reform that will make things better for all Americans. If that is what they are actually trying to do, then they should probably not offer something so obviously shaped as a shiv for Donald Trump’s political enemies. If not out of principle, then out of naked self-interest. However astonishing their current disarray, Democrats are going to be back in power someday. And if Republicans weaponized the tax code in this fashion, Democrats are likely to pick up this crudely crafted weapon and turn it on its creator.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
As a sharp liberal economist said to me at the time, “It is impossible to rescue the economy without also rescuing people who are long assets” -- which is to say, investors and financial professionals.
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Philip Gray at firstname.lastname@example.org