Improvements to the USA Tax Policy

November 23, 2017

The USA is currently looking to pass a tax bill. Actually the Republican party has decided to not seek bipartisan solutions so it is the Republicans that are looking to change the tax policy. They wish to call it tax reform but they are reforming nearly nothing. They are mainly moving around tax breaks to different people. The main aim seems to be to reduce taxes without reducing spending which given the huge annual deficit the USA government currently runs that means really this is a plan to shift taxes to the grandchildren of people living right now.

And within lowering taxes for some people today while placing those payments onto their grandchildren there is a bit of shifting around who will pay what now. Mostly this amounts to lowering the taxes on the rich today – along with some lowering of many people’s taxes that are in the middle class.

When you run a huge budget deficit (and have a huge amount of debt outstanding) “cutting taxes today” is just shifting taxes to the kids, grandkids and great-grandkids of those avoiding the taxes today. Truly cutting taxes (versus shifting them to a future generation) requires cutting the outstanding debt (which represents future tax increases) in addition to cutting current taxes.

view of the White House, Washington DC

The White House, Washington DC by John Hunter. See more of my photos of Washington DC.

To find reform ideas in the proposals requires using an extremely broad definition of what reform means. There are some attempts to reduce some favors in the tax code now for special interests. But these are minor compared to the goal of shifting the tax burden to grandchildren from those alive today.

One of the other goals is to reduce the corporate tax rate. This goal doesn’t look so great politically, so they are trying to minimize any focus on this. I think likely a reduction in the corporate tax rate is wise. This is mainly due, not to some principle that 25% corporate tax rate is better than a 35% rate (with all the system-wide effects that results in). Mainly a lower rate is needed when you consider the global economic system and the tax rates of other countries with an understanding of the global economy today. What must be sacrificed to reach a 20% corporate rate seems unreasonable to me, so 25% rate seems more sensible, but at this time they are trying to stretch to a 20% rate (and leave future generations to pay for the difference).

I support the effort to lower the corporate tax rate. In order to pay for that reducing some deductions is sensible. The plans have some of that and while each tax break has special interests benefiting from them I would support adding to the decreases in deductions. I would go along with a 20% rate if that was necessary, but think 25% or 22% or something would be better.

The most ludicrous part of the plan is the favors for trust fund babies. Eliminating the most capitalist friendly tax (the estate tax) and providing trust fund babies not only free inheritance without limit but stepping up the cost basis of investments is indefensible (economically indefensible, politically the Republicans obviously feel favors for trust fund babies are wise).

See my Curious Cat Tax Proposals blog post from 2016 for more of my ideas on how tax reform should be done.

The current deficit spending is made to look much less bad than it really is due to incredibly low interest rates. Given the inevitable rise in interest rates over the next 30 years the debt we pile on future generations is going to be much greater than it appears in an extremely low interest rate environment.

There are essentially 4 areas of significant federal spending.

  • interest on the debt – this can’t be changed, it is set by the market
  • spending on the department of defense (including spending on veterans)
  • social security
  • medicare and medicaid

There is no political will to reduce the costs of social security. I would raise the age at which you can begining taking payments and reduce payments to the rich. But this won’t pass, so that won’t change.

The Republicans have greatly increased spending by the department of defense so obviously this results in a tax increase (just on our descendants because they chose not to pay for the higher level of spending they voted for)

So the only thing left of any significance is medicare and medicaid. There is a concerted effort by a sizable (but not quite unanimous Republican faction – and in fact not quite enough to pass legislation, most likely) portion of the Republican representatives that would like to cut this spending. It likely remains unrealistic to see cuts in this spending. It continues to rise rapidly and will almost certainly continue to.

By far the best way to reduce taxes is to take care to spend the time to work at making the health care system in the United States much less costly. The cost of the USA health care system is double what it costs in other rich countries. Those costs result in hundreds of billions of dollars in deficit spending each year by the USA. If we could improve the USA health care system to be be just as efficient as an average other rich country we would save enough to reduce annual taxes needed by hundred of billions of dollars.

The problem is that improving the health care system takes effort and time and thought and for the last 40 years (at least) those we have elected from both parties have failed to do so. Again the Republican’s while spending a great deal of time and energy on talking about health care this year, they failed to make any significant effort to improve the system. In fact they made numerous extremely costly changes to make political points but with the result of raising taxes for those that have to cover the huge additions they added to the long term costs of the USA health care system due to their poor management of the existing system.

Not only didn’t they make efforts to systematically address fairly obvious failures in the existing system they made foolish decisions based on their choices given the current system. It is very hard to see either party changing decades of failed health care policy action but the Republican party has taken bad health care policy to a ludicrous new extreme in the last year.

It is hard to see how tax cuts are possible until at least a decade of work, changes to policy, experimentation, adjustment and continual improvement are undertaken to improve the system and drastically reduce costs. The only other option is to drastically reduce defense spending but that seems politically unrealistic.

Within constraints of how things stand today if we are going to make an effort to shift more of the tax burden for our current spending to our descendants at the very least we should stop policies that are aiding trust fund babies. I am fine with the efforts of the Republican party to stick it to Democratic states by eliminating or reducing state and local tax deductions. And doing things like capping the mortgage interest special interest deduction makes sense. Eliminating it for second homes seems wise. Reducing the cap on primary residence to $500,000 from $1,000,000 is aimed largely at high cost of living areas that vote largely for Democrats. I would leave it at one million myself but reducing it is acceptable I think.

One thing that definitely should inform how changes are made is that a lower corporate rate is going to largely benefit the rich (as owners of private companies and a large portion of the public stock market). So I wouldn’t further cut personal taxes on the rich given the rich will gain huge benefits as owners of stock and companies. By doing away with the proposed cuts for the rich in the current plan you could cut the amount of future taxes we are foisting onto our children.

Increasingly in the last 30 years the rich (both individuals and companies) have avoided paying the taxes owed with gimmicks and if not outright fraud things that nearly every sensible person can see is as close to fraud as it is possible to get without legally being fraud. If the political parties were concerned about the interests of all of the people they would take steps to address system failures that push tax costs onto the honest and remove them from those able to either legally buy tax loopholes or illegally take steps to avoid taxes and avoid having to suffer the consequences (through things like using political clout to prevent enforcement of laws against those with clout and hamstringing those seeking to catch those breaking the law).

The Republicans propose to make easier the use of pass through entities which have often been used to avoid paying a fair share of what is owed. They talk about putting in place measures to avoid having them abused. It seems extremely likely these will be massively abused by the rich given everything we have seen in the last 30 years. We should eliminate all effort to make it easier to use pass through entities to reduce taxes and instead greatly increase our efforts to stop those abusing the system from gaining at the expense of honest tax payers.

The Alternative Minimum Tax is far from perfect. But it is one impediment to those abusing the tax system for personal gain. The AMT should definitely not be eliminated. It should be adjusted but that is one measure to stop those most abusive tax behaviors by those abusing the rest of us by not paying their fair taxes. And we need to put in place more efforts to stop the abuses. Those efforts should focus on those with top 1% level income or assets and need to be careful to consider all the ways the rich have been abusing current rules.

Related: Chart of Net Government Debt from 1980 to 2013 by Country (USA 3rd worst after Japan and Italy)Taxes per Person by Country (2010)Politicians Again Raising Taxes On Your Children (2008)

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