Veronique, like you, there are plenty of things I do not support in the House and Senate tax bills (bills that, at the moment, are, overall, of (I’ll be kind) uncertain economic value, but will come in very handy politically for the Democrats in 2018). However, I am afraid that I don’t even like some of the things you do like.
You like the reduction in the corporate tax rate, and so do I, although I do not see any magic in the 20 percent number. A reduction in the rate to, say, 25 percent would be likely to deliver similar advantages and, by reducing the cost, make the overall package easier to sell, not least to fiscal conservatives. I agree with you that lower rates will “improve competitiveness, and reduce corporate malinvestment and tax avoidance”, but I am unconvinced that they will mean higher wages any time soon. I also doubt that they will generate (at least in the short term) much in the way of additional growth or, for that matter, investment. US companies are already enjoying historically high profit margins and have plenty of cash in the till. If they wanted to invest more now, they could and they would. A tax cut that could easily—look at the polls—be reversed within 2-4 years is not going to alter the planning of investments when the desired rate of return is typically calculated over periods of five years, ten years or longer.
Ideally, a sharply lower corporate tax rate should be funded (at least in no small part) by steep cuts in the corporate tax breaks (I use the loaded term ‘break’ with reservations) for which lawmakers have been so well paid over the years. That does not appear to be on the agenda for now.
Instead, the war on tax breaks is directed mainly at individuals, and, in an example of quite astounding political naivete, often at tax breaks that, up until now, have enjoyed bipartisan support. By turning against them now, the GOP has, I fear, removed some of the last defenses that might have held up in the face of the next Democratic raid on taxpayers, a raid that will be coming along sooner or later, and, if I had to guess, sooner, not least if anything resembling the House plan goes through. This is true of the state and local tax (SALT) deduction that the GOP is, of course, proposing to scale back (full disclosure: I’m a New York City taxpayer), a change you support. I agree with you that removing or reducing that deduction makes the tax code even more progressive than it already is (and, believe it or not, the tax code is very progressive for all but the richest taxpayers), but I see no particular advantage in that. And if it is an attempt at virtue-signaling, it will not change the minds of those already convinced that the GOP tax plan is a giveaway to the rich.
I’ve heard the argument that slashing the SALT deduction will persuade voters in Blue States (particularly on the coasts) to rein in the taxing and spending of their state and city governments. That would be great, but, looking at your numbers, there won’t be enough voters hit by this change to make, say, a Bill de Blasio change course. We both believe that higher taxes hit growth. Well, the result of this policy will (effectively) be to increase taxes on some of the more economically productive and thus, following our shared logic, pose a danger to growth in a not insignificant slice of that shrinking part of the country able to boast growth in new businesses or new jobs. That’s unwise.
Worse still, those affected by those higher tax rates will not blame local taxers and spenders, but, almost certainly, the GOP that changed the status quo. On a rough count, New York, New Jersey and California send just under 30 Republicans to the House of Representatives. Ahead of likely tough midterms in 2018, that is a total worth remembering. Those who believe that a substantial cut in the SALT deduction is economically and/or fiscally beneficial need to face the uncomfortable reality that those benefits will be more than canceled out by the consequences of a Democratic win.
More work to be done, I reckon.