Material of Interest to People on the Left 



 Max B. Sawicky 
 February 2, 2018

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 _ The Democratic Party brain trust is floating new ideas on taxes.
Their economics are questionable and their politics are worse. _ 

 Chip Somodevilla / Getty , US House Speaker Paul Ryan (R-WI) gestures
to President Donald Trump at a celebration of Congress passing the Tax
Cuts and Jobs Act on the South Lawn of the White House on December 20,
2017 in Washington, D.C. 


rom the heart of Barack Obama
exiled brain trust comes Jason Furman
former head of Obama’s Council of Economic Advisers, with a proposal
in the _Wall Street Journal _to “repeal and replace” the recent
Trump/Republican tax cuts. How do his ideas compare to alternatives
that might appeal to readers of this journal — not to mention the
vast legions of Berniecrats and The Resistance

Furman’s analysis provides a useful window into the concerns of
financial elites
To be fair, he takes aim at certain sources of tax relief for the rich
including those related to capital gains and “pass-through”
entities (a form of business organization often used by
medium-to-large-sized companies). In general, however, he prioritizes
deficit reduction and a lower tax burden on corporate capital. In
short, if Furman’s views are any indication, when it comes to tax
policy mainstream Democrats
have learned nothing
and forgotten a great deal

Scary Deficits

Furman’s point of departure is the impact of the Trump tax cuts on
deficits. He glosses over the question of whether the current deficit
is too high by referring to projections of its long-run trajectory.
The deficit-hawk mantra always goes, “If nothing is done, in sixty
years.…” The fallacy here is that _something is always done.
_Things that can’t continue, don’t. Furman admits as much himself.
The real question is what to do now.

It’s worth remembering that the last time a Republican was in the
White House, we heard exactly the same laments from liberals about
“budget-busting” tax cuts. In 2003, Paul Krugman argued that
“the government of the United States faces a fundamental fiscal
shortfall” due to the Bush tax cuts, a problem so serious that
Krugman called it a “planned crisis” that could be masked “for a
while, by running huge budget deficits,” but that would eventually
wreak economic havoc.

At the time, the CBO was projecting that federal debt in 2013 would
hit 14.4 percent of GDP. By the time 2013 rolled around, a deep
recession had intervened and federal debt actually stood at 72.6
percent of GDP. Rather than wreaking havoc, though, the higher
deficits were actually providing crucial support to the economy, and
Krugman was arguing that even bigger deficits were needed.

The lesson here is that when it comes to liberal finger-wagging over
imagined future deficit crises — even under Republican presidents
— the watchword should be: fool us twice, won’t get fooled again.
Regressive tax cuts should be opposed because they’re regressive —
not by pointing to a coming fiscal Armageddon.

Favoring Capital

The remainder of Furman’s piece addresses what a desirable tax
system would look like, and more specifically, the best ways to expand
tax revenues. From the Left’s point of view, priority should be
given to shifting the tax burden from labor to capital, from
consumption to saving, and from low- and middle-income households to
higher-income households.

One of the strongest weapons in the capital-tax arsenal is the
corporate income tax (CIT). The 2017 Republican tax cuts made the CIT
a chief target, cutting the rate from 35 to 21 percent and granting
new opportunities for individual income-tax avoidance in the name of
tax relief for small business. While defending the need to restore
some CIT revenue, Furman skates past the idea of restoring the rate to
35 percent and invokes the general idea of broadening the tax base,
without specifics. This is hardly surprising: the Obama administration
was also prone to dismay over the alleged ill effects of the old 35
percent rate on competitiveness.

The most egregious element proposed by Furman is what’s called
“full expensing” of new business investment. Like many mainstream
economists, Furman regards capital taxation as inherently inefficient,
and a switch to full expensing would amount to cutting the capital tax
rate to zero.

Under full expensing, business firms deduct the full cost of their
purchase of plant and equipment in the year of purchase. It is not
widely appreciated that this _would effectively convert the corporate
income tax into a consumption tax. _And insofar as workers spend all
their income (rather than saving it), that would completely shift the
burden of corporate taxes from capital to labor. (The reason expensing
exempts capital from tax is that, since money today is worth more than
money tomorrow, the value of the tax savings from the deduction in the
year of expensing in effect offsets the future tax on the returns to
the investment. It’s a wash.)

The most notorious feature of the Trump cuts was the new tax advantage
provided for what are called “pass-through” entities: businesses
whose profits go untaxed except at the level of the individual owners.
Furman, like other centrist Democrats, would dispense with the
pass-through breaks while raising taxes on capital gains, and he also
suggests restoring revenues by means of a new value-added tax or
carbon tax. Both would amount to new taxes on consumption and increase
income inequality.

A dicey issue is raised when a tax break disproportionately benefits
higher-income taxpayers but also helps many others. Two examples with
immediate relevance are the exclusion of employer-provided health
insurance from taxable income, and the deductibility of state and
local income tax. In a dubious appeal to tax fairness, Obamacare
included a “Cadillac tax” on high-value health insurance policies
— an exception to the standard tax break for employer-provided
health insurance. The tax was designed in part to encourage the spread
of skimpier health insurance, on the nefarious theory that increasing
out-of-pocket health care costs will induce workers to use care more
“wisely.” And since generous health insurance is a major advantage
of membership for many unions, the Cadillac tax was vociferously
by labor.

The Republicans want to eliminate the Cadillac tax a) because it’s a
tax and b) because it’s part of Obamacare (though their tax bill
will actually increase
the number affected by it). Furman, meanwhile, suggests an increase in
the tax.

As for the long-standing state and local tax break, the Republican
bill scaled it down to help pay for their business tax cuts. Due to
deficit concerns, Furman goes wobbly on the matter of restoring the
deductions, while others of a centrist persuasion have spoken
approvingly of eliminating them altogether.

In actuality, the benefits of both tax preferences — or tax
loopholes, if you don’t like them — are not confined to the rich.
The health insurance tax cuts
well into the middle of the income distribution. The deductions for
state and local taxes aggrandize the budgets of higher-income states
that tend to be more forthcoming with public services in general and
means-tested benefits (chiefly Medicaid) in particular. As a practical
matter, the ambiguous distributional implications commend a policy of
leaving well enough alone. (As for the deficit angle, we’ve already
seen why we needn’t care about it.)

A full-bore assault on capital via the tax system would cover all
returns to capital — which can take the form of corporate profits,
capital gains, interest, rents, and royalties — and regardless of a
firm’s size or legal status. It would include efforts to reverse the
shift in firms’ ability to avoid the CIT altogether, and it would
seriously beef up the IRS’s resources dedicated to curbing tax
evasion. (About one dollar in six
[] of federal tax liability is
either not paid on time or paid ever.) Rebuilding the estate
[] and gift tax
is another priority. Thanks to the labyrinthine nature of law
governing taxation of estates, much capital income escapes tax

Of particular interest in this vein is a new proposal
from Dean Baker
to convert the federal CIT into an annual capital levy. In this
scheme, instead of paying cash to the federal government, corporations
would transfer a fixed proportion of shares of their stock. Public
ownership of these shares would provide the government with an
additional revenue stream, insofar as the corporation paid out
dividends or bought back shares, thereby denying the revenue to the
wealthy. Over time, the public sector would own an increasing share of
the nation’s capital. Virtues of this approach include the fact that
opportunities for corporate tax avoidance would be narrowed, and the
political sway of private capital could be attenuated. (Baker suggests
the government’s shares be non-voting, although others might prefer
to forego this feature of his plan.)

To recap: Tax reform is more properly about inequality
than about funding public spending. And piecemeal expansions of the
tax burden with a superficial nod to equality can have perverse

Max B. Sawicky is an economist and writer in the wilds of Virginia. He
has worked at the Government Accountability Office and the Economic
Policy Institute.

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