Republicans had a decade at least to come up with a comprehensive tax reform plan that achieves their goals without raising taxes on the middle class. They failed.
The Senate plan causes about 13 million fewer people to have health insurance by repealing the individual mandate and hurting enrollment in both Medicaid and Obamacare exchanges. That will, according to the best evidence we have, lead to an increase in preventable deaths on the order of 15,600 people per year. It will also increase individual health insurance premiums even for people who still do purchase insurance.
By 2027, poor and middle-class people will see their taxes go up across the board. People making between $10,000 and $20,000 a year, the working poor, will see their income go down by 1.5 percent. Millionaires will see their income go up by 0.4 percent:
Even before major individual tax provisions expire at the end of 2025, the bill raises taxes on a significant share of people. In 2018, economist Ernie Tedeschi estimates that 11 percent of taxpayers will be paying more. The bill’s tweaks to tax brackets, doubling of the standard deduction, elimination of personal exemptions, and expansion of the child tax credit interact in sometimes unpredictable ways. Some families win, but others lose. Even in the early years, it’s not an across-the-board tax cut.
The bill cuts alcohol taxes on wine, beer, and liquor. We know that alcohol taxes are effective at reducing drunk driving, violent crime, and liver cirrhosis, and that increasing them saves thousands of lives a year. Raising the cost of a six-pack of Bud Light by 50 cents could save 2,000 to 6,000 lives every year. So cutting alcohol taxes, as the tax bill does, will likely increase preventable deaths in the US significantly.
It didn’t have to be this bad
Here’s the thing, though: Whatever the goal Republicans have, it didn’t have to be achieved this way. There is for each and every purpose a better bill that could be written.
Suppose Republicans wanted an across-the-board tax cut that helped both middle-class and rich people. They could’ve simply cut the 10 percent tax bracket to 8 percent, or that plus cut the 15 percent bracket to 12 percent. That helps middle- and upper-class people (though not the poor) and creates no losers. If they wanted to conform to Senate rules, they could have it all expire after eight or 10 years, just as the current legislation does. If they wanted to make it permanent, and cared deeply enough, they could’ve gone nuclear on the filibuster and passed a permanent cut with 51 votes.
But Republicans also want a lower, permanent corporate tax rate. Also doable: You can finance substantial rate cuts by removing tax breaks from the corporate code. Robert Pozen at Harvard Business School has estimated that eliminating the deductibility of interest payments on corporate debt would enable a cut in the corporate rate from 35 percent to 15 percent. If you wanted to, at the same time, allow 100 percent deductibility of all investments at the time they’re made, the rate would have to go up somewhat. But you could definitely cut the corporate rate, and pay for it permanently, by eliminating certain deductions and broadening the base. You don’t have to raise taxes or take away health care from middle-class people.
Republicans have grander aspirations than that, however. If you read the “Better Way” tax framework released by House Speaker Paul Ryan and House Ways and Means Chair Kevin Brady in 2016, you’ll see page after page of arguments for transitioning away from taxing income to taxing consumption. A lot of economists agree with that goal, even progressive ones (though others insist taxing consumption is inherently regressive).
Luckily there’s a plan in Congress that achieves that goal, is revenue-neutral, and doesn’t raise taxes on the poor or middle class. It’s Sen. Ben Cardin’s (D-MD) Progressive Consumption Tax Act. Cardin would exempt the first $100,000 of income for couples from income tax ($50,000 for singles, $75,000 for single parents), meaning that the vast majority of people would no longer pay income taxes. He'd consolidate rates to three — 15, 25, and 28 percent — and cut the corporate tax to 17 percent. That's a lower top individual rate, and a lower corporate rate, than the Senate is proposing. To pay for it, he'd introduce a value-added tax, the kind of consumption tax used in most other rich countries, and add a rebate so that poor people don’t see their taxes go up.
The plan, based on a proposal by Columbia tax law professor Michael Graetz, accomplishes basically all of Republicans’ substantive tax reform goals. It lowers income tax rates, and dramatically lowers the corporate tax. By exempting the majority of Americans from income taxes, it reduces the importance of deductions and credits. And it shifts the tax burden to consumption by adding a VAT.
But unlike the Senate or House tax bills, it doesn’t increase the deficit, and it’s not regressive. The Tax Policy Center modeled the Graetz plan back in 2013 with a VAT rate of 12.9 percent, and slightly tweaked individual tax brackets (14, 27, and 31). TPC found that it would cost $0. It’s completely revenue-neutral. And it's progressive. The top 0.1 percent would see their income fall by 0.9 percent, and the poorest fifth would see their income grow by 1.2 percent.
If Republicans really want to give needy people a tax cut while shifting the tax code to consumption and lowering individual and corporate tax rates, there’s your plan. You can work with Cardin on putting together a passable version right now.
Perhaps a VAT is too dramatic a step. I have a plan for then, too! Senate Finance Committee ranking member Ron Wyden has for years put out bipartisan tax reform plans, first with Sen. Judd Gregg (R-NH) and then with Sen. Dan Coats (R-IN), who have both since left the body. The plan sets a top rate of 35 percent, lowers the corporate tax rate to 24 percent, and, according to a 2010 analysis from the Tax Policy Center, would have made the tax code slightly more progressive. That analysis came before some of the high-income Bush tax cuts were revived, so the effect relative to today's laws would be different. But it’s a model for a way to cut corporate rates and simplify the code while not making the tax code more regressive.
Republicans have to ask themselves what they’re in this for
I don’t know what’s in the hearts of Orrin Hatch or Kevin Brady or Paul Ryan or Mitch McConnell. I don’t like to assume malign motives of politicians, even ones I vehemently disagree with. But the details of this tax bill are less consistent with an honest desire to achieve certain principled changes to the tax code — to make it simpler, or more pro-investment, or more tilted at taxing consumption rather than income — than with a desire to get the tax deal done fast, a desire to help important constituencies, and a desire to thumb the eyes of perceived ideological enemies.
That explains why, rather than paying for corporate cuts by offsetting an appropriate number of corporate tax breaks, the Senate wants to cut Medicaid and Obamacare. It sticks it to programs that are important to Democrats, furthers the GOP’s long-running interest in undermining Obamacare, and avoids making hard decisions about corporate benefits that might delay passage.
It explains a variety of anti-university provisions inserted into the bill. If you care about lowering tax rates on savings and investment, you do not insert a random excise tax on the earnings of big university endowments. But if you care about sticking it to coastal elite universities that are full of liberals, that provision makes sense. So does treating tuition waivers for PhD students as taxable income. This will hurt the economy dramatically in the long run by undermining human capital developments and creating a less educated workforce. It might even cost lives by impeding biomedical research. But it’s a good way to own the libs.
Republicans had years to put together this tax bill. They had the whole Obama administration, even the last two years of the Bush administration when they were in the minority. They could’ve done better. They had the tools and resources to do better. Other politicians and policy analysts had come up with ideas to help them do better.
That they didn’t do better is a massive failure.