The President’s tax plan, aimed at helping middle class families (how are they defined?), would best be described as a modest step in the wrong direction.
“Modest” because the proposed net tax increases of $350 billion spread over 10 years equals $35 billion per year or just 0.2 percent of GDP. That is tiny by any standard, so despite its highly advertised “soak the rich” provisions aimed at producing only a little damage to growth (higher taxes on capital mean there will be less of it), the macro drag on growth would be modest.
“Would” because the President’s tax proposal won’t pass the Republican congress. It will, however, enable all Democrats to accuse Republicans of being “anti-middle class” and “pro rich.” How awful! The primarily political nature of this tax reform – it is barely a blip on the economic scale – requires us to identify some notion of what level of taxable income defines “middle class” and what level defines “rich.” We all want to be rich, except for tax purposes. Is a family with two earners and net taxable income of $250,000 rich or middle class? Should the dividing line be higher or lower? Why?
Most tax reform proposals, like the President’s little stink bomb, sound great to many who think of themselves as middle class, that is, until they find that they have been defined as rich, thereby making them ineligible for the tax cuts reserved for the true middle class and subject to the higher tax rates that they, as the rich, can “easily afford.” The fact sheet distributed by the White House is silent on the middle class versus rich distinction.
The proposed uses of the extra revenue gathered from increased taxes on the rich are, in some cases, sound. For example, expansion of the earned income tax credit (EITC) provisions and constructive changes in child care tax provisions would – in a revenue neutral tax reform proposal absent these “soak the rich” revenue enhancers – be constructive.
In promoting tax reform aimed almost exclusively at transferring earmarked benefits – more EITC in exchange for higher taxes on capital – the President is totally abandoning the principal that sound tax reform (lower tax rates applied to a tax base enlarged by loophole closing) is favorable to a purely political package that modestly shifts the tax burden to higher income households, or the ambiguously defined “rich.”
One is left to wonder, if the tax code is to become an instrument primarily aimed at redistributing income and wealth, what theory of optimal distribution of income and wealth guides tax reformers, like the President, who have decided that “the rich” have too much while “the poor” or “middle class” have too little? Efforts to modify the income/wealth distribution away from levels generated by neutral tax provisions mean that the total pie is reduced for everyone. We may want to accept some tax code changes aimed at altering income/wealth distribution, but first we need to know how much they cost all of us.
But the President could care less, so long as the rich are getting soaked while “hard working” low and middle income Americans are getting stoked. Republicans need to come up with a plan for a better tax system that benefits everybody in order to avoid being labeled as anti-middle class as the president intends. It is not hard to do, especially when you control the congress as the Republicans do.
Now is the right time for revenue-neutral tax reform that boosts growth by reducing marginal tax rates. The lower tax rates can be financed by loophole closing which, given the current contorted tax system, amounts to soaking the rich while asking the lower and middle class to live with a highly-simplified tax system, something even the President ought to like.
