15 questions about tax reform
With President Trump pushing his tax reform proposal in Harrisburg, Pa., on Wednesday, here’s a look at what his plan would do to the economy.
1. Can the United States afford tax cuts?
No. On current policies, the budget deficit will average around 4 percent of Gross Domestic Product during the coming decade and the debt-GDP ratio will rise to an alarming 89 percent of GDP. The proposed tax cuts would make a dire situation far worse.
2. Which party is more fiscally irresponsible?
Both. The Democrats are for stimulus and middle-class tax cuts, and the Republicans are for military spending and tax cuts for the rich. Though the Democrats are fairer, both parties break the budget. During the Obama years, the debt-GDP ratio rose from 39 percent to 76 percent, and most of the Bush-era “temporary” tax cuts were made permanent by dint of the shared irresponsibility of the Congress and White House.
3. Didn’t we need temporary stimulus in 2009 to ward off a Great Depression?
No. The real job of warding off a depression went to the Fed, which flooded the market with liquidity after having contributed to a nearly catastrophic financial panic with the misguided closure of Lehman Brothers, in September 2008. The stimulus substantially raised the public debt with little benefit in moderating the business cycle downturn underway.
4. Will tax cuts pay for themselves through higher growth?
No. This mythology, dating back to Ronald Reagan in 1981, is a puff piece of propaganda, believed by absolutely nobody in power. It is concocted by the same people who brought you safe tobacco, clean coal, and self-policing financial markets.
5. Is the top federal corporate tax rate too high?
Yes, slightly so. In line with other major economies, it should be cut to the high-20s, as part of an overhaul that raises overall federal tax revenues as a share of GDP (see also No. 8, below). The United States and other high-income countries should also agree to avoid a “race to the bottom” in corporate tax rates.
6. Would a US corporate tax cut raise wages?
No. The alleged indirect benefit on wages overlooks a critical fact. In the world economy today, tax cuts will stimulate labor-saving automation through robotics and smart machines, vitiating any alleged gains to wages.
7. Would a US corporate tax cut be fair?
No. It would give a windfall to owners of capital, who are already enjoying an era of high profits and low wages. We are living in a capitalist dream world. The capitalists certainly don’t need yet more income, except in their reveries.
8. How could we reconcile a modest cut in the corporate tax rate with fairness?
As part of a package. Cut the corporate tax rate while raising taxes on the rich in other ways, including a higher marginal tax rate on personal income, a closure of egregious tax breaks like carried interest, and an expanded Earned Income Tax Credit for low-wage workers.
9. Should the United States move to a territorial corporate tax system?
No. US companies are currently taxed on worldwide income, though taxes on foreign earnings kept abroad are deferred. The proposed territorial system would tax only US-based income. Making this shift would lead to massive tax avoidance through bookkeeping tricks that shift US income abroad. That’s not a theory. Almost all the big companies do it already to defer taxes on foreign income. It would get much worse with a territorial system.
10. How much would President Trump’s tax cut proposals cost?
Around $5.5 trillion over 10 years. This is more than 2 percent of GDP per year, a real whopper. Not only would we not have high-charged growth, we would face a fiscal crisis sooner rather than later. Trump’s proposal to offset the tax cuts in part by eliminating the deductibility of state and local taxes is going nowhere, because it will be blocked within the Republican Party.
11. Why are Trump’s tax proposals still so vague?
Just like the Obamacare repeal, the Republicans dare not to put forward a clear proposal, because the greed and idiocy would be too easily exposed. They hope to pass the tax cuts by stealth. This will probably be impossible in the end. They will have to show their hand.
12. What would a real tax reform package include?
A modest cut in the corporate tax rate. A rise in the top marginal tax rate for high-income individuals. An end of carried interest (for hedge funds). A clampdown on allowing tax deferrals on overseas earnings. A billionaires wealth tax on net-worth above $1 billion (this could also be called a Trump Cabinet Tax). An expansion of the Earned Income Tax Credit. A tax on carbon emissions. And a Value Added Tax (VAT).
13. Wouldn’t a VAT be regressive?
No, not on balance. Every progressive country (starting with Sweden, Norway, Denmark, Netherlands, Germany, and Canada) uses a VAT or the like to help fund publicly financed health care, education, child care, family leave, and all of the other benefits that are universally enjoyed abroad but routinely denied to American working families. By itself, the VAT is regressive. Yet when considered together with what it pays for, the overall fiscal policy is progressive.
14. What should be the level of federal taxation as a share of GDP?
Around 24 percent. It is currently around 18 percent of GDP. The higher level would enable the US to close the budget deficit; reduce the debt-GDP ratio; raise national saving; invest more in research and development, renewable energy, and education from pre-K to university; and move toward affordable, publicly financed health care. Total US government revenues (federal, state, and local) as a share of GDP would rise from around 31 percent of GDP to 37 percent of GDP, nearly the level in Canada (39 percent) but far below the levels in northern Europe (around 50 percent of GDP in Scandinavia).
15. Will tax cuts pass?
Hmm. On their merits, no. On lies and populism, possibly. If the Democratic Party holds together in opposition, as it should, then no. If some conservative Democrats join in
(all-too-typical) bipartisan populism, alas, yes.
Jeffrey D. Sachs is university professor and director of the Center for Sustainable Development at Columbia University, and author of “The Age of Sustainable Development.”