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One of the ephemeral trends in Washington policy circles these days is for members of Congress to craft their own draft plans for tax reforms in anticipation of a wholesale reform effort in the coming years. It’s good that members are discussing reforming our antiquated and anti-growth tax code. However, conservative members must not fall into the trap of adopting some anti-conservative premises when crafting tax plans.
Two of the liberal premises that some conservative proposals have bought into include: 1) the notion that tax reform must produce the same level of revenue as the status quo on a static score, and 2) we need to redistribute more wealth from the rich to working-class families.
With regards to the premise of keeping the same revenue baseline, some conservative policy minds often forget that the ultimate goal is to reduce the size of the federal government, not balance the budget as an end in itself. At present, the Treasury is taking in a record level of revenue. CNS news recently reported that the Treasury had raked in a record $1,428,710,000,000 in total taxes (adjusted for inflation) so far this fiscal year. The CBO projects revenues to rise to over $3 trillion this year and grow steadily over the next ten years. This is not good news.
We don’t need more money taken from the private sector to feed the rapacious beast in an effort to create more job-killing, price-hiking bureaucracy. Any tax proposal should not seek to maintain this level of revenue on a static score, but decrease it.
As for the progressivity of the tax code, there is a disturbing trend even from some conservative lawmakers to propose tax plans that will result in higher effective tax rates for the wealthy while growing refundable tax credits at the lower end of the income ladder. It’s understandable that Republicans want to show empathy with working class families and join in piling on the evil rich, but adopting liberal premises about our tax and entitlement structure will not solve the problem.
Many of the GOP plans call for dramatically curtailing or eliminating tax deductions for upper-income individuals. Obviously, all conservatives share the goal (short of repealing the 16th Amendment altogether) of pursuing a more flat tax code with lower rates and elimination of market-distorting, social engineering tax preferences. However, under the current system, especially after the fiscal cliff and Obamacare tax hikes, upper-income earners are subject to a marginal tax rate of over 40%. Eliminating deductions without a commensurate reduction in marginal rates will result in linear increase in the effective tax rate of those who are already paying most of the income taxes in the country.
Let’s be clear: the tax code is already the most progressive in the world; it certainly doesn’t need to be made more redistributive. The Joint Committee on Taxation is out with its annual projection of how the federal tax code will affect different levels of income earners in 2014, and it appears that the tax code is more progressive than ever. If you use the graph that breaks down the distribution of income and payroll taxes by income level, you will find startling results:
Taken as a whole, anyone who believes that the rich don’t pay their fair share are not living on planet earth. Yet, many Republicans, in an effort to push tax cuts, albeit not for the rich, tend to propose changes to the tax code that actually make the system even more progressive. The dirty little secret is that the rich already pay all of the income taxes. These numbers are all final tax liabilities working off of effective tax rates, so they include all of the deductions and so-called loopholes. And yet, they still pay almost all of the income taxes, while the lower-middle income earners pay almost no income taxes, and in many cases, enjoy a negative tax liability.
Hence, it is impossible to cut taxes other than for those who already pay them. But many Republicans who want to reduce the burden on working class families, and do so in a way that will be revenue neutral, attempt to raise taxes on those who already pay the tab. It’s fundamentally unfair and anti-growth.
Conservatives who want to encourage pro-growth policies that are consistent with our constitutional values of pursuit of happiness should instead look at the payroll tax for areas to promote upward mobility with working class families. The payroll tax burden is shouldered by all workers and would provide conservatives with a great opportunity to cut taxes for all income levels. The only casualty of such a plan would be our record high revenue that purveys the federal leviathan. And that is a good thing.
Cross-posted from The Madison Project