Daily Times

Just as Ronald Reagan’s landmark 1986?bipartisan tax reform increased simplicity, fairness and economic efficiency by broadening the tax base and reducing rates, today tax reform has the potential to help American families and the economy. Properly designed, revenue-neutral reforms could help to offset the dramatic increases in inequality that have taken place over a generation, repair a business tax system that globalization has rendered dysfunctional, reduce uncertainty and promote growth.

Unfortunately, what we know regarding the intentions of the president-elect and congressional leadership suggest that they are at risk of pushing through the most misguided set of tax changes in U.S. history. The proposals from the presidential campaign, reiterated last week by President-elect Donald Trump’s choice for treasury secretary, will massively favor the top 1 percent of income earners, threaten explosive growth in federal debt, complicate the tax code and do little if anything to spur growth.

A core principle agreed to by all in 1986 was that tax reform would not reduce the tax burden on high-income taxpayers. Reagan achieved this objective while reducing top marginal rates because he raised capital-gains rates, scaled back investment incentives, increased corporate tax collections, curtailed shelters, and left estate and gift taxes alone. Unfortunately, neither the Trump plan, nor the one put forward by House Speaker Paul D. Ryan (R-Wis.), provides for nearly enough base-broadening to finance all the high-end tax-cutting they include.

Treasury secretary-designate Steven Mnuchin asserts there will be no absolute tax cut for the upper class because deductions would be scaled back. The rub is that totally eliminating all deductions (including charity, which has not been proposed and would be politically infeasible) for those with incomes over $1 million would not even raise enough revenue to cover reducing their marginal tax rates from 39 percent to 33 percent, let alone offset huge rate reductions on business and corporate income, revocation of the Affordable Care Act’s Medicare surtax and the elimination of estate and gift taxes.

That is why estimates of the Trump plan suggest that it will raise the average after-tax income of the 0.9 percent of the population with incomes greater than $1 million by 14?percent, or more than $215,000. This contrasts with proposed tax cuts for those in the middle of the income distribution of $1,000, or about 2 percent.

The repeal of estate and gift taxes is especially problematic because it would provide a window for the very rich to use gift and trust structures to ensure that their wealth passes without tax not just to their children but to their grandchildren and great-grandchildren, no matter what is done in subsequent legislation.

The Reagan tax reform simplified the code by eliminating the need for rules distinguishing ordinary and capital-gains income, because these were taxed at the same rate, and by doing away with industry-specific shelter provisions. In contrast, the Trump proposal creates sheltering opportunities by reducing to 15 percent the tax rate on any income that can be characterized as coming from an incorporated entity. Rather than reducing targeted subsidies, it would establish a highly dubious 82 percent credit – the highest in the world – for financial equity investments in infrastructure.

This all would mean not only disproportionate tax reductions for the upper-income group that has seen its incomes rise most rapidly over the past generation. It would also mean grave damage to federal budget projections. The Trump tax cut as currently envisioned is about the same size relative to the economy as the 1981 Reagan tax cut. It’s worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5 trillion over a decade) because of concerns about federal debt.

Today’s budget situation is much more worrisome than the one Reagan faced. The baseline involves much higher levels of debt and deficits. The economy was suffering from a deep recession then but approaches full employment now. If extreme tax cuts are legislated in the next months, uncertainty both about the federal budget and about further tax adjustments is likely to rise.

Finally, I can find no basis in either economic history or logic for Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2?percent rate to the historical 3 to 4 percent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it’s far from clear why tax reform will hugely spur productivity growth.