Not Tax Reform
The misleadingly-named Tax Cuts and Jobs Act of 2017 is law, but it is not tax reform. Whatever it means for various taxpayers and corporations remains to be worked out. As one writer put it:
Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge … On the “plus” side, though, at least ongoing tax complexity means there will continue to be value for tax planning advice?
What it means for the US economy is equally murky.
Merriam-Webster defines “reform” as
a: to put or change into an improved form or condition
b: to amend or improve by change of form or removal of faults or abuses
This law isn’t tax reform: The law tweaks the existing mess to deliver benefits to some and penalties to others, but it remains the same old mess.
This is the first in a series of posts discussing real tax reform. Enacting real tax reform would be enormously difficult. It is not even clear what the goals to be achieved should be, much less the details.
The first question to ask is what are the purposes of taxing.
The most important reason is to fund public services. These range from defense and police protection, to public education, infrastructure, justice system, health care, and much more. We have a wide range of views in the country about what public services should be provided, ranging from the Libertarian view that little beyond national defense should be publicly funded to the Democratic Socialist view that most human services should be publicly funded. Regardless of one’s position on this spectrum, some amount of public funding is necessary, the amount and nature being a separate discussion from the system of taxation.
Taxes can be used to encourage or discourage economic behaviors. Here are some examples of behaviors our current tax system encourages: Home ownership; investing in the stock market; adopting certain renewable energy technologies; donating to charities; high-income people owning art and collectibles; and saving for retirement. Here are some examples of behaviors that our tax system discourages: Being a high-income married couple with both spouses earning similar wages; being a wage earner as opposed to earning through investments; and smoking cigarettes or drinking alcohol.
Taxes can also be used to alter the balance of economic power. In some cases, this is a stated goal: The estate (or inheritance) tax is often discussed explicitly as a way to reduce creation of multi-generational family dynasties. In other cases, the effect may be clear but the intention not: Advocates don’t justify preferred treatment of capital gains by saying that they want to increase the economic power of investors compared to wage earners, but that is one of its effects.
Here are some questions to think and write about in comments:
- Are these the most important purposes for taxing? Are there other important purposes?
- People who object to higher tax rates for wealthier people sometimes use the phrase “wealth redistribution” as a pejorative, so it has become a politically-charged phrase. That’s why I’ve used the phrase “alter the balance of economic power”. Does that help or obscure?
Of course, other comments are welcome.
Here’s what I’m thinking now:
- What are the characteristics we should want in a “good” tax system?
- How does our current tax system stack up against these characteristics?
These topics are complex and will take multiple blog posts to discuss.