Dec 3, 2017 5 min read

I have been critical of the Republican plans for tax reform, because they are not really reforms as much as they are tax cuts for the rich. But there is a need for tax reform. The primary problem is that taxes are too complicated, which makes it expensive, difficult and frustrating to comply, and provides opportunities for people to abuse the system.

But when the economy has had more than eight years of economic growth, unemployment is under 4 percent, essentially what economists consider full employment, and we have an annual deficits of more than half-a-trillion dollars, and a total debt of more than $20 trillion, reforming the tax system should not increase the deficit. And when economic inequality is at a level not seen since just before the Great Depression, tax reform should not shower most of the tax savings onto the rich, as the Republican plans do.

Republicans claim a high corporate tax rate puts our multinational corporations at a disadvantage on the world stage, and encourages them to move overseas. This is an area where tax reform is appropriate; cutting the corporate rate to 20 percent from 35 percent would put the nominal rate in line with the actual rate most companies pay, so it would be revenue neutral if the loopholes were closed. One obvious loophole is allowing corporations to avoid paying taxes on overseas profits until they are repatriated. Forcing companies to pay U.S. taxes would eliminate the incentive for creating offshore entities and using accounting tricks to allocate profits overseas.

Other corporate tax reforms could include letting corporations expense investments immediately instead of depreciating them over years, but not allow corporations to consider interest payments as an expense to eliminate the tax advantage corporations get from using borrowing instead of equity, which fueled a lot of leveraged buyouts that bankrupted many otherwise healthy companies. These reforms would encourage investment and growth, without hurting government revenues, since the loss of government revenue in the first case would be offset by the growth of revenue in the second.

One argument against even having a corporate tax is that it is “double taxation,” since the corporations’ profits are taxed, and then once those profits are distributed as dividends, the shareholders have to include them in their income that is also taxed. Since the corporate tax rate is being reduced, now would be an appropriate time to eliminate the different rate individuals pay on dividends and capital gains. This reform is another conservative idea that was put into practice by the bipartisan tax reforms President Reagan implemented in 1986, but was gradually lost as periodically Republicans pushed to “encourage investment” by reducing the tax on capital gains. The government should not encourage one type of income over another, but tax all income equally, which simplifies tax returns and discourages people from converting one type of income into another for tax purposes.

If the Republicans want to aim this tax reform at the middle class, they could simply reduce the rates paid on middle-class income. While this might seem like it is neglecting the wealthy, one must remember that for people making higher incomes, they already would benefit more than anyone else, since all of their income in these lower categories would be taxed at the new lower rate. In other words, instead of being neglected, they would save more than anyone else.

Additional revenues, the proceeds of which could be used to pay for the tax cuts to low- and middle-income taxpayers, could be raised by the implementation of two additional taxes. First, a carbon tax to provide market incentives to encourage people to move away from carbon-based fuel sources that contribute to the costs of global climate change. The second would be a financial transaction tax, which would recoup from Wall Street some money to pay for the costs of the financial meltdown.

Another significant change would be to transforming the deductibility of local and state income taxes, as well as the deductibility of mortgage interest, into a refundable tax credit. So, instead of a system that encourages borrowing and provides more financial assistance the wealthier you are, it simply provides the same level of assistance to every head of household, including renters. This would eliminate the distortion of the real estate market created by current tax policy, which subsidizes spending in wealthy communities while providing little help to less wealthy taxpayers. Moving this assistance from the wealthy to the middle class would help them afford to invest in more moderately priced communities, and at the same time reduce the inflated values of the wealthiest communities. This could be phased in over a few years, to give markets time to adjust.

Finally, to really simplify most tax returns, the government could calculate most wage earners taxes for them, and simply issue refunds. The government could also provide software to help taxpayers with more complicated returns.

The time is right for tax reform. Simplification would make the tax code more efficient, using refundable tax credits instead of deductions would reduce the bias that benefits the wealthy, and a true middle-class tax cut would just cut rates paid on middle-class income, not be a distraction while most of the benefits accrue to the rich.