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The proposed GOP tax bill is not what it seems. First of all, pay no attention to the media discussion of who gains and who loses—as they use naive models where stockholders are assumed to bear the burden of a corporate income tax, and the person who writes the check to the IRS is assumed to bear the burden of the personal income tax. In the long run, markets adjust to tax changes and largely offset any distributional impacts.

Also pay no attention to the fact that taxes are supposedly being “cut”. The GOP has no intention of cutting spending, and one way or another society must pay for all of that spending. Money doesn’t simply grow on trees. Yes, the “starve the beast” theory might have some validity, but most likely the Dems will largely offset any tax cuts with higher future taxes. And meanwhile the larger budget deficits will be a drag on investment.

There is only one issue worth paying attention to—efficiency. Do these changes make the tax system more efficient? The initial proposal seemed positive on that score, but I’m seeing worrisome signs of backtracking:

Late Thursday, the chatter in the Capitol was that Republicans may adjust the repeal of the alternative minimum tax, which ensures that certain individuals pay a baseline tax if they have high deductions, to pay for Corker’s demands. That would cause problems in the House, where Republicans have touted the repeal of the AMT as a significant feature of their tax plan.

It’s not just a significant feature, I’d say the repeal of the AMT and the dramatic reduction in itemized deductions are pretty much all that is worth fighting for, at least on the personal income tax side. Backtracking on this would be a huge defeat, leaving our horrendously complex tax system largely unreformed. This is a real test for the GOP. Our health system is called “Obamacare”; after this bill passes our income tax system should be called the “Republitax”.

Congress has no idea how much damage it does by adding tax complexity. That’s why I still believe the best solution would be the complete abolition of the personal income tax.

PS. Yes, I’m aware that most people are not affected by the AMT, although any statistics you see in the media will be complete lies. The number is far higher than the media reports. (Just as the 39.6% top rate is a complete lie.) But the income tax system imposes complexity in a wide variety of ways, such as its interaction with the health care system. We are all much worse off because of this monstrosity.

PPS. There is also talk of sunsetting the tax cuts after 6 years. That’s like “reverse Keynesianism”. Implementing lower taxes during boom years and higher taxes during recessions.

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This entry was posted on December 01st, 2017 and is filed under Supply-side economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



