Tax Reform Should Focus on Tax Breaks, Not Tax Rates

Since the Unified Framework Tax (UFT) Plan proposal supposedly unifies all Republicans, I feel justified in addressing myself directly to you, Republicans. (I’ll discuss where the pain may lie in this plan in another piece.)

The UFT is a huge gamble that stands to be with us for a long time if implemented. If it doesn’t create the growth you expect long term (as most economists indicate it won’t), all that you will have managed to do is create a gargantuan deficit that will ultimately defeat your stated purpose, which is to bring more work to every American. The interest on the debt would be so large as to stifle every other sensible investment activity we need to do in the future. And let’s be honest, the eventual success of this tax plan will depend on eliminating most of the exemptions, deductions, and tax breaks that a horde of lobbyists are gearing up to defend.

Let me quote one of your respected senators, Bob Corker of Tennessee, on Oct. 1st: “I do know that it takes $4 trillion of loophole closing to execute what they want to execute. I’m all for the most draconian loophole closing that can possibly take place, but I haven’t seen Congress do these sort of things.”

Nobody has.

You may mean well, you may venerate jobs, you may want to make us more competitive while stimulating innovation. But if you want to succeed in this gambit, you have to drastically change our tax code, increasing taxes for some people who have benefited from unfair tax breaks for years. This may overwhelmingly include one-percenters, of which I am a member, even though we often complain that we pay enough. But this is not a good excuse, because the well-being of the country is at stake more than ever. Besides, we have benefitted enough from tax breaks over the last fifteen years.

New data from the Statistics of Income (SOI) Division of the IRS (Tax Policy Center, James R. Nunns, March 15, 2017) illustrate that every time tax rates were reduced from 2001-2014, their graduation were supposed to result in average income tax rates that increased with income. This was not the case. The very top earners, the 0.1 percenters, precisely those who have the most wherewithal to lobby to maintain the “draconian loopholes” that Senator Corker is talking about, benefitted from rate reduction more than anyone else.

It’s not rocket science to understand how this happens. The 0.1 percenters, on average, make more than half of their income from capital gains and qualified dividends (52.6%), according recorded data by the SOI.

The more you invest in Wall Street, the more your effective tax rate will decrease.

By the same reasoning, the 0.9 percenters, the rest of the 1% who on average invest less than the 0.1 percenters are able to, or only 22.6%, will also see their effective tax rates decrease, yes, but less, because they have less money invested at preferential tax rates. To be clear, it is only the effective rate that determines the amount you pay in taxes. The fact that this investment income is taxed at lower rates than ordinary income has to be out in the open when you revise the tax code. Otherwise, you are just pulling the wool over the eyes of Main Street.

This tax plan may have provisions in it that are intended to help the middle class, but the fact is that independent, nonpartisan groups have indicated that the top 1% will receive around 80% of total cuts from this plan and the top 0.1 percenters will, in fact, get nearly twice as much money as the bottom 99% combined. This isn’t a foregone conclusion though – by eliminating loopholes and honestly facing the lower capital gains and dividends rates you can create real reform.

More importantly, if you face these issues openly you’ll have the majority of the country behind you and you’ll have a better chance of getting rid of those “draconian loopholes”— like the carried interest loophole that President Trump famously wanted to eliminate…

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