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Commentary By Brian Riedl

Four Misleading Arguments Against the Tax-Reform Bills

Economics, Economics Tax & Budget, Tax & Budget

The legislation isn’t perfect, but its critics aren’t telling the truth.

The House and Senate tax-reform bills are open to legitimate criticism. The goal of deficit-neutrality is shattered by the $2 trillion price tag over a decade (adjusted for gimmicks). The goal of a stable, predictable tax code has been replaced with a mess of phase-ins, phase-outs, and expirations. The goal of tax simplification has taken a back seat to new tax provisions that are even more complicated than those eliminated. There is substantial room for improvement.

“The tax-reform bills are far from perfect. But many critics are blatantly misrepresenting them.”

Unfortunately, rather than offer these nuanced but justifiable criticisms, many critics are shouting outrageous and bogus claims. Here are four of the most popular.

1. “Middle-class tax hike.” Even before the tax bills were drafted as legislation, Senate Democrat cries of “middle-class tax hikes” earned a brutal “four pinocchio” condemnation from the Washington Post fact-checker.

Yet this talking point has expanded to the point that a plurality of Americans polled now believe their taxes will rise.

Nonsense. A Tax Policy Center analysis of the Senate bill reveals that three-quarters of all families would get a tax cut. Just 12 percent would see a tax increase — and they are concentrated among the rich. The average middle-income family would receive a tax cut of approximately $850 per year through 2025.

At that point, Congress would have to vote to extend most of the family tax cuts. This vote would probably be a formality, as a similar vote five years ago to extend the Bush tax cuts for middle-class families passed the Senate 89–8. There is no appetite in Congress to steeply raise middle-class taxes.

Even in the worst-case scenario, where the cuts fully expire, the typical middle-income family would receive a cumulative $7,000 tax cut in the early years, followed by a (roughly) $100 annual tax increase later. Still a good deal.

How do critics portray this as a middle-class tax hike? By simply ignoring the $7,000 tax cut in the early years, assuming a full expiration after 2025, and then implying that the later tax hike is much larger. That is flat-out dishonest.

2. Health-care tax hike.” The Senate bill would repeal Obamacare’s individual mandate to buy health insurance. Those who withdrew from Obamacare’s expenses would no longer need an Obamacare reimbursement payment. Yet CNN and other critics bizarrely classify the forgone reimbursement as a tax hike — even though it creates no new tax liability at all. By that twisted logic, an employee who happily accepted an offer to stop traveling as part of her job would be suffering from a mean-spirited “pay cut” because she would no longer receive travel-reimbursement payments.

In fact, ending the individual mandate would cut taxes for the 6.5 million people who have been paying the annual tax for non-compliance.

3. “Tax cuts tilted toward the rich.” Even a proportional tax cut will save wealthier families more money. In 2013 (the latest year for which data are available), the typical family in the top 1 percent paid $420,000 in federal income taxes. The top 20 percent averaged $47,000, and the typical middle-income family paid $2,000. The bottom 40 percent collectively paid zero income tax. It is not easy to give the largest income-tax cuts to those who already pay no income tax.

That said, the Senate bill would make the tax code even more progressive. The bottom 80 percent of families currently pay 33 percent of all combined federal taxes, yet would get 37 percent of the tax cuts. By contrast, the top 1 percent currently pays 27 percent of all federal taxes but would get just 18 percent of the tax cuts. The result would be wealthy families paying a larger portion of the federal tax burden.

4. “Blows up the deficit.” Yes, it is legitimate to oppose these tax cuts because they would expand the projected ten-year budget deficit from $10 trillion to $12 trillion. But overheated critics are portraying this $2 trillion cost as the difference between fiscal solvency and a deficit-induced collapse. In reality, deficits will continue rising steeply with or without these tax cuts.

Additionally, the sudden deficit obsession of many on the left seems a bit disingenuous. If $2 trillion in tax cuts is unaffordable, then what about the $5 trillion in new deficit legislation signed by President Obama? Where are the liberal deficit concerns over Senator Bernie Sanders’s $30 trillion single-payer health plan (only half of which is paid for)? And when Republicans proposed addressing the staggering $82 trillion deficit projected for Social Security and Medicare over the next 30 years, where was the liberal proposal to bring these programs into solvency? There was none. Just a vicious ad portraying a Paul Ryan lookalike murdering a senior citizen.

Critics who are unwilling to confront these mammoth spending deficits are in no position to lecture others on the deficit implications of a (comparatively modest) $2 trillion tax cut.

The tax-reform bills are far from perfect. But many critics are blatantly misrepresenting them. Voters should dismiss the four misleading arguments described above and seek out better information about the bills.

This piece originally appeared on National Review Online


Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here

This piece originally appeared in National Review Online