View all Articles
Commentary By Brian Riedl

The Tax Bill Isn't Armageddon

Economics, Economics Tax & Budget, Tax & Budget

Liberals need to stop acting like tax cuts are the end of the world.

Apocalyptic critics of Republican tax reforms have adopted the old legal adage that "If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If you have neither on your side, pound the table."

And the table has been pounded into sawdust. Major national newspapers have run op-eds with titles like "Republicans' Tax Lies Show the Rot Spreads Wide and Runs Deep," "I'm a Depression Historian. The GOP Tax Bill is Straight Out of 1929" and "Apparently Republicans Want to Kick the Middle Class in the Face."

Not to be outdone, House Democratic leader Nancy Pelosi called the Senate tax bill "the end of the world," "Armageddon," and "stiff competition … [for the] the worst bill in the history of the United States Congress." This puts the Fugitive Slave Act in an interesting context. What tax provisions could possibly rival the 1830 Indian Removal Act, 1798 Alien and Sedition Acts, and 1942 legislation that helped establish Japanese internment camps?

“The bill would bring additional business investment, wage gains and economic growth. ”

Well, as P.J. O'Rourke once quipped, "people risk having their taxes slashed in broad daylight."

More specifically, the Senate tax bill would merely trim federal tax revenues from 18.2 to 17.6 percent of GDP over the next decade – still above the 17.4 percent average of the past few decades.

It would save the typical median-income family $7,000 over the decade – and even more if Congress (as expected) votes to continue the individual tax cuts beyond 2025.

The Senate bill would make federal taxes slightly more progressive. The bottom 80 percent of families currently pay 33 percent of all combined federal taxes, yet would get 37 percentof 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. Thus, the share of total federal taxes paid by the wealthy would rise.

It would set the United States corporate tax rate at 20 percent (24 percent when including typical state taxes) – matching the 24 percent average rate of our trading partners. Territorial taxation of multinational companies would also align the U.S. with the rest of the developed world.

The bill would bring additional business investment, wage gains and economic growth. Economists and Congressional scorekeepers debate the size of these improvements, yet most agree there would be some broad-based economic benefit.

It would restore the freedom to choose whether to participate in Obamacare.

Finally, tax reform would hike the 10-year budget deficit from $10 trillion to $11.5 trillion. If fully extended, it would push the projected 30-year budget deficit up from $78 trillion to perhaps $85 trillion.

These reforms are not particularly bold. They do not replace the current tax code with a flat tax or national sales tax. They do not eliminate the major tax preferences for employer-provided health care, retirement saving, charitable giving or mortgage interest (the last one may be slightly reduced). They do not undo the tax progressivity that Democratic lawmakers have spent decades building.

Critics have slammed the corporate tax cuts. However, even Barack Obama and Bill Clintonhave called for lower corporate tax rates in order to compete globally. Since 2000, 33 of the 35 OECD countries have cut their corporate tax rates from an average of 32 percent to 24 percent. The only exceptions have been Chile (which already had a low rate), and the United States, which stubbornly clings to its exorbitant 39 percent combined rate.

Senate Finance Committee ranking Democrat Ron Wyden of Oregon has led the fight against the Republican corporate and estate tax cuts. Yet he proposed legislation cutting corporate taxes by hundreds of billions of dollars earlier this decade. And while Wyden now says that "repealing the estate tax abandons progressivity," last decade he told voters that "The estate tax is anti-worker, anti-environment, and anti-Oregon, and it is time for it to go."

“Critics have slammed the corporate tax cuts. However, even Barack Obama and Bill Clinton have called for lower corporate tax rates in order to compete globally. ”

Even tax reform's $1.5 trillion cost – a legitimate reason for opposition – is dwarfed by the $5 trillion cost of all legislation signed by President Barack Obama and the $32 trillionsingle-payer health proposal that many Democrats have championed.

The point here is not to play "gotcha," but rather to emphasize the modesty and mainstream consensus of the GOP approach (even if the White House exaggerates that it would pay for itself). Middle-class tax cuts, increased progressivity, estate tax reform and a modernized corporate tax system that better matches our trading partners were – until recently – bipartisan goals.

The legislation has its flaws. It has been written too quickly and sloppily, the small business tax cuts are ripe for abuse and the $1.5 trillion cost should be minimized given the budget deficits.

The bill makes progress on numerous on several long-held bipartisan tax priorities, yet adds roughly 10 percent to long-term deficits. Good or bad, its a long way from "Armageddon."

This piece originally appeared in U.S. News & World Report


Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here

This piece originally appeared in U.S. News and World Report