Republican House leaders portray their $5.5 trillion tax cut as middle-class tax relief. Nonpartisan tax experts, including Congress’s own Joint Committee on Taxation, conclude though that the greatest share of the tax cuts go to corporations, the ultra-wealthy and their heirs, while many in the middle class will see taxes rise over time.
The majority party in Congress plans to pay for some of this by cutting hundreds of billions from Medicaid, which provides health care to poor children and their caretakers, as well as nursing home care for our elderly who have spent their resources, from Medicare, and by cuts to other domestic programs, including the USDA.
All this will heavily impact South Dakotans, leave millions nationally without health coverage, and shift costs the federal government now bears to state and local taxpayers.
But these painful measures still won’t be enough to pay for the massive tax cuts for corporations and the very well-off. So these cuts will also cause our national debt to soar another $1.5 trillion to $2.3 trillion and likely slow rather than spur economic growth.
This is trickle-down economics, which as one economist said “is like loading a horse with oats in order to feed the sparrows.”
Proponents justify this by claiming that corporate tax rates are too high, but the truth is that corporate taxes have declined by half as a percentage of our economy over the past 50 years. While the sticker price is 35 percent, the average rate corporations pay is closer to 20 percent.
The best evidence that large corporations are prospering is that their profits and the stock market have been hitting all-time highs for years now.
And as for our highest income earners, they already enjoy relatively low taxes by historic measures and over time have gained a bevy of tax loopholes only they can access. This is why we routinely hear stories of billionaires who pay effective tax rates lower than secretaries or farmers.
Meanwhile, wages among the middle and lower middle class have stagnated despite massive worker productivity gains. These facts help explain why 1 percent percent of Americans control 90 percent of our wealth, and why one in three American children grows up poor.
The truth is that ultra-wealthy and giant corporations don’t need a tax break, and we can’t afford to give them one. America has a national debt of $20 trillion and counting. Just as a family cannot continue to spend more than it takes in, neither can a nation do so without finally reaching a day of reckoning.
So, how should we approach tax reform? First, we should enact revenue-neutral corporate tax reform that lowers rates and closes loopholes, allowing repatriation of money held overseas.
Second, we should close loopholes only the well-off can access and apply the savings to a tax cut for those who need it and will actually spend it to stimulate the economy: the middle class and small business families who create about two in three American jobs.
We can also help low- and middle-income families by converting the mortgage interest deduction to a credit, so a homeowner receives back 15 percent of mortgage interest paid, allowing those who don’t itemize to also benefit. And instead of eliminating the personal exemption for each family member, as the bills propose, we should restore the exemption to its former value by increasing it from the current $4,050 to $6,000, and we should help low-income working moms and dads by increasing the child-care credit. These are each pro-family measures that will help the middle class and spur the economy.
Finally, we can help small businesses and farmers level out their taxes by instituting my proposed “Rainy Day IRA” plan, which would allow them to set aside up to $50,000 annually from taxable income to be invested tax-deferred until needed in a low-income year.
This bill is less about sound policy than it is about giving the party in office and their major donors a legislative victory. The last tax overhaul — enacted during the Reagan administration — passed with bipartisan support. That kind of bipartisan approach is missing so far and it is sorely needed to enact the sort of sound tax policy that will stand the test of time.