Redefining 'Winners and Losers' on Taxes

Redefining 'Winners and Losers' on Taxes
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Who wins and who loses when Congress passes, and President Trump signs, the most consequential tax reform in decades? This question in itself has spun out of control. With roots in the economic principle of Pareto efficiency – econ professors commonly use the jargon to think about very simplified models of many kinds of change – this narrative of “winners and losers” has taken over political journalism. It is flawed. It is inaccurate. And it cynically poisons our politics.

Federal budget expert Brian Riedl recently expressed frustration that “most tax reform coverage has been blatantly dishonest.” Take this CNN headline, which was “CBO: Senate GOP tax bill would hurt the poor” when Riedl first linked to it and has now been changed to “Poor Americans would lose billions under Senate GOP tax bill.” Note the key word, lose. As you might guess, the scary CNN headline does not represent the milder reality described in the text of the story: The Senate bill would end Obamacare’s mandate that people must purchase insurance or face a tax penalty. The Congressional Budget Office projects that without that penalty, 13 million people will use their own money for something other than a bloated insurance policy, and by doing so surrender the related Obamacare tax reimbursement – they choose rather than lose.

Media coverage of the tax bills floating around Congress is rarely that biased, but the narrative framing is the same. USA Today’s headline is “Winners and losers in the tax bill that passed the House.” Time magazine’s is “The Republican Tax Bill's Winners and Losers.” The Washington Post has at least two tax stories whose headlines use the same phrase: “Winners and Losers in the __ tax plan.” Every other outlet does the same: stories in the Wall Street Journal, The Hill, and on and on.

The first objection to this narrative angle is the question: Is the zero-sum burden game the only thing that matters about tax policy? Distributional analysis, as wonks call it, seems to be the only thing the media is talking about. The storyline presumes class warfare, or at least political favoritism. Neglected storylines would focus on economic growth, international competitiveness, wages and employment.

Instead, cable TV hosts tend to weaponize the winners-and-losers narrative, as George Stephanopoulos did in late September while interviewing Gary Cohn, head of the White House National Economic Council. Cohn emphasized cutting taxes for the “middle class.” It is worth noting that the top rate on highest-income taxpayers is not being lowered at all by Republicans, but Stephanopoulos badgered his guest: “You can’t guarantee that no middle-class family will get a tax increase.” Cohn tried to talk about the greater good, but the host was relentless in playing the gotcha guarantee question. We all know that Cohn cannot guarantee such a thing, which leads to our second objection.

The winners and losers narrative is by definition inaccurate because it ignores the dynamic world we really live in. Conservative economists have long lamented what is known as static scoring of tax reform, and nonpartisan academic economists have come around to this point of view as well. According to the static view, if government cut an excise tax on soda from 50 percent to 10 percent, its tax revenues of $50,000 would drop to $10,000. The dynamic view says that, no, a major tax cut will lower prices and lead to a higher equilibrium. More soda will sell, so the dynamic tax loss won’t be so severe. It’s not that tax cuts pay for themselves, rather that lower taxes increase growth. 

America is a dynamic country. A year from now, after tax reform passes, many unemployed people will be working again for the first time in a long time. Guess what? They will be paying higher taxes. Than zero. Putting people back to work does that.

Kevin Hassett, the president’s chief economist, explained in his first speech in that role that a dynamic analysis of the corporate tax reform reveals a lift to “GDP per capita by approximately 4 percent over the first year.” He also explained that when America lowers its 35 percent tax rate on corporations – the highest rate in the world – then global companies will stop shifting their profits overseas. Median households should see wage gains of $4,000 once those inequities are removed, Hassett estimates.

Tax reformers should not be cowed into playing the zero-sum game. The whole point of fundamental reform is to remove gross and morally indefensible special interest tax breaks that make up the bulk of the current system. For example, why should residents of New York get a federal tax deduction because of high state income taxes when Texas residents essentially get no federal deduction since Texas has no income tax? Why should the people of low-tax Ohio subsidize the people of high-tax California? A simpler code means more efficiency, more fairness, more equality, as a worthwhile tradeoff for the existing imbalance. Republicans cannot promise everyone will pay less, but they can promise that all Americans will be treated fairly.

The third objection to the winners-and-losers narrative is the time horizon. Consider the nerd-beautiful but flawed chart in this data-rich story in the New York Times. Writers Quoctrung Bui and Ben Casselman examined the dynamic effect of the Senate’s tax bill as they understood it on Nov. 28. Each dot represents a household, with income on the vertical axis, and the net tax change on the horizontal axis. The green dots are winners; red dots the proverbial losers. But many dots are missing: Where are the blue dots for those new workers who will be earning incomes next year?

The deeper problem with that kind of chart is the way it skews our thinking. You look at it and wonder, “Why can’t politicians make a tax code where every household gets to be a green dot?” Congress could do that. If income tax rates were simply cut to zero for everyone, we would all be winners. Right? Absent any consideration of the future, sure. The dominant narrative takes no account of future burdens of future taxes that will be required to pay for larger deficits. There are hidden losers in the narrative.

Democrats are sounding the deficit alarm, to be sure, and rather cynically. In her typical, understated way, House minority leader Nancy Pelosi described the Republican budget and tax plan in an Oct. 26 press conference as “an assault, a rip-off, a shakedown, a looting of the middle class” because it would increase the total debt by $1.5 trillion over 10 years. Nothing was said about the trillion-dollar annual deficits that happened when Barack Obama was in the White House and Democrats had majority control of the House and Senate. Nothing is ever said by Pelosi about the $82 trillion unfunded liabilities of entitlements. I will believe Democrats are serious about deficits when they support a balanced budget amendment.

Yes, deficits are a problem. So is slow growth. As much as I wish Washington would stop bankrupting my children’s future, I appreciate that tax reform is not where the debt will be fixed. The spending side of the federal ledger is what threatens us. Once upon a time, a moral constraint among legislators held spending in check, but it has washed away. Sadly, there is no statutory constraint. But because of the dominant winners vs. losers narrative, federal expenditures are an even bigger mess of special interests and faux outrage, placing reform beyond legislative reach.

To save the future, America needs a balanced budget amendment. But that is a fight for another day. Today, the fight is merely for faster economic growth, higher wages, and fairness. So yes, to make our nation competitive and make us all winners in the near term, Congress should pass Trump’s tax reform.

Tim Kane is the JP Conte Fellow in Immigration Studies at the Hoover Institution at Stanford University. His most recent book is “Total Volunteer Force.” He is a veteran Air Force intelligence officer.

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