David Herbst makes a heartfelt plea in a recent opinion piece for reforming the tax code. Unfortunately, sincerity is no substitute for accuracy.
Herbst is Montana director of Americans for Prosperity, and his evidence appears to rely on a nine-page report issued in July by a deputy director of AFP and an analyst for Freedom Partners. Both groups are funded by the Koch Brothers, conservative activists who must have been delighted to find they could get the results they wanted if they were willing to pay for them.
A few minutes spent reading the AFP report exposes the rigor that went into its production. Serious reports about the federal tax system are full of qualifiers and caveats; AFP allows for no such pussyfooting. Its evidence is highly selective and quite misleading.
Herbst opens his column with a “history lesson” that consists of just two factual assertions purporting to demonstrate that “cutting taxes creates jobs and puts more money in your pocket.” The first is that tax cuts under President John F. Kennedy in the 1960s created 9.3 million jobs. The second is that tax cuts under President Ronald Reagan in 1981 raised per capita disposable income by $2,715.
The AFP report provides a crucial detail that Herbst omits: Both statistics cover the first five years after the cuts were enacted. That means the Kennedy tax cuts basically matched the length of the Johnson administration, when job growth on an annual percentage basis was 3.9 percent, the highest in the post-World War II era.
But that growth vanished when Johnson left office. Job growth didn’t hit 3 percent a year again until the Carter administration, and it hasn’t hit 3 percent since, despite dramatic tax cuts under Reagan. The closest it came was under President Bill Clinton, following a pair of tax increases.
The wage picture is even less persuasive. Reagan was elected in 1980. From 1979 to 2013, wages for the top 1 percent of income earners grew 138 percent. Wages for the bottom 90 percent grew just 15 percent.
Indeed, a 2012 report by the nonpartisan Congressional Research Service found no clear relationship between cutting top tax rates and economic growth. “However,” the report found, “the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” After Senate Republicans complained, the CRS withdrew the report.
A 2014 report by the Brookings Institution found no relationship between taxes and growth rates. From 1870 to 1912, the report notes, federal tax revenues were just 3 percent of Gross Domestic Product, and GDP per capita grew at a rate of 2.2 percent a year. In 1913, the Constitution was amended to allow a federal income tax, and that was followed in short order by two world wars, the Great Depression, and the whole vast expansion of the welfare state. From 1947 to 1999, the highest marginal income tax rate averaged 66 percent, federal revenues averaged 18 percent of GDP – and annual GDP growth was 2.2 percent a year.
Carefully designed tax cuts can increase revenues, the Brookings Institution found, but only if they are accompanied by spending cuts, and only if those spending cuts target expenses that don’t contribute to growth. AFP’s blunderbuss approach doesn’t seem to qualify.
Worse than Herbst’s analysis are his AFP-endorsed solutions. First, he wants to “eliminate the unfair special favors and handouts that rig the economy in favor of the powerful and well-connected.”
Pretty hard to argue with that. Tax deductions and exemptions are called “tax expenditures,” and a 2012 Congressional Research Service report found more than 200 of them in the tax code. Lots of flab there.
But just 20 tax expenditures account for nearly 90 percent of the revenues, and some of those expenditures are quite popular with people who aren’t powerful or well-connected – the mortgage interest and property tax deductions, for example.
Suppose you have two childless couples each earning $50,000 a year. They should pay the same taxes, right? But suppose one of them is hit one year by a crippling $25,000 medical bill. Think they should get a tax break? You have just endorsed a tax expenditure.
Herbst also favors a cut in what he calls the highest corporate tax rate in the industrialized world. He probably knows, but fails to mention, that various tax provisions reduce the rate for most corporations enough to greatly lower what they actually pay, and many corporations pay no taxes at all.
Finally, Herbst wants to reduce the number of income brackets, a change that would mean almost nothing to the average taxpayer. Those of us who insist on filling out our own returns know that the hard part of paying taxes is figuring out income and itemizing deductions. Once that work is done, we get the actual tax from a tax table. Even if there were a hundred tax brackets, our work would be no harder.
As one professor of law and business put it, “The number of brackets has an almost imperceptible effect on the complexity of tax law as it is lived by the individual taxpayer. … The call for fewer tax brackets in every case has as its real motive lowering the tax burden on the highest-income Americans, not making life simpler for the middle class.”
The fact is, taxes are complicated because the world is complicated. One effort to cut through the clutter is the alternative minimum tax, which ensures that the richest Americans have to pay some reasonable tax no matter how many loopholes their lobbyists and tax attorneys find. You may have noticed that one rich American, President Trump, wants to get rid of that tax.
In reality, paying taxes has gotten easier, not harder, for most people. Most tax forms can now be downloaded in seconds from a home computer – no last-minute scurrying to the post office hoping to find a Schedule E. Cheap calculators and spreadsheets have eased the math pain. Expanded personal exemptions have reduced the need to itemize. For the millions of Americans who can file Form 1040-EZ, Herbst’s dream of being able to pay taxes on a form the size of a postcard is nearing reality.
If Herbst really wants meaningful reform, he should instead tackle Montana’s income tax. Not only are Montana taxpayers required to reproduce much of their federal data on the Montana form, they must work through a laundry list of tax credits, deductions and exemptions. Many taxpayers who don’t have to itemize their federal taxes have to itemize for Montana.
Moreover, married couples really ought to figure their Montana taxes twice because rates may be lower for those who file separately.
If Herbst wants to take on that nightmare, I’m on board. Otherwise, he’s just asking us to join him up on that Big Rock Candy Mountain, where they hung the jerk that invented work.