The House Republicans unveiled a new tax plan today. At first glance, I thought the plan was decent. At second glance, I thought the tax structures proposed were not bad. But when I looked the third time, I felt that this tax plan, though looks good at a couple of places, is not the plan that is needed for the 21st century.
While the reduction in the number of income brackets, capping mortgage interest rate deduction at $500,000, capping property tax deduction at $10,000, doubling the standard deduction, increase in the child tax credit - are all very welcome steps in the plan, the overall plan itself fails to put more money in the hands of lower and middle-income people.
I have a fundamental disagreement in the concept behind which this plan seems to have been devised. This tax plan clearly is built around the principles of supply-side economics. While I have nothing against supply-side economics in particular, that is not where the problems of today’s slow growth in middle-income citizens lie.
The problem, from the time of the Great Recession in 2008, has been clearly on the demand side. So to address a problem that has to do with low national (even global) aggregate demand, a tax plan based on the principle of demand-side economics should have been followed.
Yes, demand has picked up a lot from the years immediately after the Great Recession. But the wage growth has been very meager. Why so? Economists are still breaking their heads on this, and there are very many factors for this, some local and some global, but in my opinion, there is undoubtedly a critical factor: pace of demand growth.
The pace of demand growth has been moderate at best. That moderate pace has prevented companies from aggressive investments, especially on the labor side. Now couple this with companies coming out of over-production in the past years, along with a commodity bust period. Yes, the global labor pool has gone up, which is another critical factor in slow wage growth in advanced economies, but the best way to address that, slow pace of demand growth and wage growth sluggishness is by directly putting more cash in the hands of the poor and middle-income people. And that is best done by revamping the tax structure around the principles of demand-side economics rather than supply-side, which the current proposal seems to be based of.
Now what do I mean by all this as it relates to the current proposal? Well, to begin with, I am not in favor of cutting the corporate tax rate to 20% from the current 35%. My friends have been very persuasive in trying to make me understand the positive effects of cutting the corporate tax rate. Among other things, they say that this would increase the “global competitiveness” of American companies, but I am not persuaded. I am yet to see any evidence of American companies not being globally competitive because they have a higher statutory corporate tax (keep in mind: the effective federal tax rate for corporations, after various deductions and loopholes, is not anywhere near 35%. It’s much less than that.) I would instead prefer to expand the earned-income-tax-credit option that would put cash directly in the hands of lower-income people. And whenever you put more cash in the pockets of poor and middle-income people, they tend to spend a big chunk of it, if not all, that goes directly into small, medium and large companies’ revenue buckets. Rather than a trickle-down, this will be a trickle-up economic model, which is what is needed in the 21st century’s globalized world.
Other than that, I have mixed feelings about the estate tax, so let me put it aside from commenting for now. But I am not glad to see the deductions go away for medical expenses, people over 65, or people who retired on disability. That doesn’t make much sense to me. Also, I am surprised that the tax plan proposal doesn’t address the carried-interest loophole that hedge funds have been using to pay so little in taxes than an average middle-income worker - as a percentage on their respective incomes. The tax plan proposal also doesn’t seem to touch capital gains tax at all - which I think is a mistake, as capital gains tax needs to be reformed to better suit the 21st century investment practices.
To conclude: at a glance, it looks some good, some bad, but at a closer look, overall, the principle behind the plan is flawed. A different road needs to be taken to reach the desired destination smoothly.