President Trump and congressional Republicans have been all over the news – from Hurricane Harvey relief bills that raise the debt ceiling to the reform of the Affordable Care Act. But among all the news, the most poignant and lasting is the Republican tax reform plan.
Recently, the Senate Budget Committee agreed on a target of $1.5 trillion in tax relief over the next ten years. At first glance, it seems like a simple strategy to reduce corporate taxes, remove the estate tax, eliminate industry-specific tax breaks, and overall increase the amount of money saved by taxpayers. However, Republicans need to be careful to not fall into critics’ arguments.
Some of the tax reformers have suggested reviving ideas from former House Ways and Means Committee Chairman Dave Camp’s 2014 tax proposal. The Michigan Republican’s proposal shares several similar stipulations to the current tax reform plan, including almost identical tax reductions for businesses and individuals. However, it also has several disguised provisions that are anti-conservative and, in general, uneconomic that Congress should kill.
How can a tax reform be fair if you reduce taxes in one place, but increase them somewhere else? The Camp tax proposal doesn’t change anything but the rules, and that is a huge problem.
These net-zero positive rules sit among effective tax cuts and tax reform. When reading Camp’s plan, two particular net-zero rules pop up: an ad tax and 401(k) “reform.”
The Dave Camp ad tax is a proposal that would only permit businesses to deduct half of their advertising expenses each accounting season. The rest of the expenditures would be amortized over the course of a decade.
In the simplest of accounting terms, according to GAAP (generally acceptable accounting principles), expenses are supposed to be deducted from a business’s net income before taxation.
Even beyond that, this new ad tax would have a sourly adverse effect. Not only would large firms be less willing to buy advertising, but start-ups and small businesses would spend far less or nothing at all on it. This problem is especially troubling given that only 20 percent of new businesses survive after their first year. When considering how important advertising spending is to success and how little revenue start-ups have in their vaults when first getting off the ground, it is clear that this change in deductibility will artificially push that statistic even lower.
If Congress adopts Camp’s ad tax, the body would essentially be picking winners and losers: the winner being the federal bank and the losers being any business that advertises, especially smaller ones. Simply put, the tax is antithetical to the free market and contradictory to conservative economics.
On the side of reform, Dave Camp’s 401(k) proposal, which some in Congress are reportedly reviewing, is also bad news. Unlike the ad tax, it does not change any existing rates of taxes. However, this provision would change exactly when the taxation would occur.
Currently, a 401(k) is not taxable until one begins pulling funds for retirement. But the new proposal would alter this policy, making the depositing of contributions subjected to taxation instead. The plan aims to raise nearly $144 billion within a decade by allowing the government to collect now rather than later.
At first glance, the policy seems harmless since the tax dollars are the same quantity. However, it ignores the long-term implications. Instead of solving the “supposed” budget deficit, it simply defers costs to the future. The government may be making more money now, but in the long-term, they won’t have any taxable 401(k)’s since withdrawing money would no longer be taxable. So, in effect, Congress would be pushing the revenue problem further into the future, instead of creating a structure to promote stability.
The current conservative tax blueprint harrows well-founded economic policy, but implementing certain provisions from the Camp bill can potentially impede the otherwise positive effects of reform.
Republicans can help the economy if they recognize that success cannot occur without failure. Good tax reform understands this principle.
In politics, there is no such thing as perfect. You can’t learn to ride a bike if you aren’t willing to fail.
Policies that try to stop failure may prevent the immediate day of reckoning, but inevitably they will create more problems in the long-term. Instead of being so fixated on short-term battles, conservatives need to focus on the effects of policy on future. Economists like Friedrich Hayek, Claude-Frédéric Bastiat, Murray Rothbard, and even John Maynard Keynes, speak to this principle. Why shouldn’t tax reform?
The current tax reform blueprint has the potential to create an economy free from the duress of an unpredictable and overreaching government. Let’s keep it that way.