01 Jan 2018

Sincere Question on Tax Reform

Economics 4 Comments

I have seen several good economists praising the increase in the standard deduction in the tax package. Now to be clear, even though these are free-market guys, they are *not* simply arguing from the position of, “This reduces theft.” (Indeed, at least two of them are scandalized that employers can still deduct health insurance premiums for their employees.)

So in that context, I’m a bit confused. When I try to explain the basic logic of “flattening the tax code” from a supply-side perspective, I’ll say something like:

“Assume the typical household makes $100,000 in gross income. Under Tax Code A, the household takes $50,000 worth of deductions and pays a marginal tax rate of 40%. Under Tax Code B, the household gets $0 of deductions and pay a marginal tax rate of 20%. With static analysis, the two codes are identical. Yet supply-side economists would say that on efficiency grounds, Tax Code B is clearly preferable. The only reason you might opt for Tax Code A is that some households would make less than $100,000 and you want to build in progressivity, at the expense of muting incentives to generate income among the most productive.”

Am I right in thinking the above is how a supply-side-friendly economist would think? If so, wouldn’t the Republican plan–which doubles the standard deduction while giving piddly rate reductions (on the personal income tax brackets) be the opposite of “reform”?

I am guessing that this is a “second-best” type of argument, where given the existence of a bunch of other itemized deductions that will be politically difficult to eliminate, boosting the standard deduction at least minimizes the “picking winners and losers” element of the tax code (as well as paying CPAs to hunt for deductions). So is that the resolution of this apparent contradiction, or am I totally missing something?

4 Responses to “Sincere Question on Tax Reform”

  1. Ben Eng says:
  2. David R Henderson says:

    “I am guessing that this is a “second-best” type of argument, where given the existence of a bunch of other itemized deductions that will be politically difficult to eliminate, boosting the standard deduction at least minimizes the “picking winners and losers” element of the tax code (as well as paying CPAs to hunt for deductions). So is that the resolution of this apparent contradiction, or am I totally missing something?”

    That’s most of the resolution. The other part is that, I believe, the deduction for just existing is gone. So the $24,000 for a married couple filing jointly is only about $7,000 higher than the current standard deduction and the exemption per person. I’ll check later, but I think I’m roughly right about those numbers.

  3. Anonymous says:

    I’ve been told by someone who insists that he is a libertarian (though I doubt it, and to my knowledge no one besides himself believes he is a libertarian) that some companies are already paying negative taxes. This isn’t exactly surprising. Normally these are called subsidies. However, some people have apparently confirmed that some companies have been known to receive more in subsidies than they pay in taxes.

    One example is Mylan, which, thanks in part to coal tax credits, had an effective negative tax rate of 294% in 2016.
    https://arstechnica.com/science/2017/06/with-help-of-coal-tax-credits-mylan-had-a-negative-294-percent-tax-rate-in-2016/

    Another example is ExxonMobil.
    http://www.motherjones.com/politics/2011/06/ge-exxon-10-other-major-corporations-paid-negative-tax-rate/

    Lowering taxes on a corporation that is already paying a negative tax rate would increase theft, not decrease it.

    However, as this self-proclaimed libertarian pointed out, theft is not always bad. Stealing from an enslaver or other warmonger to give back to their victims could be a good thing. That said, Mylan and ExxonMobil would not be in the victim category.

    This person claims he tried to post one of those links himself, in response to your article on coal, and you censored him.

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