Anne Alstott –
If the details of the House and Senate tax bills under consideration in Washington make your eyes glaze over, it’s because they’re supposed to. The tax-writers, as they often do, are using the technicalities of the tax law to mask major changes in national economic policy. It’s fairly well-known that both bills are stacked in favor of the wealthy. But the details of the tax bills (please don’t call them “tax reform”) contain a neoliberal agenda that, if enacted, will punish good governance, reward capital over labor, and favor the old over the young.
The United States, perhaps more than any other developed country, shapes its economy via the tax law. Neoliberals often say that the United States – unlike socialist Europe – has no government-sponsored industrial policy. And it is true that (for the most part) we don’t have big spending programs that subsidize business or have big bureaucracies that manage the economy. Instead, our politicians hide economic and social policy in the tax code and leave administration to the IRS. In 2015, for instance, the United States devoted $1.2 trillion to tax-based subsidies – an amount that exceeded federal discretionary spending in that year.
So, even as politicians rail publicly against tax loopholes, both parties use the tax code to reward favored industries and citizens. The current tax code, for instance, favors owners of capital, wealthy dynasties, highly-paid workers, and industries including tech and pharmaceuticals as well as finance, insurance, and real estate.
The House and Senate tax bills would multiply the magnitude of these tax subsidies by enacting net tax cuts (that is, tax cuts less tax increases) of around $1.5 trillion over the next decade. About half the benefits will go to the rich and very little to the poor.
This regressive redistribution is striking, but don’t stop there. Cutting through technical jargon like corporate tax rates, pass-through entities, and the alternative minimum tax, the fact is that both bills would shift our tax-based industrial policy in a decidedly neoliberal direction. There are nontrivial differences between the two bills, but both would (1) raise the cost of providing good government to citizens, (2) reward capital owners and punish labor, and (3) burden young people as a group.
First, both bills would literally tax good governance by raising federal taxes on residents of states with robust and ambitious governments. The Washington debate has so far been framed in neoliberal terms: you may have read that the elimination of the deduction for state and local taxes will harm “high-tax states” (or “blue states”). But this characterization of states like California, New York, and Massachusetts implicitly asserts that “high taxes” are a bad thing and disclaims any positive relationship between tax revenue and robust governance.
Now, no one could defend everything that these state governments spend tax revenue on. There is room for reform in the public sector as in the private. But in broad-brush terms, these jurisdictions redistribute income and provide relatively extensive services to their residents.
It’s nonsense to spin the federal tax increase on progressive states as a move to “level the playing field” between low-tax and high-tax states. There is no neutral or technical answer to the value-laden question of how much the federal government should support ambitious governance in the states and localities. The House and Senate tax bills take a clear stance by intentionally putting political pressure on the states to cut taxes and cut services.
Second, both bills would massively excuse capital from supporting the work of the federal government. Both bills would cut the tax rates that apply to the biggest corporations and the wealthiest capital owners, with minimal benefit to truly small businesses and to workers. The cut in the corporate rate is the most visible of the pro-capital initiatives, but its bias toward capital is intensified by changes that favor investors in hedge funds, in venture capital, in oil and gas and real estate. At the same time, the bills would re-engineer international tax law to offer multinationals a permanent tax break for moving income and assets offshore.
Proponents of the tax bills claim that cuts in taxes on capital will spur economic growth and raise wages. But their economic analyses exaggerate (to put it politely) the economic evidence, which suggests that the tax cuts will remain in the pockets of capital owners.
Third, both tax plans burden younger workers by imposing artificial constraints on future government action. Everyone in Washington knows that the revenue needs of the federal government will grow in the next few decades, as the Baby Boomers claim Social Security and Medicare. But both tax plans would add to the federal debt and starve future revenues. The predictable result is that future taxpayers will face a depressing choice: pay higher taxes or cut spending (on progressive programs like infrastructure and college aid). The Senate bill makes the shift in tax burden to younger workers obvious: the bill would sunset all individual tax cuts in 2026 but enact most capital tax cuts on a permanent basis.
The stakes here are high. Tax law isn’t technical or neutral, and it devotes literally trillions of dollars annually to managing the economy. The House and Senate tax bills would burden progressive federalism and exacerbate inequality driven by skyrocketing returns to capital. And both bills would burden ordinary workers, especially younger ones, who already bear unprecedented burdens of college debt, high housing costs, and intermittent employment.
Anne Alstott is the Jacquin D. Bierman Professor in Taxation at Yale Law School.