It sounds like the Trump administration is going back to the drawing board on tax reform.
After the stinging defeat of the ObamaCare repeal effort, the White House is taking a more active role in reshaping tax policy, rather than leaving the design to Congress, The Associated Press reports. But President Trump himself has few firm opinions on matters of policy. That reality has opened up the dealmaking process to a host of oddball possibilities.
Some of these ideas, remarkably enough, aren't half bad. Here are four of the best ones that the Trump administration is reportedly considering:
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1. Eliminate the payroll tax. This is the tax that's ostensibly dedicated to Social Security. Every employee in the country pays a 6.2 percent tax rate directly, and then their employer pays an additional 6.2 percent rate on what they pay the employee.
The employee side of the tax is incredibly regressive, precisely because everyone pays the same rate no matter how much (or how little) they make. To add insult to injury, if you make above a certain threshold of income — $118,500 in 2015 — you don't pay any tax on earnings above that cutoff. So killing the employee side of the payroll tax would make the overall U.S. tax code less regressive and put money directly back into the pockets of workers — including millions of low-income Americans who need the boost the most. This, in turn, would increase aggregate demand and encourage more job creation.
Now, it sounds like they might replace the lost revenue by scrapping the deduction for labor expenses in the corporate income tax. That would effectively replace the employer side of the payroll tax with a different tax on the cost of hiring people. Some people won't like that, because they worry the employer side of the payroll tax raises the price of labor and thus discourages job creation. And to some degree that's probably true. But the history of minimum wage hikes should make us skeptical that raising the price of labor matters much when aggregate demand is also raised.
Finally, what about Social Security? We can't cut off the program's funding source!
But the federal government doesn't "save" money the way households or businesses do because ultimately it controls the currency in which it spends and borrows. The Social Security trust fund is and always has been a political and accounting gimmick. It's already standard procedure for the Congressional Budget Office to assume the federal government will ignore the depletion of the trust fund and continue paying the benefits in full.
2. A border adjustment tax. This is an idea that's been pushed by Rep. Kevin Brady (R-Tex.): Introduce a new deduction into the corporate tax code that allows U.S. companies to deduct the costs of the goods they export, while they still have to pay a tax on the goods they import. It's estimated to raise $1 trillion in revenue over a decade. And it would grant a tax advantage to all economic activity that shrinks the U.S. trade deficit rather than widens it.
Of course, there are a few complications here to. For one thing, it's not clear a border adjustment tax would pass muster with World Trade Organization rules. (Though the thinking is that combining it with the elimination of the corporate deduction for labor expenses would satisfy the WTO's concern with international fairness.) For another, companies that keep importing will likely pass the cost of the tax onto consumers.
But again, it's important to keep the net effect in mind: If a border adjustment tax can corral more demand within the U.S. while creating jobs and increasing wages, the hike in consumer prices could well be worth it.
3. A carbon tax. This would be a tax penalty levied on all energy sources that produce CO2, in an effort to discourage carbon emissions and encourage clean energy use. The Trump administration is infamous for scoffing at climate concerns, so this might seem like the last thing they'd pursue. And indeed, after reports surfaced that they were looking into a carbon tax, a White House spokesperson denied it was "under consideration."
But a carbon tax would make a certain amount of sense. Among business-friendly types who admit climate change is a problem, the carbon tax is seen as a vastly more market friendly solution than the regulations the Obama administration was pursuing. Gary Cohn, head of Trump's National Economic Council and a former president of Goldman Sachs, is a fan of the idea. It's Stephen Bannon, the reactionary nationalist on Trump's team, who opposes it — and Bannon's star is reportedly waning.
So a carbon tax could be a politically useful way to find some revenue, possibly bring Democrats on board, and make Trump's approach to climate change look less appalling.
4. Reform the corporate tax in general. This has, of course, been on the GOP agenda forever. While the reason given is that the U.S. corporate tax rate is too high, the real problem is that it's riddled with so many loopholes that companies pay vastly different rates — and sometimes, no tax at all! While introducing one or two key deductions — like the tax on imports — could be a good idea, mostly deductions need to come out. They bias companies towards financing themselves with debt over equity, and towards under-investment in inventory and physical capital, to name just a few examples. If the loopholes can be cleaned out so the headline rate can be lowered without losing net revenue, that tradeoff could be worth it.
Obviously, some of these ideas are pretty outside the mainstream. But the Trump White House is in a tight spot. If they're going to stick with just Republican votes, they'll need big revenue raisers to keep tax reform budget neutral and thus get it through the Senate on a simple majority vote. If they don't want to bother with budget neutrality, they'll need Democrats' help in the Senate — and that means progressive or environmentally-friendly ideas. So they'll need to get creative if they want a win here.
And really, when could Trump ever be accused of being mainstream?
