10 Things the Average American Needs Trump to Get Right on Tax Reform
- President Donald Trump and Republicans in Congress are set to take on tax reform in the coming months.
- According to the Institute on Taxation and Economic Policy, the richest 1% would get 61.4% of proposed tax cuts.
- What do average Americans need to benefit from ongoing attempts at tax reform?
If there’s one thing (besides health care) that Republicans in the White House and Congress desperately want to change, it’s our tax system. Tax reform has been at the top of the wish list for President Donald Trump since the campaign, and it looks like we’re finally getting to it. Unfortunately, that means we’re probably due for more partisan fights and late-night deal making — you know, the stuff people absolutely hate about politics.
But don’t overlook it because the stakes are huge. Although tax reform, on its face, doesn’t sound like that sexy of a topic, changes to the tax code can have huge ramifications. For some, it might mean their paychecks get a little bigger (or smaller). For others, it might mean their annual raise is no longer going to arriving with predictable regularity. Depending on what happens, there are numerous potential outcomes.
While we’re still waiting for more details on what, exactly, Trump and company plan to do, we can look at what they’ve told us so far. We know, for example, that Trump wants to lower the corporate tax rate to 15%. That would be a reduction of more than 50% for some companies (assuming they’re paying the current rate). We also know the Republicans want to lower taxes for individuals. But some estimates show the lion’s share of those savings would go to the wealthiest Americans.
One analysis puts the overall tax savings at $4.8 trillion over the next 10 years. More than 61% of that, however, would go to the top 1% of earners. And for some middle-class Americans, it would actually amount to a tax increase. For that reason, the average American has every right to be skeptical. If they’re not going to benefit, then why should anyone hope to see tax reform codified?
We’ll have to wait and see how things shake out. But for the time being, here are the things the Trump administration needs to get right as it tries to reform our tax system. First up? Trump needs to echo the rhetoric he espoused during the campaign and fight for the middle class.
1. Trump needs to stick up for the little guy (as promised)
- The president’s campaign was focused on helping the average American. It’s time to put up or shut up.
Trump rode into Washington after convincing his base he would look out for them and take the concerns of the middle class and middle America to Washington. When it comes to reforming the tax code, this is his chance. So far, it appears his tax plan would help the rich more than anyone, which conflicts with his campaign promises. If Trump hopes to throw more red meat to his base (and expand it), devising and codifying a more progressive tax system would do the trick — not a tax cut that overwhelmingly benefits the rich.
Next: Fixing the corporate tax rate
2. Fixing the corporate tax rate
- There’s an argument to be made for lower corporate taxes, but most people aren’t receptive to the idea.
We know Trump wants to lower the corporate tax rate. What businessman wouldn’t? As mentioned, Trump seems to have zeroed in on a 15% corporate tax rate, which would be a large drop from the 38.91% current rate. The idea is to make it cheaper for companies to do business. If it’s cheaper, they’ll have more money to innovate or hire people. Whether that will actually happen is anyone’s guess. Similar experiments, such as that in Kansas, have proven otherwise. But that doesn’t mean lowering taxes on corporations is a bad idea. Again, the key is to make sure that everyone benefits.
Next: It’s not just fixing the tax rates that will help the average American. It’s holding those who benefit to the fire.
3. Holding powerful interests accountable
- If taxes are lowered on corporations, make sure those savings are put to work — not put in overseas accounts.
We touched on this earlier: When corporations or the wealthy get tax breaks, the hopes are that they’ll invest those savings back into the economy. Trump needs to find a way to ensure they do, perhaps by codifying certain stipulations into the tax code. For example, if company X doesn’t do Y with its tax savings, it pays a higher rate. That would be difficult and perhaps monstrously unpopular in the business community. But for the average American worker, it probably sounds like a great idea.
Next: Another important goal for the Trump administration? Making sure tax cuts don’t come at the expense of our national security — or health care system.
4. Don’t cut taxes at the expense of the health care system
- Replacing the Affordable Care Act was less about fixing the health care system and more about tax cuts for wealthy people.
There is an ongoing fight over the Affordable Care Act. Trump and the Republicans want to repeal and replace it with a new system — one that drastically reduces federal spending on health care. That reduction would free up a lot of money to gave Republicans something to work with when figuring out tax reform.
Specifically, they planned to cut taxes for the rich because they were able to reduce spending. But, as we know, the ACA remains intact and attempts to stop spending on health care in order to pass tax reform would be disastrous. For the average American, that’s a deal breaker.
Next: We want people to work, not be worried about taxes.
5. Fix the incentives
- Those who work are taxed at a higher rate than those who earn money passively, or through investments.
We’re all better off when people are working rather than coasting. But there are some wonky incentives at play that actively work against our interests.
A Bloomberg article spells this out quite well. A fictional scenario is explored in which a doctor earning $300,000 per year is compared to someone living off of an inheritance with the same amount of income. The doctor pays a hefty amount in taxes: $104,767. The heir? $41,742. Sure, one is lucky enough to have been the benefactor of an inheritance, but you can easily see how there are some skewed incentives at work.
Next: This is perhaps the most important thing Republicans can aim for during tax reform talks.
6. Keep it simple, stupid
- The tax code is impossibly complex. Simplifying it would go a long way.
The single biggest issue with our tax system is it’s incredibly, impossibly complex. The average American can’t understand it — and often needs to enlist the help of a professional (at considerable cost) to help them navigate and file.
If Trump really wants to do the middle class a favor, simplifying the system would have the biggest and most immediate impact. Speaker Paul Ryan has pushed for this, so there is some hope it could happen. Unfortunately, there are powerful and deep-pocketed interests fighting against it.
Next: Another important thing? Making sure people don’t feel like they’re getting cheated.
7. Close the loopholes
- Tax loopholes don’t violate the letter of the law but rather the spirit of it. And they overwhelmingly benefit the wealthy.
Sure, tax loopholes are great if you have enough money to take advantage of them. But for the average American, it looks more like a way to get out of paying your fair share than anything. That breeds resentment, leading to further division.
By simplifying the tax code, closing the numerous loopholes would be a win for Trump and company. That’s especially true for those who can’t afford to take advantage of them, as most loopholes benefit the rich almost exclusively.
Next: The proposal to tax retirement accounts
8. Leave retirement accounts alone
- Rumor has it that Republicans want to tax retirement accounts, such as 401(k)s. Why?
There’s a lot to be said about taxing investments, and a retirement account is a type of investment. But it seems counterintuitive to tax a retirement account. We typically tax things we want to disincentivize.
With a budding retirement crisis on our hands, we should be doing everything we can to get people to save more. So far, the rumors have swirled around possible taxes on 401(k), but we don’t know for sure whether there any plans to actually pursue them.
Next: If we really want tax reform to succeed, it’s important we allow a fair and open process to get us there.
9. Let the process work — unlike what happened with health care
- When attempting to repeal and replace Obamacare, Republicans did it all in secret. Let’s see the process play out in the open.
We all saw how the health care reform process went. Republicans took to backrooms, worked out the legislation, and subsequently tried to jam it through with no hearings or debate. They thought they had the votes but ultimately couldn’t get it through the Senate (and that’s not to say they couldn’t do it in the future).
This, again, is exactly why people hate politics. When it comes to taxes, as with health care, there’s a lot at stake. Everyone has an interest in seeing a prosperous, accessible system put into place. Republicans would get a long way with the middle class by allowing an open and honest process.
Next: The most important element of the tax reform fight must make it abundantly clear to the average American that they will be better off.
10. Above all else, Americans need a real plan that will benefit them
- The last thing we need? The Bush tax cuts part two, which cost the economy as much as $2.5 trillion with interest.
In the early 2000s, Republicans under the George W. Bush administration passed tax cuts that largely benefited the rich. As far as we know, it looks like the Trump administration plans to do more or less the same thing. It appears to be yet another iteration of “trickle down” economics, which hasn’t proven to be too successful in the past.
If Trump and the Republicans really want to shore up support and pass something middle-class America wants, they need to pass a plan that benefits their base. It’s what they promised to do during the campaign.