How Democrats can write a fairer tax code
Published 11:15 pm Monday, November 26, 2018
The Washington Post
“Budget constraint” is econ-speak for the familiar concept that, in this world of finite resources, you can’t have everything you want. It’s necessary to set priorities and spend only on the most urgent. One of President Donald Trump’s numerous unhealthy innovations has been to govern, with the connivance of a Republican Congress, as if there were no budget constraint. Republicans got a lot of legislation passed — massive tax cuts for the wealthy and corporations, first and foremost — by ignoring limitations that they used to say were important, such as the federal debt.
Understandably, given that hypocritical recent history, Democrats are starting to roll out big, budget-unconstrained policy plans of their own in preparation for the 2020 presidential campaign. Sen. Bernie Sanders, I-Vt., has his Medicare-for-all proposal, and Sen. Kamala Harris, D-Calif., has her Livable Incomes for Families Today (LIFT) tax plan. Basically, the LIFT plan would provide cash tax credits of $3,000 per year (delivered in monthly installments) to working individuals earning up to $30,000, and $6,000 for married couples earning up to $60,000. Thereafter, it would phase out at different rates, depending on household status, such that none with incomes exceeding $100,000 would benefit.
If this sounds familiar, it’s because it resembles the existing earned-income tax credit; the main differences are that Harris’ plan (which would add to, not replace, the EITC) would pay people higher in the income scale, and regardless of the number of children they have.
It would be progressive, in stark contrast to the top-heavy Trump tax cuts. Nearly all the benefits of Harris’ plan would go to those making $87,000 or less, according to the nonpartisan Tax Policy Center. More doubtful is whether this huge new transfer of resources — $3 trillion over the next decade, the Tax Policy Center estimates — makes sense without a more solid and politically practical means of financing it than the vague suggestions Harris has so far offered: to repeal all of the Trump tax cuts benefiting those who make $100,000 or more, plus an unspecified tax on financial institutions.
As sketched, the plan also has some potential perverse incentives built into it, such as a disincentive for cohabiting couples with children to get married. Its phase-outs as income rises also penalize increased earnings from work.
That said, Harris’ proposal points federal policy in the right direction. The tax code should be rewritten to ask more of those at the top of the income scale; Democrats should use their new control of the House to argue for selective repeal of the least defensible new upper-income breaks in the Trump tax law. And the code should do more to help the working poor through an expanded EITC that also reaches single workers without children.
Ambitious, blue-sky proposals such as Harris’ can help jump-start discussions, but they do not translate well into policy because the budget constraint is real. No doubt Trump is trying to repeal that basic rule of responsible self-governance, but that’s no reason for Democrats to respond in kind. A progressive reordering of the tax code, plausibly paid for with specific spending cuts or revenue increases, would make the Democrats competing to replace Trump not only more egalitarian than he is but also more responsible.