Unfortunately, whatever its impact it won’t match that of Reagan’s cuts in the 1980s.
President Trump and congressional Republicans unveiled a tax-reform plan this week.
After whiffing on an Obamacare repeal and replace, the GOP, which looks fairly united here and, after all, owns the Oval Office and majorities in both houses, enjoys better-than-even odds of passing some variant of its plan. Independent of this, as Warren Buffett noted to CNBC, “Any politician that can’t pass a tax cut is probably in the wrong line of business.”
That said, obstacles confront this group of Republican reformers that did not get in the way of their forebears in the 1980s.
First, nearly half of all households (44 percent) do not pay any federal income taxes. In fact, the bottom two-fifths gets a check rather than a bill from the IRS. Whereas they receive an average of more than $500 from Uncle Sam at tax time, the top fifth pays an average of more than $50,000. People who pay an April tax bill really like this October tax bill. People who don’t, well, don’t.
The second obstacle relates to the hyper-partisanship engulfing Washington. When Ronald Reagan slashed the 70 percent top marginal rate in 1981, conservative Democrats existed in office and not just in imaginations. And several liberal and centrist Democrats, such as New Jersey Senator Bill Bradley and Missouri Representative Dick Gephardt, voted for the president’s cuts. Trump does not enjoy such goodwill.
This relates more to Trump’s personality than his plan. Whereas Reagan initially shrunk top rates from 70 percent to 50 percent — and subsequently to 28 percent — Trump offers a relatively modest cut to income taxes that brings the top rate to a higher absolute number than Reagan ultimately did.
In fact, Trump’s plan merely follows the recent pattern of Republicans implementing modest tax cuts that reverse the modest increases of the previous Democratic administrations. Clinton jacked rates up near 40 percent. Bush slashed them to 35 percent. Obama hiked them up again near 40 percent. Trump seeks to cut them to 35 percent. Though not exactly Tweedledum and Tweedledee, the differences between the parties on income taxes do not appear as dramatic as they did in the 1970s and 1980s.
The plan simplifies the tax code by consolidating seven brackets into three. It lowers the top marginal rate from 39.6 to 35. It doubles the standard personal deduction to $12,000. Deductions for dependents increase. It speaks vaguely of eliminating myriad deductions. Top corporate rates go from 35 percent to 20 percent. It eliminates the death tax.
With regard to the income tax, the proposed legislation seems more milquetoast than radical. Its changes to inheritance laws and the business tax code appear more dramatic. Perhaps here lies its vulnerability. One imagines that minor cut in rates, and a simplification of the varied rates, proves unifying to the disparate GOP caucus. For a party in identity-crisis mode on trade, immigration, foreign policy, and much else, tax cuts figure to serve as a sturdy cast to fuse together its fractured parts.
The tax cuts demonstrate that nearly three decades after he left office, Ronald Reagan still rules the Republican Party. But while the plan emphasizes Reagan’s issues, the times do not.
Reagan inherited a national debt just under $1 trillion. Trump inherited a national debt about twenty times that number. In a decade, that number exceeds $30 trillion.
Beyond this, taxes no longer serve as the primary burden weighing down the American people. Health-care costs, which exceed $3 trillion annually, do. Republicans punted on that only to subsequently draw on something more familiar from their playbook.
The tax code remains too complex, too oppressive to commerce, and too punitive of success. Trump deserves credit for tackling these problems. But the problem in 1981 serves as a problem in 2017. For America to embark on a “seven fat years” run witnessed in the 1980s, reining in debt and health-care spending work as better catalysts than a cut in the top marginal rate from 39.6 percent to 35 percent.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.