Every tax plan is a social vision and a statement of values. The social vision embedded in the House Republican tax plan is straightforward: to take money away from affluent professionals in blue states and to pump up corporations as the engine for broad economic growth.
Or to put it more bluntly, Republicans think the whole country would be better off if we take money away from the Democrats’ rich people and give it to their own (more productive) rich people.
The plan raises taxes on affluent professionals in blue states in several ways. First, it caps the mortgage interest deduction at loan principal of $500,000 instead of $1 million. According to an analysis by Christopher Ingraham at the Washington Post, only about 2.5 percent of Americans are paying off mortgages on homes valued over $500,000. These are mostly in places like California, New York, Boston and Washington, D.C.
Second, the Republican plan cuts the deduction for state and local taxes. In 2014, according to the Economist, nearly 90 percent of the benefit from this deduction flowed to those making more than $100,000 a year. Once again, this tax hike hits mostly those in high-tax blue states.
Third, the bill taxes investment income earned by private universities with at least 500 students and assets not directly tied to educational objectives of more than $100,000 per student. It imposes a 20 percent excise tax on nonprofit executives who make more than $1 million.
This is the beginning of the full-bore Republican assault on the private universities, which are seen as the power centers of blue America — rich, money-hoarding institutions that widen inequality and house radical left-wing ideologies.
Fourth, the bill preserves high top marginal tax rates on individual income and even raises rates in some cases on the very rich. Over the past few decades when Republicans have talked about tax reform, they have generally talked about sharply cutting the top marginal rate to 25 percent or even 15 percent. But this plan keeps the top rate at 39.6 percent. And then it throws in some peculiarities. As the Wall Street Journal noted, under the plan a married couple would face a 45.6 percent top rate on earnings between $1.2 million and $1.6 million.
These changes could leave the rich paying an astonishingly high percentage of their income in taxes. Scott Sumner of EconLog calculates that when you throw in state and local taxes, rich Californians would face a tax rate of 62.7 percent.
Republicans would take the revenue from these tax hikes (and much more) and they would use it to lighten the load borne by corporations.
The intellectual case for general corporate tax reform is strong. Countries across the world have been cutting corporate rates. The United States now has the highest corporate rates in the OECD and the third-highest rates in the world. Cutting those rates would attract investment, unlock money trapped abroad and increase wages for many families. Economists vary widely in their estimates, but Larry Kotlikoff of Boston University estimates, on the high end, that a lower corporate tax rate could increase working-household income by roughly $3,500 annually.
None of this is to say that the Republican plan is worth supporting. I personally oppose it because of the way it explodes the deficits. Second, the level of largesse to corporate shareholders is frankly ridiculous. It piles one corporate tax cut on top of another like piling a chocolate sundae on top of chocolate cake on top of a Toblerone bar.