It says something about the politics of tax reform that some of the best parts of the new Republican bill are its most politically vulnerable.
Tax cuts are easier to enact because they produce only winners — at least if you put any resulting deficits out of mind, as a lot of people do. Reform that scales back unjustified tax breaks creates losers, too, even if it yields a more efficient tax code.
The losers from the Republican tax reform are now starting to yelp. They include people in areas with high housing costs: The reform caps the tax deduction for mortgage interest at a loan value of $500,000, and eliminates the deduction for second homes. That’s a commendable change, since there is no good reason for the federal government to encourage people to buy bigger (or more desirably located) residences rather than using their money some other way.
They also include people in high-tax states, who are often the same people. Republicans would end the tax deduction for state and local income and sales taxes and cap it for state and local property taxes.
This is a trickier issue. Opponents of the elimination of the tax breaks say that the feds should not tax them on income that they don’t enjoy. Supporters of the change say that low-tax states should not have to subsidize high-tax ones.
Both are reasonable points, but the second one is more compelling: The federal government should not put its thumb on the scale for bigger state and local governments.
While we await detailed analyses, it appears that the big net losers from the Republican plan — those who will pay larger tax bills as a result of it — are upper middle-class people in high-tax, high-cost areas. The winners include businesses and people higher and lower on the income scale.
Lower-income people will benefit from the increased standard deduction, and parents in the 10 percent bracket (for couples, that’s people with taxable incomes below $19,000) would benefit from the reform’s changes to tax benefits for children.
Higher-income people would benefit from lower average tax rates, lower taxes on pass-through business income, lower taxes on corporations in which they have shares and lower estate taxes.
As I said, any tax reform will have winners and losers. Does this pattern of winners and losers make sense? Yes, in part. The upper middle class people who will be paying more may not feel rich, but the tax breaks they are losing ought to be scaled back, and they can take the hit more easily than most people.
But other provisions of the tax reform make less sense. Couples making between $470,000 and $1 million will pay a marginal rate of 35 percent instead of the current 39.6 percent. There is little evidence that the change will do much to boost economic growth, and if Republicans didn’t make it, they would have more room to shield the upper middle class from tax increases, or to help a lot of middle-class families by increasing the value of the tax credit for children.
Moving people in the current 15 percent bracket to a 12 percent rate does not accomplish much, either. It can’t possibly boost economic growth by increasing incentives to work, save and invest; and if the point is to help middle-class households, enlarging the child credit or the standard deduction more would be a more efficient way to do it.
I’m persuaded that the changes to corporate tax code — cutting rates, allowing investments to be written off more quickly, reducing the deductibility of debt — make economic sense.
The changes to the individual side of the tax code, on the other hand, seem like a lot of motion without much rationale. And it’s the changes to individual taxation that are going to do the most to determine whether this plan passes.
Ramesh Ponnuru is a columnist for Bloomberg View.