In the week before Christmas 2017, a Republican Congress passed the Tax Cuts and Jobs Act. The first major tax law overhaul since 1986, it was totally partisan, done behind closed doors with little debate or Democratic participation. The IRS was stuck with clarifying the hastily written legislation, promulgating regulations and scrambling to put the law into effect.
The new tax law made small cuts in rates for most individual taxpayers until 2025. The most consequential tax cuts, however, went to corporations and these are largely permanent cuts. Corporate rates dropped from 35 percent to 21 percent. Corporations did not lose their existing loopholes and carve-outs. They also received favorable, redesigned international tax rules and deductions for non-corporate “pass-through” business income.
Despite the intent that they would fund jobs and capital investments, the tax cuts have largely funded share buybacks, which hit a record $1.1 trillion in 2018. The big winners were corporations, large shareholders and top corporate executives.
While the new law gave a short term boost to the economy, its stimulative effects are weakening. On Feb. 26, Federal Reserve Chairman Jerome Powell testified that the U.S. economy is slowing and that growth in 2019 will be only 2.3 percent.
Mr. Powell also urged lawmakers to address our “unsustainable debt” — a debt that has just eclipsed $22 trillion for the first time. It stood at $19.95 trillion when President Trump took office. The Congressional Budget Office projects this year’s deficit at close to $1 trillion. The CBO warns that the U.S. Treasury will run out of money by the end of September if Congress does not raise the debt limit, i.e., allow more borrowing. Reliable forecasts predict that the U.S. now faces many years of trillion-dollar deficits.
The Internal Revenue Service receives little support from official Washington, especially President Trump. To head the IRS, the president appointed Charles Rettig, a lawyer whose career was built on defending people accused of criminal tax cheating.
In recent years, the IRS has cut staff by 24,000 employees. Its revenue agents in Fiscal Year 2010 numbered 14,000. By FY 2017, they had been reduced to fewer than 10,000, the lowest level since 1953. The agency budget is down 16 percent since 2011. Because of shrinking resources, the IRS audit rate has fallen by half to 630,000 fewer last year than in 2011. Yet the return rate on audits is profitable — every audit-dollar spent returns $6. For incomes of $1 million or more, one in six used to get audited; now it’s fewer than 1 in 20.
So far, the left-leaning Democratic candidates for president are offering various complicated plans to raise taxes on wealth and on high-income earners. The plans are confusing and filled with their litanies of grievances. These Democrats would be better served to pivot to optimism, practicality and persuasion. At this point, they offer a scarcity of well-articulated arguments for tax progressivity and its across-the-board fairness.
The recent tax law, the shrinking of the IRS and the Republican anti-tax advances are all clearly intended to kill the remaining progressivity in the U.S. tax system. They are succeeding.
The progressive tax system has long been a mainstay of effectiveness and fairness in the U.S.
Those who gain the most in income and wealth from the American society and economic infrastructure not only have the greatest ability to pay, they also derive far and away the greatest benefits. The American tax burden provides far more than the usual and obvious benefits that all Americans enjoy — national defense, police protection, roads and highways. It also sustains an elaborate, orderly, stable and subsidized U.S. economy. Wall Street works because property interests are protected and regulated. Within a framework of tax justice, founded in republican and liberal ideals, it follows that those who benefit the most would pay the most.
Many goods and services result from democratic processes and are provided at public expense. Only government can provide certain functions, e.g., enforcing personal and property security and insuring a fair and stable economic environment. The interstate highway system, the G.I. Bill, the internet, the most powerful military ever and currently half the nation’s annual medical coverage, all have resulted from public programs.
As inequality increases, power shifts away from middle class and the working poor. Pessimism, discontent and anger assert themselves. This is happening in America right now. Tax justice is critical to social stability and economic progress. As Justice Oliver Wendell Holmes observed, “Taxes are what we pay for civilized society.”