Bad Tax Policy Ideas to Watch Out For In the Coming Decade
Most New Year’s resolutions focus on improving an aspect of their lives that is lacking, but sometimes preserving the good things can be just as valuable. The end of the 2010s clears the way for a fresh new decade of bad policy ideas to watch out for — here are some incipient proposals that the country should resolve to say no to this decade.
Two similar proposals, a wealth tax and mark-to-market taxation, stand out as being particularly dangerous. Either proposal would dramatically change the tax treatment of assets, while harming start-ups and cash-poor investors — not to mention the administrative nightmare enforcing either regime would require.
But the list of bad ideas doesn’t end there. Sen. Elizabeth Warren (D-MA), along with numerous Congressional Democrats, has also proposed a financial transactions tax (FTT) in order to limit Wall Street speculation. However, a Congressional Budget Office report from 2011 on a far more modest FTT proposal than Warren’s found that such a tax would make it more expensive to finance new investment, reducing economic output and employment.
On top of these economic problems, an FTT may not even raise as much revenue as predicted. Though Warren claims her FTT would raise $800 billion a year, evidence from other countries with similar policies suggests that trades could shift to different markets, driving down trading and lowering capital gains tax revenue as well.
Another proposal that Warren has endorsed, along with most other Democratic primary candidates, is the elimination of the so-called “step up in basis.” Reviled by the left as a means of shielding inherited wealth from tax, the step up in basis allows heirs to face tax based on the price of an asset when they acquire it, rather than the initial purchase years (or decades) earlier by a decedent.
While the step up in basis is nobody’s idea of perfect tax policy in a vacuum, it does serve to reduce the government’s bite out of an estate when someone dies, which is an important goal given the inherent unfairness and unworkability of the estate tax.
Another popular idea in Democratic primary circles is a hike in the corporate tax rate, in response to the Tax Cuts and Jobs Act (TCJA)’s cut. While the TCJA lowered the corporate income tax (CIT) rate from 35 percent to 21 percent, Sens. Warren and Sanders (I-VT) have proposed restoring the old 35 percent rate, as has Pete Buttigieg (Joe Biden has called for a 28 percent rate).
While corporate tax hikes are always popular on the left, they primarily fall on labor — 70 percentor more of the tax is paid by labor. At the same time, even the new 21 percent rate (not taking into account state and local CITs) is still higher than the European average, meaning that U.S.-based businesses are at a disadvantage. Restoring the old 35 percent rate, or even a 28 percent rate, would further exacerbate this problem.
Thankfully, other dangerous proposals haven’t worked their way into the American mainstream...yet. France and the U.K. have each crafted proposals that would establish a substantial corporate income surtax on digital companies reaching as high as 5 percent, and the Organisation of Economic Co-operation and Development is drafting a worldwide proposal to expand these taxes reach across the globe.
In pursuing these “digital taxes,” these countries are targeting an industry that has providedtrillions of dollars in benefits to the world economy in the name of a crass pursuit of extra revenue. Good tax policy should never target specific industries that lawmakers see as cash cows, but with the dramatic revenue shortfalls that Democratic primary candidates are experiencing relative to their extravagant spending proposals, it’s not hard to imagine one of them latching on to this idea.
Most resolutions involve doing more of something in an effort to improve one’s life, but sometimes doing less of something is just as important. In the 2020s, the U.S. should commit to avoiding these (and other) tax policy pitfalls that could threaten the historic economic expansion that characterized the end of the last decade.