Reform plan violates basic tenets of capitalist tax policy

So, what's not to like about the sweeping federal tax package the Republicans are pushing through Congress? If you answered "virtually everything" you'd be right. As most independent analysts - from the Tax Policy Center and the Brookings Institute to the government's own, nonpartisan Joint Committee on Taxation - have pointed out, the tax cuts being proposed: won't effectively stimulate job creation or the economy; but will dramatically increase the federal deficit over the next decade; all while exacerbating the growth in income inequality, which has been worsening dramatically since 1980. And that doesn't even touch on how poorly the proposal stacks up as tax policy, where it fails on so many levels they can't all be covered in one column. But here are two that stand out.

First, it's fundamental that tax policy should accurately determine the amount of income a taxpayer has to pay taxes with. After all, it's not possible to allocate tax burden fairly among taxpayers unless the calculation of taxable income is realistic. This is why both the federal government and all 41 states with an income tax don't impose it on an individual's gross annual income, but rather some lesser amount, which is reduced by various deductions and credits. The idea behind this is simple: if someone is obligated to spend a portion of his or her gross income on various items, obviously that money is not actually available to pay taxes.

Now, an interesting discussion can be had about whether all the various deductions and credits which have become part of the Internal Revenue Code over time are legitimate as currently crafted, or whether they should be modified or even eliminated. However, capping the deduction taxpayers receive for paying state and local taxes - as the current version of the Republican tax package does - makes no sense at all. The reason: folks have a legal obligation to pay state and local taxes. Which means whatever someone is compelled to spend on state and local taxes, is not available to pay federal income taxes. Period. After all, no one can spend the same dollar twice.

Limiting the state and local tax deduction is particularly pernicious, given that in many instances, these taxes are higher than local authorities would otherwise assess, because they're covering unfunded mandates flowing down from the feds. These unfunded mandates are both numerous and costly, involving everything from security at public transit agencies to the cost of complying with the Federal Individuals with Disabilities Education Act. It violates even the most basic concept of fairness for the feds to drive up state and local taxes with unfunded mandates and then cap the deduction folks can take at the federal level for paying them.

But then again fairness is a foreign concept to the design of this tax package. Consider that it's textbook policy that a fair tax system takes ability to pay into account. This is a hoary, and I might add capitalist, concept that goes all the way back to Adam Smith, the father of capitalism. In his seminal work "The Wealth of Nations," Smith wrote that taxes ought be designed "to remedy inequality of riches as much as possible, by relieving the poor and burdening the rich." Smith reasoned this would be fair, because in a capitalist economy, folks at the top of the income ladder would always receive a disproportionate economic benefit from the system.

And Smith was right, as all the data concerning growing income inequality in America since 1980 clearly shows. Indeed, the richest one percent of Americans now own around 40 percent of the nation's wealth - while the bottom 90 percent in income have just 27 percent of national wealth. Yet this current tax cut package ignores that reality and provides the vast majority of the dollar value of its relief to the wealthiest. Or in other words, is patently unfair from both textbook - and capitalist - tax policy standpoints.

Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.