The Rural-Urban Connection: Making sense of tax reform
Baffled by the crossfire over the House and Senate tax bills? The defections of some Republicans, again? Here's one economist's value-laden guide to the most important issues and likely impacts.
First, let's consider the impact on workers and families from bottom to top. Those of us earning less than $30,000 a year will be worse off under the current House-passed bill, chiefly due to the withdrawal of government aid for health care. The biggest gains, according to the nonpartisan Congressional Budget Office, will go to millionaires and those with incomes in the range of $100,000 to $500,000. Convolution No. 1!
Second, the extravagant claims for macroeconomic effects of current bills, which drastically cut the corporate tax rate without withdrawing any services to corporations, are met by skepticism by most economists. The impact on GDP might be as much as 0.6 percent in 2018, but only enough to offset 10 percent of the federal government's revenue loss from the tax cuts.
The tax bill as it rolls out over future bills will significantly increase the national debt, adding $10 trillion over the next 10 years. That will drive up interest rates and discourage investment. And the claims that lowering corporate tax rates dramatically (in the House bill, from 35 percent to 20 percent) will lead to investment and jobs in the U.S.? Many of our corporations have been and will continue to build new plants and hire workers in other countries, especially East and South Asia. The corporate tax rate cut, by increasing retained income, could quicken the pace of these overseas investments, displacing U.S. workers. Convolution No. 2.
Third, House and Senate bills both propose (differently) to reduce or eliminate state and local tax deductions for people who itemize their deductions. These are the taxes we pay for schools; road maintenance; public and fire safety; social services; pensions for public servants; environmental protection; and paying off the borrowing we've done to for infrastructure investments. Our constitution provides for the separation of powers and responsibilities between federal and state/local governments. The system that ensures each city and state can provide what citizens most want in these areas.
Ironically, the current bills would penalize most heavily those states and cities that have chosen to tax themselves for more and better schools and public services. Convolution No. 3.
Fourth, the health insurance mandate. As a gesture toward repealing Obamacare and also to save money, the Senate tax bill currently in debate would eliminate the requirement that all Americans buy health insurance or pay a penalty.
The majority of us have health coverage through our workplaces, paid for by both employers and workers. The elderly, former and current Armed Services members, and the very poor are covered, in major part, through Medicare, veterans benefits and Medicaid. But about 7 percent of Americans, mostly self-employed or working on contract, buy their insurance on the open market, and it is pricey.
Under the mandate, 60 percent of those without employer coverage who purchase it directly, unless wealthy, receive a subsidy from the federal government that goes directly to their insurer, lowering their premiums. Repealing the mandate could result in 13 million more people without health insurance. Insurance companies will respond by raising premiums for the rest of us. Also convoluted.
Should we require everyone to have health insurance? I think yes, just as we require auto insurance. Accidents and illnesses can strike anyone. If you aren't covered, you show up at the emergency room of a hospital, which by law must take you in. Costs go up for everyone else. If your damage or illness is long-lasting, you are in deep financial trouble.
Personally, I support a single-payer system as in Canada, the UK and most of Europe. Medicare is a single-payer system, and in addition to universal coverage for age and disability, it gives the government power to negotiate lower costs for drugs and hospitalization.
And there are more disappointments for this writer: The attempt to eliminate charitable tax deductions, a major source of support for our nonprofit housing, social welfare, environment, educational and arts and cultural initiatives. To eliminate the electric car tax credit of $7,500. Even though we elected not to buy a hybrid last time around — too noisy for my hard-of-hearing husband, because fuel efficiency is gained by skimping on insulation — it's clear that electric cars will be in our future, as innovations continue. And the particularly lamentable elimination of the $250 deduction for teachers who buy their own materials for their students. Why?
I'm hoping, as with other recent controversial Congressional proposals, that enough Republican members of Congress will be successful in moderating some of these convolutions. If so, I will applaud!