Democrats attacking President Donald Trump’s tax cut have primarily voiced two objections: first, that it is a tax cut for the rich. And second, that it will blow a hole in the deficit.
If Republicans get smart, they can squash both of these arguments — and strike a blow for a much more ambitious, once-in-a-generation tax reform than the plans now on the table in the House and Senate. To do so, they should revisit an idea that was central to the original Trump campaign plan that Larry Kudlow and I helped to craft. In every meeting, Donald Trump told us he didn’t want a tax cut “for rich people like me.” So we solved this problem by putting a global cap of $150,000 on all deductions and credits.
Under this approach, no deductions (such as for home-mortgage interest or charitable contributions) would be eliminated from the tax code. But families whose write-offs exceeded the limit would have to pick and choose which ones to use.
For at least 95 percent of taxpayers, the cap would be so high as to be irrelevant — and, remember, because of the doubling of the standard deduction, fewer than 2 in 10 Americans would itemize deductions at all under the House GOP bill. But for multimillionaires and, even more so, billionaires, such a cap would effectively end their deductions. This would raise hundreds of billions of dollars a year in tax collections and would end tax-avoidance schemes by those with armies of tax lawyers. Internal Revenue Service statistics tell us that at least one-third of the cost to the treasury from tax write-offs come from the tax returns of Americans in the top 1 percent of income.
In short, tax deductions are the playpens of the very rich.
We ran the numbers on what this buys you. The money raised could be used to cut the highest income-tax rate to 36 percent — without giving the top 1 percent a net tax cut — and help fund the tax cut for everyone else.
This would eliminate with one swipe almost all the thorny issues in the current tax bill. No longer would it be necessary to eliminate state and local tax deductions (a tough vote for Northeastern Republicans) or place a lower cap on the mortgage deduction (anathema to the real estate agents’ and home builders’ lobbies). The middle class wouldn’t face any new limitation on deductions for medical expenses and student loan expenses.
Sure, the housing lobby and K Street will hate this idea. But let them explain to the American people why Warren Buffett, Taylor Swift and LeBron James need a mortgage deduction to pay for their mansions.
The idea offers something for Democrats, too: a much more progressive tax code. How could liberals such as Sens. Bernie Sanders and Elizabeth Warren, who argue the rich don’t pay their fair share, stand against this idea? They would look extremely hypocritical if they did.
History shows that eliminating loopholes is a far more effective and less economically destructive way to raise money from the wealthy than raising tax rates. For example, in the 1980s, after tax rates came down from 70 percent to 28 percent but most loopholes were eliminated, the share of taxes paid by the top 1 percent nearly doubled from 19 percent to more than 35 percent.
Higher tax rates historically have been at best a disappointing revenue raiser — in part because they make loopholes even more valuable and thus more likely to proliferate. (At a 30 percent tax rate, a deduction saves you 30 cents on the dollar, while at a 50 percent rate, you save 50 cents.) This was a point that Democrats such as former senators Bill Bradley and Sam Nunn and former House majority leader Richard Gephardt made persuasively in the 1980s.
Speaking of the 1980s, one of the enduring lessons of the last great bipartisan policy triumphs — the 1986 Tax Reform Act — is that sometimes the best way to roll over the special interests is to take them all on at once. My guess is that if the GOP adopted this tax code cleanup, public support would skyrocket across the political spectrum.