Paul Ryan’s tax reform taps noted fiscal policy experts Donald Trump and Sam Brownback
Last Friday, Speaker Paul Ryan released his long awaited tax reform proposal, the final piece of the House GOP’s election year agenda, “A Better Way.” This agenda, as Ryan noted, is meant to highlight the policies Republicans are for, not simply what they are against. So what kind of tax reform are Republicans for?
It will come as no surprise that the consensus view of House Republicans is that tax reform means more tax cuts for the rich (a point I’ll highlight more in later posts). What is surprising, however, is how Paul Ryan and the House GOP propose cutting taxes for the rich.
Ryan has decided that the House GOP should take tax advice from noted fiscal policy experts Sam Brownback and Donald Trump. Specifically, Ryan’s House GOP tax reform agenda creates a new loophole for “pass-through” income. Pass-through entities are businesses whose incomes are not taxed at the corporate level, but instead “passed through” entirely to the business owners and then taxed at their individual income tax levels. Trump’s tax plan called for cuts to the top individual income rate that would reduce it from today’s 39.6 percent to 25 percent. But, on top of this already generous tax cut for the very top, he also introduces a special, lower rate for pass-through income—15 percent.
All this does is reward financial engineering for the purpose of tax avoidance. Rather than pay the 25 percent top individual tax rate, high-income individuals will simply call themselves independent contractors to qualify for the 15 percent pass-through rate. And this incredibly stupid loophole, first implemented by Brownback for the state of Kansas and then proposed in Trump’s tax plan, has now made it into the House GOP election year agenda. In Ryan’s plan, the top individual income tax rate will be 33 percent, while the top rate on pass-through income will be 25 percent, thereby creating a loophole through which high-income individuals will be able to lower their top marginal income tax rate by 8 percent.
This isn’t a tax cut, this is a loophole. This is a loophole so bad that the resolutely pro-tax cut Tax Foundation isn’t even in favor of it. The House GOP version of tax reform trades our current array of already-regressive tax loopholes for even more regressive loopholes aimed at the very rich.
As part of his infamous failed experiment of supply-side economics, Brownback also exempted pass-through income from the personal income tax. Rather than pay the non-zero top rates for the individual or corporate income tax, thousands of high-income individuals and corporations reclassified as pass-through entities and paid nothing, further draining Kansas of tax revenues.
Since Brownback’s tax cuts, Kansas’ tax revenues have plummeted—and there has been no growth surge following the cuts. This has left Kansas facing enormous budget deficits and tax collections that come in consistently under projections. And while Brownback himself won’t back down from the tax loophole he’s created, some Kansas Republicans have lost patience. Most recently, instead of shoring up the long-term hole that Brownback’s cuts and loopholes blew in the state budget, he and the state legislative leaders have authorized temporarily borrowing a record $900 million from sources like state transportation and Medicaid fee funds to balance Kansas’ budget. This is the fiscal conservatism that alleged policy wonk Paul Ryan feels is worth embracing.
Ryan’s plan for tax reform also includes lowering the corporate income tax rate to 20 percent, so we wouldn’t expect to see corporations (as opposed to high-income individuals) flocking to reclassify themselves as pass-through entities the way that they did in Kansas. Instead, high-income individuals will either (a) game the system in order to keep their income internal to a standard corporation to obtain a top tax rate that is 13 percentage points lower than the top individual rate, or (b) reclassify themselves as pass-through entities to get the 8 percentage point do-it-yourself tax cut made available by the Ryan pass-through loophole.
To recap, in 2012, Governor Brownback enacted a tax loophole that, when paired with other rate cuts for high-income individuals, has caused Kansas to hemorrhage tax revenue. This has forced Kansas to drastically cut basic public services like education. Subsequently, Governor Brownback’s brainchild has been embraced by the Trump campaign. We’ve been told that Brownback and Trump are outliers—ideologues with no respect for policy expertise. The intellectual torch of conservative thinking, meanwhile, is being kept alight by the “serious, policy-minded” wing of the Republican Party, exemplified by Speaker Ryan. And now Ryan has cribbed his tax plan from Brownback and Trump.
This should serve as a useful reminder that while the Washington media desperately wants Ryan to be an intellectually serious and honest budget expert, he’s just not.