I turn now to the Mandate for Leadership’s chapter on the Treasury Department, authored by William L. Walton, Stephen Moore, and David R. Burton. It contains conservative recommendations for federal fiscal policy, especially tax policy.
The Biden administration’s “woke agenda”
The chapter begins with a condemnation of President Biden’s fiscal policies:
The Biden Administration Treasury Department has failed badly in achieving every one of the agency’s core objectives. The financial affairs of the nation have seldom been in worse condition, with the national debt expanding by more than $4 trillion in Biden’s first two years in office. No President in modern times—perhaps ever—has been more fiscally reckless than has the Biden Administration.
The chapter does not mention that the Trump administration outdid Biden by adding over $8 trillion to the national debt. And while it places the blame for inflation squarely on Biden, it gives him no credit for the best record on job creation and low unemployment since the 1960s.
The authors attribute the Treasury Department’s failure to achieve its core objectives to the administration’s “woke agenda.” They cite Secretary Janet Yellen’s introduction to the department’s strategic plan:
We will have to address the structural problems that have plagued our economy for decades: the decline in labor force participation, income and racial inequality, and serious underinvestment in crucial public goods like childcare, education, and physical infrastructure. And then there are rising challenges, like climate change, which, left unchecked, will undermine every aspect of our economy from supply chains to the financial system.
The authors object to including goals like social equality, human capital development, and cleaner energy in fiscal policy. They want the next administration to limit its concerns to the “core missions of promoting economic growth, prosperity, and economic stability.” They do not see the relevance of the administration’s broader goals to the core missions, which points to a fundamental philosophical difference between Republicans and Democrats.
A flatter tax
The authors propose to “simplify the tax code by enacting a simple two-rate individual tax system of 15 percent and 30 percent that eliminates most deductions, credits and exclusions.”
Let’s set aside the eliminations for a moment and explore the implications of a two-bracket system. The higher bracket would begin at or near the Social Security wage base, which is currently $160,200. The idea is that income below that amount is subject to Social Security taxes, so it should be subject to lower income taxes. That way, the combination of taxes would constitute a fairly flat tax, with all income taxed at similar rates. This is a departure from the more progressive system we have now, with seven different brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Bear in mind that these tax rates apply only to taxable income, after the standard deduction or itemized deductions are taken. And the effective rate one pays is not the same as one’s tax bracket. People in the top bracket pay 37% only on the income that exceeds $578,125; they pay lower rates on the rest. Someone with a taxable income of $1 million pays an effective rate of 33% after the seven different bracket rates are applied to the portions of income they cover.
Here are some effects of replacing the current seven brackets with two brackets of 15% and 30%:
- Taxes on an individual with $50,000 taxable income go from $6,308 (13%) to $7,500 (15%), an increase of $1192
- Taxes on an individual with $100,000 taxable income go from $17,400 (17%) to $15,000 (15%), a decrease of $2,400
- Taxes on an individual with $200,000 taxable income go from $42,832 (21%) to $35,970 (18%), a decrease of $6,862
- Taxes on an individual with $1 million taxable income go from $330,332 (33%) to $275,970 (28%), a decrease of $54,362
High-income people get the biggest tax cuts, both as a percentage and in dollars, while middle-income people get a smaller tax cut, and the lowest get an actual increase. The break-even point is a taxable income of around $67,000, since individuals at that level will pay about $10,000 (15%) either way. People below that income will see at least a small tax increase, and people above that income will get a potentially large tax cut. Of course, people in the higher brackets pay most of the taxes now, since that’s where the real money is.
Under this conservative plan, high-income taxpayers get some additional breaks, because the top rate for qualified dividends and capital gains gets cut from 20% to 15%. The richest taxpayers have the bulk of that income. The corporate tax rate is cut from 21% to 18%, which also benefits corporate shareholders.
Other tax “reforms”
The authors would offset at least some of the revenue losses from tax cuts by eliminating most tax deductions and credits, such as the deduction for state taxes. This may make taxes simpler, but not necessarily fairer. Personally, I believe that people who must pay high state taxes or unusually high medical expenses deserve a break on their federal taxes.
The authors also recommend a consumption tax as the best way to raise additional tax revenue. You can think of it as a national sales tax. That is also a rather flat tax, since the rate would be the same on all expenditures. However, people who must spend all of their income to make ends meet would be hit the hardest, while people who can afford to save and invest much of their income would be more protected from it. That makes it rather regressive.
Low-income people could be hurt in three ways by these proposals: having to pay taxes at 15% instead of their current 10% or 12% rate; having to pay consumption taxes; and (less commonly) losing the advantage of itemized deductions if those would have exceeded the standard deduction.
Impact on revenue
Anyone who advocates a flatter, less progressive tax system should be able to say whether they intend their plan to be revenue-neutral or revenue-negative. Both create political challenges for fiscal policy.
To be revenue-neutral, the plan must raise taxes on one group to lower them on another. Flat-tax proposals often raise taxes on the poor to lower them on the rich. Obviously, advocates of such plans would rather talk about how they “simplify” people’s taxes than how they raise their taxes.
If, on the other hand, the plan is willing to sacrifice revenue to cut taxes for those who pay the most now, that complicates the task of reducing the deficit. Those who advocate both a flat tax and a balanced budget need to explain how they intend to accomplish that. The authors do not discuss the implications of their tax plans for revenue or the deficit.
Fiscal responsibility
The authors do have a brief statement about fiscal responsibility, in which they say that the Treasury Department should “make balancing the federal budget a mission-critical objective.” But as to the means of doing so, they give only the standard Republican advice: “The budget should be balanced by driving down federal spending while maintaining a strong national defense and not raising taxes.”
Nowhere in the economics section of the Mandate for Leadership is there a chapter, or even a section of a chapter, on the federal budget. That is a strange omission for a book that blames reckless federal spending for most of the ills of the economy. To be fair, suggestions for program cuts are scattered throughout the book, such as abolishing the Consumer Financial Protection Bureau or ending subsidies for clean energy. But I looked in vain for anything resembling a balanced budget plan. The Democrats may not have one either, but they are not the ones claiming to be able to balance the budget without raising taxes.
I can think of two reasons for this omission, neither very reassuring. One possibility is that conservatives are not really serious about budget cutting. They just like to claim that they are to get elected. Another is that they are serious, but the budget cuts they want are so unpopular they would rather not talk about them until after the next election. Given the composition of the federal budget, reducing the deficit is very hard without raising taxes or cutting popular benefits or services. I talked about this problem in a recent post.
Conservative or destructive?
I sometimes call the Republicans under the Trump leadership “radical conservatives,” but that phrase is in danger of becoming an oxymoron. How radical can proposals get before they do more to destroy existing institutions than to conserve and improve them? Both the Federal Reserve and the progressive income tax were Progressive Era reforms enacted in 1913. They have had over a century to become institutionalized. Now both are under attack. This may be a part of an effort to solidify the economic gains of the rich and powerful in our new Gilded Age by undermining democratic reforms and institutions.
Although I disagree with much of what I read in the Mandate for Leadership, I think that publications like this are useful, if for no other reason than to warn the public about what radical conservatives are thinking.
Beneath the Surface 