×

How Democrats could beat Republicans on tax reform

  • The GOP tax plan is vague, expensive and regressive.
  • Democrats have good ideas on tax reform.
  • It's time for them to put together a comprehensive plan.
Senate Minority Leader Charles Schumer, D-N.Y., and House Minority Leader Nancy Pelosi, D-Calif.
Tom Williams | CQ Roll Call | Getty Images
Senate Minority Leader Charles Schumer, D-N.Y., and House Minority Leader Nancy Pelosi, D-Calif.

If you pay attention to how Donald Trump's team and allies are selling his egregiously expensive, hopefully vague, and extremely regressive tax plan, you start to see why Republicans have made taxes a winning issue for themselves for decades.

Naturally, the pitch doesn't mention the rich households who'll get the bulk of the tax cuts at all, or even really big businesses that will enjoy a massive rate cut. The focus is on what the plan offers middle-class people. It offers most (but not all) of them a cut; it expands the standard deduction for everybody. But more than anything, it offers middle-class taxpayers simplicity.

This is why Trump's team has repeatedly emphasized their zeal for cutting loopholes — not only do people hate the idea of unfair breaks for special interests in the tax code, but they like the idea of a simpler list of deductions. It's no accident that Treasury Secretary Steve Mnuchin and Paul Ryan are going around telling people they'll be able to fill out their taxes on postcards:

More from Vox:
How the states can make President Trump's taxes public
The fight over Obamacare is hurting health care job growth
The Trump administration is making Obamacare more expensive

And for years, Democrats haven't really had a good answer to this, because Democrats don't tend to propose tax plans much at all.

Hillary Clinton kept promising to release a plan for middle-class tax cuts during 2016, and it just never happened. Her plans for tax hikes on the rich to pay for spending plans, though, did come out. Trump then, predictably, attacked her as proposing tax increases for the middle class, which was a lie, but which was also guaranteed to be effective with low-information voters:

The result is that Republicans own the issue of taxes in general and tax simplification in particular. While Democrats wipe the floor with Republicans when you ask voters whom they trust on education, health care, foreign policy, the environment, and even government spending, Republicans retain a slight advantage on taxes.

Democrats could run on tax simplification. They could run as the party that will liberate middle- and upper-middle-class people from ever having to deal with a 1040 form again in their lives. But they largely don't — in part because Democrats and Republicans approach taxes differently.

Republicans and conservatives, in government and in think tanks, have no shortage of big, ambitious plans that reflect a vision for the role taxes should play in society. I don't agree with that vision, but it lets them position themselves as enemies of a much-loathed, overcomplicated tax code.

Democrats, though, are far less likely to think about the tax code holistically. More typically, they propose spending plans — for free college or health care or family leave — and then come up with a tax plan to pay for it. Or they use the tax code itself to create new programs through new tax credits. The result is that taxes get more complicated, and that Democratic politicians end up talking about taxes mostly when they want to raise them (at least on the rich).

But there is a Democratic plan to make taxes simpler and lower for middle-class people. Designed by former Obama chief economist Austan Goolsbee, it would do more to simplify taxes for Americans than anything else the federal government can do. If enacted in its broadest form, it would eliminate the need for the large majority of Americans to ever file another income tax return. These are the kind of big ideas on taxes that Democrats need — not just to claim political turf from Republicans but to address the big concerns most Americans actually have about their own taxes.

How Democrats could beat Republicans on tax simplification

Republicans like to tout "tax simplification" as a feature of plans that mostly exist to cut rates for the very wealthy. But there's no law of the universe saying that the only way to make taxes simpler is to cut them for rich people

In fact, the best way to simplify taxes wouldn't require any changes to tax rates at all.

In a number of countries, like Japan and the UK, the vast majority of people don't have to file tax returns at all. Instead, through a system known as "precision withholding," the government takes exactly the right amount out of every paycheck. If they find that a mistake was made — not accounting for a charitable donation or mortgage interest, for example — they find that mistake in charity and bank records, and they fix it for you. In journalist T.R. Reid's great new book A Fine Mess, he explains how the Japanese system works:

Japan's equivalent of the IRS, Kokuzeicho, gathers all the pertinent data for each worker — income, taxable benefits, number of personal exemptions, tax withheld, and so on — and then computes how much the worker owes in tax, down to the last yen. Because Japan uses a system known as "precision withholding," with the amount changing whenever pay goes up or down, most people withhold the exact amount due.

In early March, Kokuzeicho sends a postcard to every citizen that sets forth all this information: how much you earned, how much tax you owe, how much tax you've already paid through withholding. If you've paid in more tax than you owe, Kokuzeicho deposits the refund amount in your bank account; if you did not withhold enough, the agency takes the tax that's due from your bank account. …

As a result, paying income tax is a totally automatic process for about 80 percent of Japanese households, requiring no more work than reading a postcard once a year.

This is a vastly simpler system, from the taxpayer's point of view, than the American one, and it's not because Japan has lower taxes than us. They don't: People making over around $350,000 a year pay a 45 percent rate, and there's also a value-added tax (a form of sales tax). The difference is that they have chosen to make it easier to pay taxes.

That's a choice that American conservatives have fought against, tooth and nail, with the help of predatory tax services companies like H&R Block and Intuit (the makers of TurboTax). When Sens. Ron Wyden (D-OR) and Dan Coats (R-IN) introduced a fairly timid, intentionally bipartisan tax reform bill in 2011 and included a proposal for return-free filing, anti-tax crusader Grover Norquist blasted it, writing in a letter to the senators that "the clear goal of this measure is to raise taxes in a way that leaves politicians with clean hands." Norquist wants to make taxes complicated so people hate them, just as Intuit wants them complicated so that people remain dependent on its terrible, unnecessary software.

Some Democrats have proposed return-free filing, most recently Elizabeth Warren, whose plan would, unlike the Japanese system, send people filled-out returns that they would still need to confirm are correct and return to the IRS.

But return-free filing for the middle class hasn't become the centerpiece of Democratic messaging on taxes. It should. It's a political winner: If Republicans voted against a return-free filing bill, Democrats could run ads asking, "Why does Congressman Miller want your tax season to be miserable? Democratic Barbara Smith wants taxes to be easy for you." It would let Democrats go on the offensive on taxes, and deny Republicans a monopoly on the tax simplification discussion.

But more importantly, it's the single biggest thing Congress could do to make taxes better for average people. The effects wouldn't be limited to the middle class, either. Return-free filingwould cut poverty by expanding access to refundable tax credits like the earned income tax credit and the child tax credit. About one in five people qualifying for refunds from those programs don't get them; having the government file returns would make sure the money gets to them.

Democrats should get more ambitious on tax substance too

Adopting Japanese-style return-free filing would fix a lot of what's wrong with the tax system, but not everything. Even with return-free filing, the tax system would include marriage penalties and evasion opportunities for the rich and corporations. The American tax code could still do more to reduce inequality, to make work pay, and to provide a basic standard of living to poor families, including ones who cannot work.

Fixing these problems requires a wholesale, bottom-up reevaluation, a holistic project that basically no Democrats in recent memory have decided to take on.

Bernie Sanders was the most ambitious Democratic candidate on policy in decades, but even he didn't release a comprehensive reimagining of the tax code. He proposed a plan for single-payer health care and then specified that payroll taxes and a few other measures would pay for it; he proposed making public college free, and specified that a tax on financial transactions would pay for it.

Hillary Clinton did the same. Her "tax plan" was a melange of new benefits (like new tax credits for caregivers of elderly family and for out-of-pocket medical costs and an expansion of the child credit) with a lot more new taxes of various kinds on rich people to pay for non-tax programs she wanted, like free college, paid family leave, and universal pre-K for 4-year-olds.

There are some advantages to this approach. It makes it clear that the candidates' tax plans are designed to pay for popular and beneficial programs, not just for kicks; it's easier for Republicans to just slash rates and call that an accomplishment in and of itself. And taxing the rich is pretty popular, making it tempting to hike taxes for high-income people in a sort of slapdash way to pay for various stuff.

But this approach can also lead to overcomplicated policy. Tax credits, tax breaks, and welfare programs with very similar but slightly distinct goals proliferate. The government could offer low-income families with children a clear cash allowance. Instead, benefits for the poor from federal and state governments are a mix of food stamps, the WIC program for kids under 5, the earned income tax credit, the child tax credit, and, for a small fraction of poor families, actual cash welfare with lots of strings attached.

Most of those programs are good and effective, but it's a lot for anyone to keep straight, let alone a poor parent coping with the stresses of rent and low pay and debt and child rearing.

Steven Teles, a political science professor at Johns Hopkins University, has called this system "kludgeocracy," and argues the consequences aren't limited to the people the benefits are meant to help. The piecemeal approach also leads to exorbitantly high compliance costs, makes government administration more difficult, and makes it easier for businesses to extract rents from the government.

It also has broader implications for the political system: Suzanne Mettler, a political scientist at Cornell, calls the approach "submerged state," and argues it erodes public belief in the effectiveness of government by hiding the government benefits voters receive from view. Middle-class Americans who got subsidized student loans to pay for college and deduct their mortgage interest from their taxes are getting government benefits too — but those benefits aren't perceived the same way as, say, Social Security.

Many of Clinton's proposals — like the out-of-pocket health costs tax credit — were good ideas that were nonetheless kludges. They would make the system more complicated and difficult to interact with rather than less. Bernie Sanders's spending platform was less kludgey — single-payer health care would simplify a lot of government functions in one fell swoop — but his tax plan was far less coherent. His tax increases were scattered across a plethora of different plans, and unless you added them up by hand (as I found myself doing), it was hard to know what they amounted to, all put together.

The proposals were split up in so many places that it was hard to even see potential problems, such as Sanders's proposed a maximum rate on capital gains income of 64.2 percent. Both the Joint Committee on Taxation and the Treasury Department think people would just stop selling stocks if rates got that high. There's a relatively straightforward way to fix this — tax assets every year rather than when they're sold — but, perhaps because the problem itself was hidden, Sanders didn't propose that solution.

Liberals have lots of good ideas to make the tax code better

Democratic candidates should stop putting out patchwork pay-fors, and instead put together comprehensive tax plans the way Republicans on the campaign trail, or in the White House, always seem to. These plans should be bold enough to let them run on tearing up the overcomplicated, flawed code that currently existing, just like Republicans have done to great success. And they should fix noxious distortions in the tax code while doing more to fight inequality and poverty.

Luckily there are a lot of policies on offer, from tax lawyers and economists and other wonks, that are up to the challenge:

  • To make work pay more, you could adopt Rep. Ro Khanna's (D-CA) extremely ambitious plan to increase the earned income tax credit by as much as $215 billion a year. This would give families a de facto raise as large as $12,000 a year, increase labor force participation, and reduce inequality and poverty. Under the most ambitious option, the poorest Americans would get a 10 percent raise, and childless workers would finally get a benefit equivalent to workers with kids.
  • To ensure that credits like the EITC go to more people, you could pay them out regularly with people's paychecks rather than waiting until the end of the year.
  • The EITC only goes to people who work. For households that are having trouble finding work or who cannot work, you could make the child tax credit fully refundable, pay it out monthly, and increase it to as much as $4,000 or more. That would cut child poverty by more than half. Rep. Rosa DeLauro's (D-CT) bill to create a refundable child credit of $3,600 for kids under 6 is a great first step.
  • The corporate tax is hampered by companies moving profits overseas. That could be effectively addressed if the US adopted "sales-based apportionment," wherein if, say, Apple does 60 percent of its sales in the US, then 60 percent of its worldwide profits would be subject to US tax. This could dramatically reduce tax evasion and raise billions.
  • The US currently has two systems for corporate taxation: C corporations subject to corporate taxes, and pass-throughs, which don't. The US could force most "pass-throughs" to become C-corps, to end that kind of tax avoidance and make there be just one system for the vast majority of companies.
  • The US taxes capital gains when assets like stocks are sold. It could instead "mark-to-market" assets and tax people who own them every year on their value. That would raise more revenue and enable higher taxes on capital income, which goes overwhelmingly to the rich.
  • The US could adopt a wealth tax, like the ones France and Switzerland already have, to fight wealth inequality.
  • The US could replace the estate tax with an inheritance tax, where heirs are taxed on inheritances like any other income (maybe with a surtax). This would look better politically (you're taxing rich heirs, not dead people) and be more efficient.
  • The US could add a value-added tax to the mix as Sen. Ben Cardin (D-MD), one of the few Democrats to think ambitiously about taxes, has proposed, while in the process exempting all but the richest Americans from income taxes and adding a rebate for poor people so the whole thing is distributionally neutral.
  • The US could end the "married filing jointly" status and have everyone do taxes as individuals, which would be easy with return-free filing and would eliminate marriage penalties and other distortions.
  • The US could add a carbon tax and a sugar tax, and raise the tobacco, alcohol, and gas taxes to reflect their social costs or the cost of infrastructure. If you wanted to go really nuts, you could let independent panels of environmental or health economists and other experts determine the social cost of these products and set tax rates accordingly, rather than letting lobbying-susceptible politicians do it.

Most of these ideas are old hat among tax lawyers and economists, and some are embraced by heterodox Democrats in the House and Senate. But of the above list, only a young child credit is backed by party leadership in Congress. Democrats can, and should, go a lot further, both in the midterms and in the 2020 primaries.

If Democrats were as ambitious as Republicans about taxes, every Democratic primary candidate for president would be grabbing liberally from the above list and combining ideas to craft plan for a more coherent, simple, and logical tax system that raises more revenue, taxes bad stuff more and good stuff less, and reduces inequality.

And yet in previous years, they haven't done that. They have settled for pay-fors that increase existing taxes but don't fundamentally change the structure of the system. That's not just a problem for Democrats as a party; it denies Americans a substantive debate about what the tax code ought to look like.

Commentary by Dylan Matthews, a senior correspondent at Vox. Follow him/her on Twitter @dylanmatt.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.