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12/1/15

Taxing times for GOP candidates

Most polls suggest that voters care little about taxes. A recent ABC News/Washington Post Poll found that 6% of voters who leaned Republican and 4% who leaned Democrat, ranked taxes as the most important issue to their vote. A Pew Research Center Poll ranked tax reform low in the list of priorities for Congress, well below dealing with terrorism, the economy and jobs. A Gallup poll that asked voters to rank the biggest problems facing the nation did not even list taxes as a separate issue. Yet, tax policy has been a central theme in the 2016 Presidential election. Many leading Presidential candidates, particularly Republican candidates like Jeb Bush, Rand Paul and Marco Rubio, have announced detailed tax plans aimed at a comprehensive tax reform. This is a losing strategy.

First, most voters don’t think taxes are a priority so discussions of tax reform are unlikely to sway their vote–debating jobs and the economy might. Second, Republican candidates’ tax plans often involve cuts in tax rates on top earners which alienates the candidates further from the average voter, even if the tax cuts could potentially improve economic growth. So for Republican candidates, there is no upside in releasing a detailed tax plan at this stage. Instead, the focus should be on jobs and the economy.

Why do few voters care about taxes?

The latest data from the Tax Foundation finds that the bottom 50% of the population paid 2.78% of all federal income taxes while the top 10% paid nearly 70% of all federal income taxes. So it is not surprising that discussions of tax reform appeal to only a small fraction of the population. In fact, a new report from Pew Research Center shows that 54% of those surveyed said they think they paid the right amount in taxes, considering what they receive from the federal government. Therefore, when candidates discuss plans for tax reform, most voters correctly assume that their tax bill is unlikely to change. If anything, since many candidates have espoused the expansion of tax credit programs that usually benefit low to middle income households, their tax burden is likely to decrease.

Tax reform takes time

Tax reform requires a lot of time, thought and effort. When President George W. Bush’s Advisory Panel on Tax Reform was given the task of devising a revenue neutral tax reform of the Federal Income Revenue Code, it took a team of economists and policymakers nearly a year to come up with a proposal. They held 12 public meetings in five states and D.C.. The panel developed two plans for broad-based reform, a simplified income tax and business cash-flow tax. However, the Commission received no support from the Bush Administration or Congress and nothing much came of its proposals. Similarly, earlier last year, then Chairman of the House Ways and Means Committee, former Congressman Dave Camp announced a comprehensive tax reform plan that would overhaul the nation’s tax code and that took three years of work. Yet despite the sweeping changes proposed and general positive reception, his proposal has not gained much traction in Congress. This experience suggests that aiming to come up with a comprehensive tax reform plan that would do well with voters and Congress so early in the electoral cycle is unlikely.

Not simply about top tax rates

In comparing the candidates’ tax plans, it is pretty clear that the big differences lie in how they would tax incomes of top earners. While Democratic proposals typically call for hiking taxes on capital gains income or estates, Republican proposals tend to call for lowered top marginal tax rates on personal income, capital gains and dividend income, and estates. There are pros and cons of undertaking either action. While raising taxes on top earners may result in higher revenues in the short-run and lower deficits, it is also likely that the revenue gains may be overstated because of the nature of the compensation package of top earners, as I have written earlier. Moreover, it may be costly to have really high taxes on personal incomes since it distorts incentives for work, saving and investment. It is not surprising, therefore, that many Republican proposals have been criticized and scored as adding to deficits, even though they boost incentives to work and invest.

However, tax reform is not just about raising or lowering tax rates, but about the larger goal of achieving high rates of growth while at the same time addressing social inequities. As MIT economist Jim Poterba pointed out at a recent conference at the Tax Policy Center, persistent slow growth in the U.S. may demand pro-growth reform which could include lower taxes on capital income, but at the same time, the concern about income inequality makes it more difficult to expect that reductions in capital taxes or taxes on top earners would be acceptable. Tax reform is likely to be a long, complicated and challenging process involving multiple trade-offs of tax cuts with tax hikes, promoting economic growth while reducing social inequity. A process that involves many compromises, requires time, a lot of deliberations, bipartisan support and give-and-take in Congress.

Given the reality of tax reform (in the short-run) candidates benefit most from focusing on the issues that are of immediate concern to voters, such as the economy and jobs, and leaving more meaningful discussions of tax reform for the future.

Hillary Clinton and Bernie Sanders seem to understand that having “no specific proposal” on many tax policy items is often better than aiming to come up with a comprehensive tax reform plan this early in the race.



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