Thursday, House Republican leaders proposed much-needed tax reform. In one breath, liberal commentators immediately decried a lowering of tax rates and protested that the Tax Cuts and Jobs Act takes away numerous tax breaks that individuals and business have used to lower their taxable income.
These criticisms reveal a media that is uninterested in the particulars of any tax reform effort proposed by Republicans. The media simultaneously blasted both efforts to lower rates — which it worries will negatively impact the lower and middle classes — and also efforts to reduce various deductions, which would result in a higher effective tax rate on the upper class.
Economists agree that income taxes distort the economy — generally in damaging ways. Taxes reduce incentives to work, to save, and to invest in the economy, and they incentivize investment in inefficient tax shelters, all of which inhibits growth and lowers GDP. Because income taxes distort the economy, raising a particular amount of money always costs more than the tax sticker price. Most economists estimate that the true social cost of a tax is around 30 cents on the dollar.
Consider, for example, taxes levied to build a $100 million dollar bridge. Because of market distortions, economists Leonard Burman and Joel Slemrod estimate the total cost of the bridge project to be around $130 million.
The disincentives to work and to save caused by taxes decrease with marginal rates. Thus, there is much to be said for lowering these rates, especially when rate reductions are coupled with the elimination or lowering of tax deductions that primarily benefit the wealthy.
Putting to one side the merits of any particular proposal, the liberal media’s instantaneous and vociferous rejection of any proposed reduction in various deductions is inconsistent with their complaint that the proposed legislation favors the well-to-do.
Take the State and Local Tax Deduction, otherwise known as SALT, for example. This deduction allows individuals to deduct amounts paid for state income (or state sales) taxes and state and local property taxes. The cost of this deduction is staggering — about $1.3 trillion over 10 years. And the deduction benefits the wealthy most — thus making the federal tax code less progressive.
Only those who itemize can take the deduction. Indeed, 82 percent of deduction takers had incomes over $100,000. The average deduction ranged from $11,000 for those with incomes between $100,000 and $200,000, to $57,000 for incomes between $500,000 and $1 million, to a whopping $288,000 for those with incomes over $1 million.
Or take the proposed reduction in the home mortgage interest deduction from $1 million on newly purchased homes to $500,000. The deduction was originally intended to help families purchase their own home — to enable them to participate fully in the American dream. But the reality today is an expensive deduction — over $70 billion per year — that mostly benefits wealthy Americans.
Four-out-of-five tax filers do not use the deduction at all — either because they do not itemize, do not own a home, or have paid off their mortgage. And among those that do, the well-to-do benefit most. The average benefit for taxpayers with taxable income between $40,000 and $50,000 is less than $500, while the average benefit for taxpayers making more than $1 million is $8,020.
In short, the reaction of the liberal media to blast both lower rates and the reduction of deductions that primarily benefit the wealthy displays ignorance at best. At worst, it’s another sign of an increasingly polarized and partisan media.