Tax Reform’s Seismic Shift that Nobody’s Talking About

6757821397_ba181435ea_bNobody disputes that if Congressional Republicans and the White House succeed in dragging their gargantuan tax plan over the finish line, it will reshape massive parts of the economy (and keep accountants in business for years to come).

But its impacts go way beyond the nation’s fiscal state. In fact, this bill may mark a watershed moment in conservatives’ decades-long movement to remove the federal government as a factor in the civic life of the country.

On the chopping block in the House or Senate bills – and in some cases, both – are scores of tax incentives for everything from orphan drugs and medical devices to historic preservation and energy efficiency. Even tax credits for adoption were slated for elimination, until Republicans remembered that humans like adoptions. Other changes, like the increase in the standard deduction, would render many tax incentives effectively useless.

True, some or all of these incentives may find their way back into the final bill. But there’s little doubt Republicans don’t like them. Why? The bill’s supporters maintain that these are “special-interest deductions that increase rates and complicate Americans’ taxes.” And nobody likes a special interest, other than their own.

Besides, Republicans argue that businesses and families won’t miss these deductions and credits since they come along with a hefty tax cut (putting aside for the moment analyses that show the tax cuts aren’t as generous as advertised, unless your last name is Kardashian, Gates, or, well, Trump).

But the real reason conservatives want to gut these incentives is more fundamental:  they are, in their view, nothing more than social engineering run amok. “We’re going to tax the hell out of you,” is how they perceive shifty-eyed bureaucrats thinking, “but if you do things that are socially acceptable (read: politically correct), we’ll kindly let you keep a little more of your hard-earned money.” In their view, only a Democrat would support tax incentives like these (and many do).

But here’s the thing: Republicans used to love tax breaks, and Democrats? Not so much.

In the New Deal and Great Society eras, if you wanted to address a social problem, you created a program that spent taxpayer funds directly: Pell Grants for education, Section 8 for housing, and so on. That all changed when Ronald Reagan declared that government was the problem. Ever since, Republicans have gone to war against direct government spending.

But cutting taxes? That’s far more popular than creating spending programs. And in the conservative world, a dollar refunded to the taxpayer stimulates the economy far more than a dollar spent by Uncle Sam.

Progressives, meanwhile, would much prefer direct spending on government programs. For one thing, tax incentives tend to skew towards the wealthy. The Center on Budget and Policy Priorities notes that more than half of the money from these tax expenditures goes to the top 20 percent income-earners – and nearly one out of every six dollars out the door goes to the one-percenters. Second, running social programs through the tax code provides far less oversight and fewer guarantees the funding goes to its intended recipients.

For the last two decades, however, Democrats have learned to love tax incentives (or at least dislike them less), since creating new spending programs has become politically impossible. When Bill Clinton announced in 1995 that the “era of big government is over,” conservatives may as well have strung a Mission Accomplished banner across the Capitol.

The fact is, tax breaks represent big government just as much as direct spending – even more. In 2015, tax expenditures drained the federal coffers of more than $1.2 trillion, more than spending on all defense and non-defense programs combined. That’s why they’re called, in DC-speak, tax expenditures. You’re still spending taxpayer money, but in a far more opaque way.

As a result, the IRS has a bigger role over government policy than most other agencies do. The federal government “spent” more than $7 billion for energy-related tax incentives in 2017, as much as half of the Energy Department’s entire non-nuclear budget. And while the tax experts at the IRS are pretty smart, they aren’t experts in energy – or in R&D, or adoption, or medical devices, or the countless other items that qualify for tax breaks.

Tax expenditures are a lousy way of making policy.  But in the “government-is-bad” era, they’re the only way for Washington to achieve social policy goals.

That’s why the current tax plan portends an ominous future for those who support a federal role in domestic affairs. Having made direct spending politically unfeasible, conservatives are now furiously working to make tax incentives equally obsolete. Once they’re gone, conservatives will be one step closer making the federal government so small they can, in the words of ant-tax crusader Grover Norquist, drown it in a bathtub.

At the end of the day, the Frankenstein monster that is the current tax bill may fall short of conservatives’ goal of eliminating tax expenditures completely. But their efforts will likely continue. The federal government hasn’t been drowned in the bathtub quite yet. But the water level is getting awfully high.

Photo: 401calculator.org

 

 

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