By Greg Peele, Treasurer
This week, the US House and Senate passed significant tax cuts. While we focus mainly on local issues here at the Libertarian Party of Orange County, since we actually have some hope of influencing those at our county commission and city council meetings, I wanted to share a Libertarian analysis on this federal matter since it is a fairly big deal that affects everyone. On the surface, one could be forgiven for assuming that Libertarians automatically approve any and all tax cuts. "Taxation is theft" after all, and we strongly favor getting the government out of our pocketbooks as well as our bedrooms. But like most major federal legislation, the tax cut bill was a fairly complicated piece of work that I believe deserves a deeper dive.
The mainstream media is bringing out the hatchets and going all out in propaganda pieces against the bill and trying to say it's electoral doom for the Republicans, so clearly there must be something good in it right? Well, sort of. In the final analysis, it's not perfect, and does nothing to solve our deficit or debt issues, but there's definitely plenty for Libertarians to like despite those issues.
Corporate Tax Cuts
Loud cheers for cutting the corporate income tax rate! And furthermore, for converting the corporate income tax to a territorial tax! The United States of America has long been a completely insane outlier compared to literally every other country in the world regarding corporate income taxes. The prior 35% rate was among the highest in the world, and the assertion that we can tax any US-based corporate income in the world was absurd. Reducing the rate to 21% and restricting it to earnings on US territory puts us right about average by world standards, and thus no longer leaves our corporations at a severe operational disadvantage compared to European and Asian corporations. I'd prefer to see it go to 0%, but... baby steps, I guess?
While many corporations had used deductions and "loopholes" to avoid paying that full rate, that's hardly a ringing endorsement of taxing more than large-government European Union rates. Some of those deductions were closed, more were not, but at the end of the day, the reality is that corporations never paid that income tax anyways - it's always employees and consumers that pay the real cost of corporate taxes. To drive that point home, upon announcement of the passage of this tax bill, a number of large corporations including AT&T, Wells Fargo, and Fifth-Third Bank announced employee bonuses and increasing hourly wages. Political stunt? Sure. But warranted all the same. This move should lead to significant onshoring effort for US jobs, increases in employee take-home pay, and possibly even reduction in US prices for goods and services.
Ending the Affordable Care Act Mandate
The Affordable Care Act was such an amazing affront to individual liberty on so many grounds. But the biggest affront was the individual mandate - that people are forced to purchase a product on penalty of tax, regardless of whether they need it or not, much less whether they can afford it. Mandating that "free" people purchase a product under threat of taxation is literally the opposite of everything Libertarians believe. Repealing the individual mandate is a rare instance of politicians (finally, and at great difficulty to be sure) keeping their promises, so kudos to the Republicans for that - you won't hear me say that often. While those in the most dire of need could (in theory) obtain subsidies to offset the cost, the mandate tax and all-too-expected insurance unaffordibility fell hardest on young Millennial working families struggling to make ends meet.
Of course, the reality is that the rest of the Affordable Care Act can't stand without the mandate. Monopolized insurance pools at unaffordable rates will enter a death spiral, and insurance companies will either collapse or be forced to compete on affordable prices. It doesn't solve the rest of our health care issues, but maybe we can finally start the real discussion we need to have - that health insurance and health care aren't the same thing, and that we desperately need a free market in health care to make it affordable. This isn't a new problem, either: we haven't had a free market in health care since arguably the 1920s. It's going to be a long road, but without the mandate it's at least a road we can hope to travel.
Tax Rate Reduction for Working Families
The largest percentage reductions were in the second, third, and fourth lowest tax brackets. These are the brackets that the vast majority of working class and middle class families fall into, and they'll see a real benefit in having less of their money stolen at gunpoint to fund the collective waste dump we call government. The lowest bracket stays at 10%, but the next bracket is reduced from 15% to 12% which is a huge difference for folks in that bracket. The next level reduces rates from 25% to 22%, a similarly large change, and the next level reduces from 28% to 24%. Comparatively, the top brackets get less percentage reductions, though you'd never know it from all the screeching about tax cuts for the wealthy.
The only down side is that the reduced rates expire in 2025 unless a future Congress takes action. Really, guys?
Reduce Applicability of Alternative Minimum Tax
Most people don't have to deal with the Alternative Minimum Tax. It's basically a "rules patch" to deal with all the shenanigans the wealthy can do in the normal tax code, without actually fixing the normal tax code. The problem is that it was never indexed to inflation, so average people started having to deal with that hot mess. It wasn't repealed entirely, which I'd have preferred, but at least the limits of applicability were raised,
Doubling the Standard Deduction
Libertarians have interested principled arguments regarding targeted tax deductions. Some say any tax deduction is good regardless of how narrowly targeted. My own opinion is that this has to be balanced against how the tax deduction distorts the free market in whatever it is related to. A tax deduction for solar panels, for example, unfairly favors solar companies. Mortgage interest deductions, while I personally heavily benefit from them, unfairly favor home owners over renters.
For people like me with lots of itemized deductions, it probably doesn't matter much one way or the other. But the average person runs with the standard deduction. And making it easier for everyone to claim more via the standard deduction without itemization is unequivocally a good thing. Everyone benefits from it, it's fair, and for those who take advantage of it, it simplifies their taxes.
One caveat on this one is that it also repeals personal exemptions. So in some circumstances this can be less of a benefit than one might think. But from a simplification standpoint I find that acceptable.
Reducing State and Local Tax Deduction
On a related vein to the previous item, not every Libertarian agrees on how to process removing the state and local tax deduction. Some say that all deductions should be preserved, expanded, and generalized. I can respect that view. But personally? I think it's a good move to reduce or even eliminate the state and local deduction. This deduction insulated state government officials from the electoral penalties of increasing state taxes in high-tax states like California, Massachusetts, and New York. Without the deduction, they have to answer to their own electorate on whether their state and local taxes are justified and reasonable, and their high taxes did not come at the expense of taxpayers in lower tax states like Florida.
Note that many high-tax states are also net federal taxpayers (pay more in federal taxes than they receive back in benefits) which this change will only exacerbate. But in large part this is precisely because they are high-tax states with high costs of living, and thus pay more in federal taxes to begin with.
The end result is that you can deduct a combination of state income, sales, and property tax up to $10,000. If your state is taxing you more than $10,000 per year, the problem is your state.
Mortgage Interest Deduction Cap
On the theme of deductions, the bill also caps mortgage interest deductions to only apply to loans of $750,000 or less. Needless to say, residents of Southern California, Northern Virginia, and New York City are screaming. I'd prefer to see the mortgage deduction eliminated entirely since it's a flagrant distortion of the free market in housing favoring homeowners over renters. But this particular change is only really a pain to those whose governments have already driven up the cost of housing to an unaffordable level and, otherwise, the very wealthy. Hard for me to get riled up one way or the other on it.
Deficit and Debt - Where's the Spending Cuts?
The elephant in the room is that this tax bill is by no means budget neutral - and we're not exactly big fans of elephants, don't you know. The federal government is already on a totally unsustainable trajectory on spending, and this bill does absolutely nothing to solve that. If anything, it makes it worse. The corporate tax cuts MIGHT partially pay for themselves with onshoring and increased tax base (hard to say) but the overall impact is to increase the deficit. But this bill makes no pretense of fiscal responsibility and does absolutely nothing to avert our pending debt spiral. It's not really a tax cut if we end up having to pay more taxes later to cover the interest and principle payments.
The silver lining is that it has the chance, however small, of forcing a future discussion on spending cuts. I won't hold my breath on that one, since in my lifetime Republicans have shown very little willingness to cut spending on big ticket items like military or even welfare entitlements. But I hope they prove me wrong.
Taxes are Complicated - A Missed Opportunity
Libertarians, of course, would ideally prefer to see people pay no income taxes at all and abolish the IRS and repeal the 16th amendment in the process. However, failing that, we'd at least prefer to simplify it down to the point where the average person could file their taxes on a postcard, so that it's not horrible unfair in favor of the wealthy who can buy the complicated accounting to get all the deductions or those who sit on welfare and don't pay taxes at all. The original House version of the tax bill did actually remove some deductions, "loopholes," and made some effort to simplify the tax code. But most of that was sold down the river to secure Senate votes, so the end result is that the tax code is as complicated as ever. The tax bill also didn't decrease the number of tax brackets, so that's not any simpler either.
Florida Senator Marco Rubio deserves special mention on this, since he held his own party hostage on the tax bill for his desired child tax credit. No doubt he will tout this as a major achievement, but a tax credit based on procreation such that folks can even get a larger refund than what they paid into the system is not a tax cut, but rather a disguised form of welfare and wealth redistribution. There's nothing Libertarian about refundable tax credits that can actually give you other people's money.
All in all, some steps forward, and a lot to like. The main problem is that it doesn't solve any underlying issues regarding cash flow or tax complexity. But the steps it does take are otherwise mostly positive, if limited and temporary.
We're still on an unsustainable debt spiral though.