Opinion: Tax reform? How about giving Plan B a try?

Bruce Lohof

Bruce Lohof

I wonder if, earlier this month, Montana’s congressional delegation was listening when Steve Bannon, disrupter-in-chief in the Trump White House, suggested raising taxes on the wealthy to defray the costs of substantial middle- and working-class tax cuts.

Bannon’s balloon was quickly pricked by others in the White House: Treasury Secretary Steven Mnuchin said that he’d “never heard Steve mention that,” adding that, in any case, a higher top tax rate isn’t on the table.

Forbes reported that “Steve Bannon wants to soak the rich—or at least leave them a little bit damp.” Not very damp, though: apparently, he “wants the top income tax bracket to ‘have a 4 in front of it,’” which isn’t even a spritz in a world where the top bracket is already 39.6 percent.

Here’s a better proposal. Call it Plan B.

One, discard every deduction, exclusion, exemption, deferral and preference in the U.S.’s 70,000-page Tax Code. Discard, that is to say, what the policy wonks call “tax expenditures.” In Form-1040-speak: “adjusted gross income” disappears and taxes are paid on “total income.”

Two, replace tax brackets with tax slabs, each $50,000 thick. In slab No. 1 are total incomes of $0 to $50,000, in slab No. 2 are incomes of $50,000 to $100,000, and so on to slab No. 20 where incomes of $950,000 to $1,000,000 are found. Total income in slab No. 1 is taxed at a rate of 5 percent. Income within each higher slab is taxed at 10 percent, 15 percent, 20 percent, etc., until, at slab No. 20, each dollar is taxed at 100 percent.

I’ll do some of the arithmetic for you: the average household income in Montana—which I’m told is $47,000–would attract a 5 percent tax bill of $2,350. An income of $250,000 would be taxed at 18.3 percent, $500,000 at 38.3 percent, $750,000 at 51.7 percent, $1 million at 68.3 percent, $2 million at 91.9 percent. (Since you’ve asked, taxes on $2 million would be $1.8 million and change.)

(Older readers of the New Yorker will be reminded of Calvin Trillin’s “Alice Tax.” Named after Trillin’s wife, the tax reflected Alice’s belief “in the principle of enoughness.” “… at a certain point an annual income is simply more than anybody could possibly need for even a lavish style of living.” At that point, Alice thought, “government would simply take everything.”)

The advantages of Plan B are obvious—and attractive.

One, it’s simple. During the 2016 presidential campaign Ted Cruz spoke for many when he hoped for a “tax [system] that would allow every American to fill out his or her taxes on a postcard.” Plan B replaces every existing IRS form with a five-line filing: your identity (a Social Security number will do), your total income (no adjustments permitted), taxes payable (taken from the IRS’ only publication), taxes already withheld or otherwise paid, taxes due (enclose check here). That’s all.

Two, it’s fair. It’s common knowledge that when tax policies are progressive—as they have been in the U.S. for more than a century—tax rates correlate with income, i.e., the more you earn the higher your tax rate.

Less often acknowledged but equally true, progressive rates also correlate with benefits. Few government benefits—Medicaid and food stamps come to mind—are paid only to the poor. Most accrue to all, and incrementally with affluence. Do only the poor benefit from defense expenditures, or Medicare or Social Security programs? Don’t you need an automobile or an airplane ticket to take advantage of the nation’s Interstate highways or its airports?

And perhaps it’s best not to mention how the “benefits” of the criminal justice system morph with movement from actual wealth through affluence and down into poverty. The bottom line: everyone enjoys the public table. It’s just that the well-to-do get larger portions.

Three, it raises public revenue, which is the purpose of a tax system. The public should get—and pay for—the government that it wants. If Plan B attracts a surplus, the rates per slab can be reduced; if it creates a deficit, rates can be increased. The plan doesn’t reward homeowners for paying mortgage interest or hedge fund managers for carrying interest or landlords for property depreciation or farmers or fishermen for being farmers and fishermen. It just raises public revenue (which, in a climate as politicized as ours is nowadays, is worth repeating).

Would Plan B attract critics? You bet.

In the largest—but not the most influential—group would be folks who believe, mistakenly, that the plan would increase their taxes. Lose exemptions for us and the kids, a family of four might argue, and then lose those juicy itemized deductions in Schedule A, and we’re toast. Probably not. Probably their new and lower tax rate—±8 percent for an income of $100,000 or less—would mean a new and lower tax bill. Still, their anxiety is understandable.

A second group, smaller but vastly more influential, would include folks who believe, correctly, that the plan would increase their taxes. Discard the tax expenditures enjoyed by the wealthy—think capital gains rates, carried interest scams and the whole panoply of goodies available to, say, real estate developers—and then move the maximum tax rate from 39.6 percent to 68.3 percent and higher (on the first $1 million and beyond). Anxiety morphs into political action.

In a still smaller—but at the upper reaches equally influential—group would be folks who make up the “tax industry,” folks familiar with a tax code too cumbersome for the average filer. The bottom feeder is the high school social studies teacher who moonlights each spring semester with H&R Block. The sharks are the white-shoe lawyers and/or lobbyists who interpret and/or write tax law. What do these folks share? An addiction to complexity. What do they fear? A tax plan so uncomplicated that a taxpayer could “fill out his or her taxes on a postcard.”

Despite its attractions, and considering its critics, Plan B is a long shot. Still, double back with me to the Forbes take on Steve Bannon. He “wants to use tax hikes on the rich to pay for tax cuts for the middle and working class. Apparently, President Trump’s chief political strategist believes such a move would be a ‘potent populist idea.’ Bannon may be right. Raising taxes on the rich tends to poll pretty well. … [M]aybe tax hikes on the rich will be Trump’s ‘Sister Souljah moment.’”

Not only a Sister Souljah moment. Think Nixon in China, 1972. Only a virulent anticommunist like Nixon would have survived rapprochement with the Peoples Republic. Just so with tax reform. Only a plutocrat’s politician like Trump could survive the rollout of Plan B.

Besides, in the first six months of his presidency, Trump has delivered nothing to his political base. Plan B, by contrast, would be something that they could, quite literally, take to the bank.

Bruce A. Lohof is a native of Montana. A former professor and a retired diplomat, he lives in Vienna and in Red Lodge.

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