Answering Three Important Tax Reform Questions

Last month, the Tax Foundation held a congressional briefing titled “Talking Tax Reform: Reforming the Individual Income Tax.” Mercatus scholar Veronique de Rugy was one of three experts on the event’s panel, along with Tax Foundation analyst Erica York and executive director of the Tax Institute at H&R Block, Kathy Pickering. The event was moderated by Nicole Kaeding, director of Federal Projects at the Tax Foundation.

The event focused on three basic questions:

• What did the 2017 tax reform change?
• What is currently happening to taxpayers and other stakeholders because of the changes?
• What should the next round of tax legislation—informally referred to as “Tax Reform 2.0”—do?

Dr. de Rugy framed her answers by explaining how the 2017 tax reform resulted in “two wins and a loss.” She praised the reform’s pro-growth cuts and simplifications; in particular, the reduction of the corporate tax rate, the changes to the alternative minimum tax, and the expanded exemption to the estate tax all encourage productive economic activity. At the same time, in cases such as the expansion of the child tax credit, Dr. de Rugy worried that policymakers “traded more middle-class cuts for better cuts.” However, while legislators may not have chosen the most efficient tax cuts in every instance, Dr. de Rugy stated that the cuts were unquestionably a “win” for the economy overall

Furthermore, Dr. de Rugy noted that shrinking the state and local tax (SALT) deduction forces high-tax states and localities to bear the burden for their fiscal decisions, rather than pass those costs off to all federal taxpayers. She believes that this change “puts more pressure at the state level” to adopt taxpayer-friendly policies going forward. In her words, the SALT cap marks “the end of a bad incentive to shelter high-income earners from the consequences of the state that they are living in.” That’s a second “win” for good policy.

But Dr. de Rugy also argued that the 2017 tax cuts were accompanied by a significant “loss”: the failure to control the size of government or shrink spending. Our fundamental fiscal problem is high spending—which brings about the need for taxation and government debt. Unless the United States brings its spending habits to heel, tax cuts will not achieve long-term prosperity.

Dr. de Rugy’s final point applied the lessons of the 2017 “loss” to Tax Reform 2.0 legislation. In her opinion, Congress “shouldn’t be doing any reform [...] if they aren’t going to cut spending.” While revenue-neutral measures that merely “simplify the structure” of taxes could be useful, she concluded that policymakers had run out of room to enact further cuts. 

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