The Politics of Poverty

Ideas and analysis from Oxfam America's policy experts

The dangerous long-game hidden in the GOP tax proposal

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Speaker of the House Paul Ryan and fellow Republican leaders unveiled the outline of their tax plan, receiving the endorsement of President Donald Trump. (Photo: Ron Sachs/CNP/Sipa USA/Newscom)

There’s a radical anti-tax ideology underneath the surface, but it’s easy to spot.

The topline picture of the new tax reform plan is very clear: tax cuts for the rich paid for by budget cuts for the poor.

The leadership of the House and Senate, and anti-government activist groups like Americans for Prosperity have tried to describe their ideas as bringing “simplicity” to the tax code and in their most Orwellian turn claiming their tax cuts for the rich will “unrig the economy.”

But if you look beneath the surface you can find a radical attempt to use the power of the US federal government to drive down all taxes everywhere. They aim to achieve this through tweaks to the tax code, which will be difficult for the average voter not steeped in tax policy minutia to follow, but could have dramatic implications for how and how much tax is collected at the state, local, and international levels.

There are two key provisions that reveal this strategy:

The first is the shift from a “worldwide” tax system for US companies to a “territorial” tax system. This change would eliminate the federal taxes US companies must pay on the profits they earn offshore. Right now companies pay the normal US corporate tax rate (35 percent) for profits they repatriate from their business activities around the world. Companies get to offset the cost of any taxes they have already paid on these profits in other countries to avoid any double-taxation.

Under the current system, US companies make business decisions based largely on the best market opportunities rather than shopping around for the ideal tax deals. The shift to a territorial system would create stronger pressure on other countries to slash their corporate tax rates in order to attract US companies. In combination with lower US corporate tax rates, the shift to territorial taxes will fuel a dangerous global race to the bottom. It would be particularly harmful to poor countries, which raise a disproportionate share of their revenue from corporate taxes. For leaders in Congress this race to the bottom is a feature, not a bug, as it imposes their anti-tax ideological position on other governments, whether or not they agree.

The second provision to watch is the elimination of the state and local tax deduction. The tax plan released jointly by the White House and leaders from the House and Senate called for the elimination of this deduction, sparking a contentious lobbying effort, by Republicans that represent blue states, to protect it. In spite of the backlash, the White House is “maintaining a hard line” that it will go.

The deduction helps Americans avoid double-taxation on their income by allowing them to deduct the cost of state and local taxes from their federal tax bills. It has long been a target of conservative activists who argue that it is a subsidy to states and localities. Setting aside the fact that calling a tax deduction a subsidy is supposed to be a left-wing construct, the underlying rationale for eliminating the state and local deduction is to punish localities and states that have relatively higher taxes.

That’s why groups like the Koch Brothers funded Americans for Prosperity and the Heritage Foundation, along with Speaker of the House Paul Ryan have vocally called for it to go. For these voices getting rid of the deduction is a perfect win-win. It helps raise revenue that can offset the massive rate cuts they want to give large multinational companies and the wealthy while increasing the pressure on state and local governments to lower their own taxes. It allows them to see their ideological vision implemented in places where they don’t even hold political power.

Ultimately that’s what makes these ideas so dangerous. Reasonable people can disagree about the merits of different tax rates, but Republicans are supposed to be the party of federalism, of states’ rights and of local decision making. I guess when it comes tax cuts for big companies and the rich, LOL nothing matters.

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