Tax Analysts Blog

Steve Bannon Continues Trump Tradition of Half-Baked Tax Reform Ideas

Posted on Jul 6, 2017

Steve Bannon wants to soak the rich – or at least leave them a little bit damp.

According to Axios, Bannon 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. And playing against type can work nicely for a certain kind of politician; maybe tax hikes on the rich will be Trump’s Sister Souljah moment – or at least one of them.

“It’s classic Bannon,” writes Jonathan Swan for Axios, “pushing a maximalist position that's reviled by the Republican establishment.”

Substantively, Bannon’s suggestion is a good one. As Dylan Matthews pointed out at Vox, the Republican wish list for tax reform is long and expensive, featuring a dramatic reduction in corporate tax rates (from 35 percent to 15 percent), full expensing for business investment, and a much enlarged standard deduction. Higher tax rates on the rich won’t pay for all this, Matthews acknowledges, but it would help limit the budgetary carnage.

The Congressional Budget Office estimates that raising the brackets for people making more than $400,000 or so by 1 point each would raise about $93 billion over 10 years. For a new top rate of, say, 47 percent, that could mean as much as $650 billion over 10 years, and even more if you're willing to hit 50 percent or raise taxes on people making under $400,000.

In other words, Bannon may be on to something. 

But Bannon’s flirtation with progressive tax reform seems less than wholly convincing. According to Axios, “Bannon has told colleagues he wants the top income tax bracket to ‘have a 4 in front of it.’” But it wouldn’t take much to boost the top-bracket rate over 40 percent, given that it now sits at 39.6 percent.

A Bannon-style rate hike, in other words, might be more of a spritz than a soaking for the nation’s most fortunate few.

In the absence of further detail, it’s hard to tell how Bannon’s rate hike would affect taxpayers. Without some sense of where bracket lines will be drawn in the new regime, it’s impossible to know how many taxpayers will actually be paying this over-40 rate.

More important, we don’t know what Bannon has in mind for other taxes targeting the rich, including some that already push marginal rates above 40 percent for wealthy taxpayers. For instance, the net investment tax – currently looming large in the Obamacare repeal debate – adds an additional 3.8 percent to the tax rate on certain kinds of income for certain kinds of taxpayers. What does Bannon have in mind for that controversial levy?

Ultimately, the most worrisome aspect of Bannon’s proposal is the incoherence it reveals in White House thinking about tax reform. The administration has staked its credibility on a one-page list of vague bullet points that supposedly constitute a “plan” for meaningful tax reform. But Bannon’s over-40 rate proposal conflicts directly with a key element of that plan, which called for a top rate of 35 percent.

Plus, in good White House fashion, the administration has already begun rejecting  the Bannon heresy. “We’re beyond that,” one “senior administration official” told The Weekly Standard. Press secretary Sean Spicer was even more direct, telling Fox News that “the report is not an accurate representation of Steve's thinking.”

To be fair, every White House floats the occasional trial balloon, only to puncture it at the first sign of controversy. And even when deflated, these half-baked ideas still serve an important political purpose, projecting an image of pragmatism and ideological flexibility.

But the Trump administration has made incoherence an art form, at least with tax. Over the last five months, Trump and his advisers have issued a steady stream of confusing comments about the administration’s intentions. Even the occasional efforts at clarity (like the tax reform one-pager released in April) have created more questions than they’ve answered.

(Let’s not forget all the earnest exegesis devoted to the administration’s vague and contradictory comments about  “border taxes” and “reciprocal taxes” – an epic exercise in reading the policy tea leaves.)

Ultimately, we need something better from the White House. Bannon’s rate proposal is a masterpiece of Trumpian policy formulation – long on improvisation and short on coherence. But real tax reform requires something altogether different: strong, clear, unambiguous presidential leadership.

Personally, I think the prospects for meaningful tax reform are pretty dim, especially over the short term. And for what it’s worth, Tax Notes readers agree with me; in a recent poll, roughly 85 percent said reform in 2017 is impossible.

But if tax reform is ever going to happen – this year, next year, or whenever – it will require a sea change in White House behavior. Specifically, it will depend on better, more coherent policy formulation, coupled with clearer, more energetic political leadership from the president.

Anything less will leave tax reform where it’s been for 30 years: out of reach.

 

Read Comments (2)

Edmund DantesJul 6, 2017

Although I am in general agreement with everything here, I am troubled by: "a soaking for the nation’s most fortunate few."

The phrase implies that the fortunate few have not earned their success. In the majority of cases, those fortunes are acquired through hard work and talent. They are deserved, not an accident of fate, as the MSM always implies.

I am nowhere near the tax bracket that might have a 4 at the front, but when the government is asking for a 40% cut that seems less like a tax and more like a severe penalty on success. The trouble with 40% tax rates is that it becomes too worthwhile to spend money on tax lawyers to avoid them. That is economic waste.

Mike55Jul 10, 2017

I don't think Team Trump is worried about consistent messaging. They lead a coalition of groups with different, and at times conflicting, views. They presumably assume only a handful of tax wonks will ever realize their messaging is contradictory: those reading the latest Mnuchin comments in the WSJ probably don't devote a whole lot of attention to what Bannon is saying, and vice-versa for the populist/alt. right types who listen to Bannon. Given these facts, a consistent message might be deemed unhelpful if the goal is to enact tax reform.

As for the larger point, it's hard to dismiss a smaller-but-more-progressive tax system out of hand. I tend to not like such ideas for the same basic reason as Edmund's final paragraph, though I'd state it slightly differently: at some point the tax applied at the top becomes confiscatory.

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