The Ignorance of Trump’s Vague Tax Plan

This article originally appeared on this site.

Frank Ramsey lived as if he knew he would die young—and he did, just shy of twenty-seven. Born in 1903, he spent his shortened twenties in something of a fury, hurtling around Europe and engaging with the most exciting intellectuals of the time. His mentor, at home in Cambridge, was John Maynard Keynes, with whom he shared a goal of combining pure mathematics, philosophy, and the formal study of beauty. Ramsey produced an astonishing array of academic papers on those subjects, but for both men, economics, which they saw as a grubby side project, was where they would have their greatest impact. Today, eighty-seven years after his death, Ramsey is considered a central figure in multiple academic fields, including philosophy, as well as in several branches of mathematics. Ramsey would presumably be upset to learn that his most enduring effect on the world is in a subject he gave brief attention to in a paper he tossed out in the last year of his life: the best way for a government to design tax policy.

For the rest of this year, Washington will be engaging in another sporadic spasm of tax reform. The White House has made clear that a major tax bill is now its highest priority. Under President Trump’s byline, an op-ed in USA Today laid out the tax goal in triumphal, vague language: “We want you to spend your valuable time pursuing your dreams, not trapped in a tax compliance nightmare.” There are a few more details in the Treasury Department’s “Unified Framework for Fixing Our Broken Tax Code.” The nonpartisan Tax Policy Center found that the plan would cut federal revenue by trillions of dollars, and that “those with the very highest incomes would receive the biggest tax cuts.” A change to the tax code would begin in the House Ways and Means Committee, whose chairman, Kevin Brady, promises passage by early December. Passage will likely be far more challenging in the Senate, where a two-vote majority means that a bill cannot alienate moderates or hard-line conservatives, and that every wavering Republican can bargain for huge benefits for favored constituents and supporters.

On the eve of what is likely to be a confusing debate over taxes, it seems worth spending a moment to look at tax reform through the eyes of Ramsey, the man whom many see as the founder of the study of optimal taxation, an academic discipline in which scholars seek to design tax systems that are most conducive to a healthy, growing economy. (This is not to be confused with tax optimization, a discipline of accountants and lawyers seeking to help wealthy clients avoid paying as much tax as possible.)

Ramsey proposed that the optimal tax system would have the least impact on long-term human behavior. We would spend money and our time—at work or leisure—based on our personal preferences and market conditions, not because of incentives and discouragements in the tax code. Ramsey’s deliberately simplistic model has been much improved upon, though the core idea remains. One of the central beliefs of the field of optimal taxation—shared by nearly all economists—is that the least distortionary tax policy will help make a country, as a whole, wealthier and more equal.

The Trump Administration’s Unified Framework has far too little detail to analyze properly—it’s only eight pages. But there is enough to show that the plan would surely make Ramsey unhappy. For one thing, it is filled with short-term giveaways, special time-limited gifts for corporations. It will allow large companies that have kept billions in savings overseas to repatriate that money to the U.S. with a special tax holiday. Most economists disdain this sort of short-term solution because it incentivizes the richest companies to do precisely the opposite of what average citizens would want. Huge companies—most notably Apple—have spent years and millions of dollars designing complex tax schemes to hide their money overseas and then lobbying members of Congress to give them exactly this kind of giveaway. That’s the opposite of how Ramsey would want a tax system to work: it is entirely distortionary, and represents a huge waste of money and political muscle used to carve out benefits that serve a tiny few.

That is only one of many regressive measures in Trump’s proposal. The Unified Framework would create a special tax status for an oddly specific sort of company: a foreign firm in which an American company has a ten-per-cent or greater ownership share. Investors in such companies can fully write off their dividends. If this is confusing, that’s precisely the point. It’s the sort of complex tax engineering that will pay off for a small minority while most of the population remains oblivious. It will likely encourage Americans rich enough to conduct tax optimization to put far more of their investments in overseas companies with minority American ownership, which will allow them to receive their dividends tax-free, saving the wealthiest millions.

When Ramsey died, early in 1930, the tax code of the U.K., like that of the U.S., was still a fairly simple affair. He inspired several generations of economists to think through how the code might be rewritten to best improve all citizens’ lives. Tax experts ignored him until a Ramsey-inspired revolution began in 1971; it has continued to this day. There are many great scholars—Republicans and Democrats—who have taken Ramsey’s ideas and built sophisticated models for how to construct a tax system that doesn’t distort, doesn’t increase inequality, doesn’t incentivize wasteful tax-avoidance efforts. During past tax-reform efforts, the final result has almost always favored politics over economic optimality, ignored logic, and favored the powerful. But in past American efforts— Ronald Reagan’s, in 1986, and George W. Bush’s, in 2001—there was at least an effort, especially in the early days, to assess and address what the best minds know about the best sort of taxes. There is none of that today. Never have Ramsey’s work and the business of writing the tax code seemed so far apart.

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