The Gang of Six Is Right. The Tax Code Needs Reform—But Not What They Are Selling

September 27, 2017

Today, President Trump unveiled new details about the tax reform plan that have been hashed out in secret for months by the so-called Gang of Six. As reporters and policy experts run numbers about who wins and who loses (spoiler alert: Mnuchin, Trump, and Cohn win, America loses), let’s take a step back at the case they are making—and how Democrats would be right to respond.

For months, Congressional Republicans have made the case that the tax code needs to be reformed. The smart take in Washington is to expect so-called tax reform to turn into tax cuts when real legislating gets hard and messy, and #thistown prognosticators may be right. But Republicans make the case for reform because it’s a popular case to be made.

For good reason. Republicans talk about reforming the tax code because they say it is riddled with loopholes, it’s too complicated, and it’s why so many companies are offshoring their profits and moving jobs overseas. They are wrong about most of their tax claims—especially this last one, which barely passes the laugh test. But they are right on one thing: that the tax code should be reformed.

Why? The tax code should be reformed because it’s a big part of the reason our economy isn’t working for most Americans. See, the tax code isn’t just about the government redistributing resources after they are taxed. It’s also about conditioning the choices that corporate executives make predistributionally, in ways that fundamentally shape our economy. The tax code shapes how corporate executives bargain for themselves, and reforms can induce executives either to bargain for more of a company’s profits for themselves or invest those profits back into their companies. The tax code shapes the relative profitability of different businesses and industries, and reforms can advantage ones that either strengthen the economy or ones that undermine it. And the tax code shapes decisions about how to generate profit. Reforms can encourage companies to generate profits through tax avoidance strategies, or it can foreclose these strategies and force executives to make profits by investing in business growth.

We’ve already written reams about why Republican tax plans will not help the economy, and why past reforms have been part of the reason for so much of the structural inequality we’re experiencing today.

But that can’t be the end of the debate. Progressives should embrace the call for tax reform—real tax reform, like the Roosevelt Institute has been advocating for several years—because real, progressive tax reform can strengthen the economy. It can strengthen the economy by changing the kinds of choices companies make about what’s profitable and how to generate profits. This in turn can induce companies to generate and spend profits doing the kinds of things that help their companies—and the real economy—grow, like investing in research, expanding operations, and raising wages.

Embracing the call for tax reform doesn’t open the door for compromise with Republicans on their tax plans. There’s no room for compromise when Republicans insist on more of the same failed strategies that we’ve been living with for decades, as if the outcomes will be different. What it does is open the door for contrast, between the failed trickle-down tax policies of the past and the new, progressive tax policies of the future—ones that account for and begin to solve for the real, out-of-balance economy Americans experience today.