Money

What Kind of Tax Reform Should We Be Fighting For?

The Trump administration’s Tax Cuts and Jobs Act was unpopular with young Americans. Here are some tax policy ideas they should advocate for in the future.

by Becky Ferreira
Mar 5 2018, 1:03pm

Illustration by Koji Yamamoto

President Trump has frequently hailed the Tax Cuts and Jobs Act, which he signed into law on December 22, 2017, as the signature achievement of this administration. But while Trump boasts that these cuts are a boon to the middle class, many millennials see through the bluster to an all-too familiar scam.

Young Americans appear to recognize that the tax overhaul overwhelmingly benefits wealthy people and corporations, especially over the long-term. For many millennials, this can feel like yet another instance of the GOP robbing future security in exchange for some near-term “crumbs,” as House Minority Leader Nancy Pelosi dubbed the immediate middle class gains.

“Essentially, I saw this as the same algorithm of, ‘how little do we have to give you to get what we want?’” Rus Garofalo, founder of Brass Taxes—an accounting firm that specializes in freelance and gig workers—told me over the phone.

“Everybody has the natural instinct of, ‘I want to keep my money I don't want to pay any taxes,’” he continued. “I totally understand that motivation and have the same instincts. What makes us say, ‘we should raise taxes for a social safety net’ is a separate part of our brain. At some point, one wins out more often than the other.”

It may be many years before millennials will see another tax overhaul passed that’s more in line with their interests, but in the meantime, it’s worth figuring out what shape those changes should take.

Take, for instance, the 1981 and 1986 Ronald Reagan tax cuts. Though lampooned as “trickle-down economics” in retrospect, this tax reform had a firm economic vision: The basic concept behind Reaganomics is that cutting government spending, deregulating the corporate sector, and reducing taxes would create a business-friendly environment that would ultimately support the middle class by encouraging companies to raise wages and hire more employees (the results of this assumption are shaky).

On the other hand, tax hikes, especially on the wealthy, tend to coincide with expensive national problems like war or depression. Abraham Lincoln introduced the first income tax in 1862 to help fund the Union Army, while Franklin D. Roosevelt’s Victory Tax of 1942 was passed to pay for US involvement in World War II.

These approaches offer a contrast to the legislative shenanigans we witnessed in late 2017, as the Trump White House and the GOP-led Congress cobbled together a disjointed grab bag of policies with little effort to involve opposition views.

“I think that’s what was challenging and hard for everyone to get their mind around,” Garofalo told me. “It created a tax bill with a not very coherent economic idea behind it. It feels like a hodgepodge of rules. I think of it as being like 30 five-year-olds making up rules to a game and saying ‘let’s play.’”

Unfortunately, the entire American population is now forced on the playing field, and it’s a lot less fun than anything designed by kindergarteners. When I asked Garofalo what tax policies younger people should fight for—especially his clientele in the gig economy—his overarching advice was to come up with a comprehensive policy with a clear, data-backed outcome in mind.

One example of a vision that practically every American shares is the recovery of a strong middle class. Millennials are particularly receptive to this message since many are struggling to reach or remain in this income category—one of the reasons many in this age group responded to Senator Bernie Sanders’ frequent lamentations of a “war on the middle class” during his presidential run. Here are some ideas that might promote a healthier and more vibrant middle class the next time tax reform is on the table.

TL;DR - The Four Elements of Tax Reform Millennials Should be Fighting For:
- Emphasizing Wage Growth
- Raise Taxes for High Earners to Build the Social Safety Net
- Privilege Direct Income Over Passive Income
- Acknowledge the Hidden Costs of Tax Cuts

Emphasizing Wage Growth

One foundational element for better millennial tax policies could be emphasizing wage growth, as opposed to GDP growth, as the metric for American success. It’s no secret that even as the GDP rises in the US, wage growth has remained stagnant for decades, increasing at a glacial rate of 0.2 percent annually, according to the Brookings Institute.

Since Trump’s tax plan passed, there has been an uptick in wage growth as some companies have used their breaks to raise employee salaries. But this is projected to be short-lived, as with the Reagan tax cuts, because most companies will direct gains to shareholders rather than employees.

“What people do is save the money or buy back their own stock, and drive up their own stock price,” Garofalo said. “It’s not going to workers. When most of these companies talk about tax reform and what they’re doing, most of the payout comes as bonuses rather than increased pay.”

There are numerous methods that have been shown to boost wage growth, from empowering unions to raising the minimum wage, so millennials should be wary of claims that tax cuts like Trump’s are the best or only route to bring about higher wages.

Raise Taxes for High Earners to Build the Social Safety Net

As nice as it is for any American to get a tax cut, there are hidden costs to reduced revenue. A more sustainable approach might be to raise taxes on wealthier Americans to pay for nationwide infrastructure, education, and R&D initiatives, which are much safer bets if the goal is to stimulate middle class wage growth. This has become known as “middle-out” tax policy, as opposed to “trickle-down,” and it’s a natural sell for those millennials struggling to ascend to the middle class, or those bending over backwards to remain part of it.

Privilege Direct Income Over Passive Income

Another slam dunk for millennials might be to question the tax code’s longstanding preference for passive income over pay earned by direct labor. This bias has only been exacerbated by Trump. “There’s such a strong preference for people making money that aren’t working that’s written into this bill,” Garofalo said. “It was written into the tax code already because making money from the stock market is cheaper than making money from going to work everyday.”

That doesn’t necessarily mean arguing for passive income to be taxed more than earned income (that would be a huge shift, as the current rates tax passive income at 15 percent, and earned income at 35 percent), but it’s interesting to ponder what could be accomplished by taxing both at a slightly more equal rate.

Acknowledge the Hidden Costs of Tax Cuts

The biggest takeaway for younger voters should be that these new tax cuts do not exist in a vacuum. Perhaps the best example is that the eight million millennials who rely on the Affordable Care Act will likely see a hike in their premiums due to Trump’s insistence on repealing the ACA’s individual mandate. This will be especially difficult on freelancers who depend on the ACA for coverage.

On a wider scope, it’s clear that the Republican tax strategy is to defund the government in order to justify cutting social programs to balance the budget. A short-term tax cut for the middle class will not outweigh the costs of decaying public infrastructure, sinking American educational standards, and limited access to basic necessities like food, housing, and utilities for poor families.

Likewise, if the IRS is inadequately funded, it loses the ability to thoroughly audit and investigate people, thus hemorrhaging even more future revenue. “They know that the less money the IRS has, the more people cheat on their taxes, the less errors they can correct, the less they can check in to make sure people are paying their taxes,” Garofalo said. “Once you erode the trust that the average person pays their taxes in the honor system, then anyone who pays taxes feels like a sucker.”

If we want to empower ourselves through future tax policies, we need to promote a more holistic view of the economic realities of our generation, and our nation. It may be years before we have the opportunity to turn the tax tide, but when it arises, we should be ready.

Follow Becky Ferreira on Twitter.