Highlights
Oren Cass of American Compass, an organization that rationalizes populist economic policies, took to the pages of the New York Times to critique a core tenet of modern conservatism – low taxes.
Meanwhile, Congressional Republicans are currently advancing legislation to facilitate the extension of the TCJA. Just this morning senior conservative policymakers from the House and Senate were signaling the strong support for extending tax cuts. This is understandable, as unlike a NYT essayist, elected conservatives tend to have a better sense of the conservative electorate.
Indeed, polling recently commissioned by Pinpoint found Republicans and swing voters strongly embrace pro-growth policies, including lower taxes, fewer regulations, and smaller government, and overwhelmingly rejected the high-tax message espoused by progressives and some populists like Cass:
As part of Cass’s approach to tax policy, American Compass proposed 8 policy proposals to “raise substantial revenue” to offset the cost of extending the Tax Cuts and Jobs Act of 2017. This is a somewhat interesting evolution from past commentary on the TCJA from Compass, which had previously observed that the Act was “an expensive failure,” mirroring the argumentation from the progressive left’s criticism of the 2017 law. It should not surprise, however, that American Compass’s proposals are mostly tax policies supported by elected Democrats, now in the Congressional minority.
Congressional Republicans are currently considering budget resolutions that will facilitate budget reconciliation – the process through which Congress can enact budget-related legislation through simple majorities. In short, progressive proposals are substantially irrelevant to the tax policy outlook for the current Congress. The policies that American Compass proposes are, not without coincidence, largely harmful to U.S. prosperity and deeply misguided.
Proposals Partially or Wholly Supported by Democrats
1. Implement a Market Access Charge
Under this proposal, the Federal Reserve would charge a premium for foreign investment. This is predicated on a desperately flawed understanding of trade deficits and foreign investment. This proposal would effectively tax foreign investment. In the absence of that additional investment, it would generally follow that American’s would need to decrease consumption (i.e. standard of living) or the overall level of investment in the U.S. would fall. Taxes on investment harm workers and American prosperity. This is precisely the harm that progressive lawmakers overlook when they propose new taxes on investment. It should therefore not surprise that this policy has been embraced by populists and the progressive left – Senator Tammy Baldwin has sponsored legislation to impose a market access charge.
2. Implement a 10% Global Tariff
American Compass has been a serial advocate for increasing trade barriers, including tariffs. Theory and evidence serially demonstrate that tariffs harm U.S. prosperity. Tariffs are a tax, and the incidence of the tax largely falls on U.S. consumers and producers. In short, tariffs make Americans poorer through many channels. Reducing U.S. prosperity through new taxes has typically been the preferred fiscal policy approach from Democrats, and indeed, legislation to impose a 10 percent tariff has been sponsored by a Democratic House member from Pennsylvania.
3. Rescind China’s Permanent Normal Trade Relations (PNTR) Status
The U.S. relationship with China has necessarily evolved over time, as it does with all foreign nations. U.S. trade policy is a function of both economic and foreign, and indeed these policy domains can be in tension. The U.S. does not typically engage in free and open trade with geopolitical adversaries. With respect to China, their intentions and behavior should be subject to continuing scrutiny that should animate trade policy, along with U.S. security policy posture. With respect to ending China’s PNTR, the upshot would be to raise additional trade barriers and impose costs on U.S. producers and consumers. Importantly, this is an unstable and contradictory budget offset for tax policy. 1.) It likely double-counts revenue from tariffs already assumed, and 2.) if “Decoupling” form China is successful, tariff and related revenue from import duties would decline. As with most of the proposals offered by American Compass, it is also has Democrat support.
4. Reform the De Minimis Exception
The last trade related revenue raiser offered by American Compass is to eliminate a near-century old provision that exempts imported goods under a certain dollar-value from duties. In a test case, the current administration announced a suspension of this policy for China, earlier this month only to restore it after significant disruptions. This policy raises relatively little revenue, and research has found that eliminating this provision would impose welfare losses greater than the revenue collected – largely falling on lower income Americans. There have been a number of proposals related to this, but several have enjoyed Democrat support including from (now defeated) Senator Sherrod Brown.
5. Increase the Corporate Rate to 25 Percent
American Compass has previously advocated for a higher corporate tax rate, despite the fact that the TCJA’s reduction in the corporate rate was substantially pro-growth. A number of studies have since found that the TCJA materially improved growth and domestic investment. It also put an end to companies moving overseas to escape what had been the developed world’s highest corporate tax rate. Prior to the enactment of the TCJA, U.S. firms often picked up and fled U.S. shores, a practice known as “inversion.” Those came to a halt after the TCJA. Raising the corporate rate was a significant proposal from both president Biden and Vice-President Harris’ campaign, who appear to share American Compass’s views on taxation.
6. Ending the Carried Interest Tax Treatment
American compass has previously launched highly misleading critiques on aspects of U.S. financial services. It is there unsurprising that the organization has supported changing the tax treatment of certain forms of income related to investment, including carried interest. This policy would result in an inconsistent and inefficient treatment of investment income, would harm entrepreneurial activity, and would raise relatively little in terms of revenue. Importantly, and overlooked by American Compass, president Trump limited the scope of this to better align the tax policy with long-term investment. Nevertheless, American Compass has joined with Elizabeth Warren, Bernie Sanders, and other progressive lawmakers to raise this tax.
Additional Proposals
American Compass also proposed two policies: repealing electric vehicle tax credits and raising taxes on certain tax preferred endowments such as universities. Unlike the preceding 6 proposals, these proposals are substantially supported by conservatives and are likely to be included in legislation extending the TCJA. Importantly, however, there is far more work to be done to potentially offset the cost of extending TCJA. The policies proposed by Compass that are not borrowed, at least in part, from Democrats would raise less than $500 billion according to the organization.