The Trump administration and congressional Republicans are refining their tax reform plan and ramping up their marketing efforts. It is a good plan so far, but comments by some GOP leaders suggest that reforms may veer off-course as more details emerge.

To keep policymakers focused on true reform, the table below summarizes five tax reform goals and the policy changes needed to achieve each.

Tax reform is sometimes portrayed as a balancing act with various goals in conflict. But the table indicates the opposite. By adopting a lower, flatter rate structure and a more neutral tax base, policymakers would further multiple objectives at once: growth, simplification, fairness, and the strengthening of support for limited government.

Tax Reform Goals

For more on …

Principles of tax reform, here.

Advantages of consumption-based taxes, here.

Reforms to boost saving, here.

Reforming the corporate tax, here.

International tax competition, here.

CNBC reports that the burger chain Shake Shack is planning to trial a new restaurant in New York which will not have a traditional cashier’s counter. Instead, “guests will use digital kiosks or their mobile phones to place [and pay for] orders.” Their order will be processed immediately to the kitchen and the guest will receive a text message when their food is ready.

Great, you might think. Shake Shack is investing in innovations which could improve the productivity of remaining workers, increasing wages (indeed, they want to pay the lower relative number of staff in this restaurant at least $15 an hour). Such investments might provide a more efficient and desirable service to customers too. This frees resources and excess labor for other more productive pursuits in the economy.

But the kicker for why Shake Shack is undertaking such investments comes later in the article:

it’s likely that in the next 15 to 20 months that areas like New York, California and D.C., in which there are many Shake Shacks, will transition to a $15 minimum wage…Adopting this payment policy in Astor Place will give the company a chance to work out the kinks before it rolls out a $15 minimum wage in these locations.

Anyone who has been to a McDonald’s in France will know what’s going on here. Shake Shack suspects that the cost of labor will rise due to an increased minimum wage, and given that projection, it’s become economic to consider investments in labor-saving technologies. Higher minimum wages act in effect as a subsidy to automation.

But these investments for productivity improvements don’t come for free. A recent paper by Grace Lordan and David Neumark finds empirical evidence showing that between 1980 and 2015, increasing the minimum wage by $1 decreased the share of low-skilled automatable jobs by 0.43 percent in general and by 0.99 percent in manufacturing. Other jobs might be created of course, but they may well be more demanding or stressful, such as overseeing the running of multiple machines or having to have the skills to deal with technical problems etc. “Regulating to innovate,” subsidizing the rapid introduction of some technologies before they are actually high quality and cost effective, drives up prices for consumers too.

Perhaps more pertinently, low-skilled workers younger than 25 and older than 40, especially women, tend to be particularly affected by the disemployment effects of automation and can find it very difficult to find replacement work given their productivity levels.

As I concluded in a recent Daily Telegraph article:

If we are moving into a period when technological innovations are speeding up, we could be hiking minimum wages dramatically at just the wrong time. It will prove enough of a policy challenge as it is, to equip people with new skills to adapt in a rapidly changing labor market. Making more low-skilled jobs uneconomic by artificially hiking the cost of labor substantially could exacerbate this change at a time before new investments would otherwise make economic sense.

Being worried about this consequence is not to be anti-technology or anti-innovation. We all recognize that mechanization and technological innovation are the only way to sustainably raise living standards. But encouraging new investments by raising business costs and driving out low-skilled jobs is another matter entirely.

Just because Luddite efforts to destroy machines was economically harmful does not mean that destroying low-skilled employment opportunities would be beneficial.

More on the minimum wage here, here, here, and here.

President Trump and his advisors are stressing that they want tax cuts for the middle class, not high earners. Trump said, “the rich will not be gaining at all with this plan,” while Treasury Secretary Steve Munchin said, “Our objective is not to create tax cuts for the wealthy. Our objective is about creating middle-income tax cuts.”

The problem is that high earners, not those in the middle, pay the vast bulk of federal income taxes. As the chart below shows, the share of federal income taxes paid by the highest-earning 10 percent has steadily risen—from 49 percent in 1980 to 71 percent by 2014. Meanwhile, the share paid by everyone else has plunged. (Source: TF based on IRS).

The Trump team is painting itself into a corner with its “tax cuts for the middle-class only” rhetoric. I fear that to satisfy that promise in coming weeks, the administration will seek to expand further the most unproductive parts of the tax plan, such as child credits. In turn, that will reduce budget room for tax reforms that would promote growth and simplify the code.

Cutting the most damaging parts of the tax code—such as our high corporate income tax rate—would benefit all Americans by spurring growth and raising wages. That is what Trump and Republicans should be focusing on.

As Republicans unveiled their tax reform plan last week, President Trump said, “We will cut taxes tremendously for the middle class.” Trump advisor Gary Cohn said, “We are giving tax cuts to middle- and lower-income Americans.” And House Speaker Paul Ryan said, “The entire purpose of this is to lower middle-class taxes.”

The problem is that “middle-class” Americans pay little in federal income taxes, while “lower-income” Americans pay virtually nothing. So Republican leaders are making promises that will be difficult to keep, and they are distracting themselves from the better message of growth and prosperity for all.

The chart below, based on CBO data for 2013, shows average federal income tax rates by income quintile. The highest-earning fifth of households paid 15.5 percent of their income to taxes, on average. The bottom two groups paid less than nothing, on average, because the refundable EITC and child credit wiped out their liabilities and gave them a subsidy. And the middle-income group that Trump, Cohn, and Ryan are talking about paid just 2.6 percent, on average.

The CBO uses a broad definition of “income” in these calculations, which inflates the denominators here and reduces the measured tax rates. Nonetheless, the data indicate who needs income-tax relief, and it is not the bottom three groups.

More important, dividing Americans into “classes” is the wrong way to go. Instead, Republicans should focus their tax reform talking points on economic expansion, business investment, entrepreneurship, job opportunities, wage growth, simplification, and international competitiveness. The Republican tax framework would advance all those goals, and thus benefit every American.

GOP leaders should leave the class struggle to the other party, and focus on how tax reform would support durable economic growth for the nation and broad-based prosperity.

The Republican tax framework released yesterday was generally excellent. However, it appears to include a sneaky and invisible tax hike. The framework “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”

The individual income tax is indexed for inflation, meaning that the dollar split points between the rate brackets and other parameters are set to rise a bit each year. Without those adjustments, Americans would lose ground to the government over time, as more of their income would be taxed at higher rates due to the general rise in prices.

Current indexing is based on the Consumer Price Index (CPI). The CPI overstates inflation somewhat, so some analysts have suggested switching tax-code indexing to chained CPI, which produces a lower inflation measure.

If Republicans indexed the tax code to chained CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. The Tax Foundation has a brief on the issue here.

Switching tax-code indexing to a lower measure of inflation is a bad idea for two reasons:

• It would generate a substantial tax increase over time, and it would be an invisible increase because there would be no tax-filing changes for people to notice.
• It would be an anti-growth tax increase because it would push people into higher brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to slowly and steadily increase marginal tax rates.

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes people into higher tax brackets over time, called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets, since the tax code is indexed for inflation but not real growth.

Long-range projections from the Congressional Budget Office reflect substantial increases in taxes over time from real bracket creep. The agency notes:

… if current laws remained generally unchanged, real bracket creep would continue to gradually push up taxes relative to income over the next three decades. That phenomenon occurs because most income tax brackets, exemptions, and other tax thresholds are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, tax receipts grow faster than income.

So, I’ve got a better idea than indexing the tax code to a “more accurate measure of inflation,” as Republicans are suggesting: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax-code parameters, and it would prevent stealth tax-rate increases under our graduated income tax system.

More on tax reform here, here, here, here, here, and here.

The Trump administration and Republicans in Congress have released a framework for tax reform legislation that they hope to pass in coming months.

There were few surprises in the framework. The pro-growth elements that party leaders have championed for months are there, including: 

• Cutting the corporate tax rate from 35 to 20 percent.
• Cutting the top rate for businesses that pay under the individual code from 40 to 25 percent.
• Expensing business equipment purchases.
• Replacing the worldwide corporate tax system with a territorial system.
• Repealing the estate or death tax.
• Repealing the individual and corporate alternative minimum taxes.
• Simplifying the individual tax rate structure to 12, 25, and 35 percent.

The other main tax cut in the plan is a doubling of the standard deduction, which would not do much for growth but would simplify the system. 

The framework suggests that reforms may impose a higher individual rate than 35 percent “to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.” But why shouldn’t high-earners pay less tax? They pay a hugely disproportionate share of federal income taxes today, and they generally have the most dynamic responses to tax cuts.

High-earners generally add more to economic growth than other taxpayers. They are investors, executives, doctors, and other highly skilled individuals. Basic theory indicates that it is the highest tax rates that do the most economic damage. Indeed, tax damage rises rapidly as tax rates rise. If Congress is going to cut any individual tax rates, it should cut the highest rates.

That said, the most important goal for tax reform right now is to cut the corporate tax rate, and the GOP framework moves boldly in that direction. High corporate tax rates reduce capital investment, and that ultimately suppresses wages and opportunities for U.S. workers.

On the whole, the GOP is on the right track. Now they need to really hustle and move specific legislation through Congress and finally deliver a reform plan to the president’s desk.

Some recent comments on tax reform are here, here, here, here, and here.

Federal worker compensation is rising faster than compensation in the private sector. On average, federal workers now earn 80 percent more in wages and benefits than other Americans, as examined in this blog yesterday. The data come from the Bureau of Economic Analysis (BEA), and is discussed further in this study. 

The BEA breaks down the data by industry. The chart below shows average compensation for the BEA’s 19 major private industries and the military, state and local governments, federal civilian workers, and federal government enterprises (mainly the postal service).

The federal government has the third highest paid workers in the United States after utilities and the management of companies. Federal compensation is higher, on average, than compensation in the information, finance and insurance, and professional and scientific industries.

Federal compensation is twice as high as compensation in the education industry, and is almost three times higher than compensation in retail trade.

Further discussion of federal pay is here.