MAKING TAX POLICY GREAT AGAIN: AMERICA, YOU'VE BEEN TRUMPED.

• Author: Taite, Phyllis C.

INTRODUCTION 242 I. EVOLUTION OF TAX POLICY 246 A. Brief Historical Review 246 B. Intentional and Structural Regressiveness 248 C. Regressivity in Tax Policy and the TCJA 252 D. Proposals 254 II. THE MORTGAGE INTEREST DEDUCTION 259 A. Homeownership and Tax Policy 259 B. TCJA and the Mortgage Interest Deduction 263 III. THE OVERALL IMPACT OF TCJA ON INCOME AND WEALTH INEQUALITIES 267 A. Income Inequality 267 B. Wealth Inequality 271 C. The TCJA and Income and Wealth Inequality 274 CONCLUSION 276 INTRODUCTION

Tax policy plays a role in shaping the economy. (1) Scholars have long asserted that tax policy should be used to make positive impacts on economic activity by adjusting and creating policies that benefit the majority of the population rather than the elite few. (2) Scholars advocate for implementing policies to address wealth and income inequality while effectively facilitating other goals such as revenue raising and combating wealth concentration. (3)

Scholars and economists found that a key factor in wealth inequality is the increasing capital income concentration of the top income earners. (4) Economists have further found that income and wealth inequality undermines democracy and the economy. (5) Scholars assert tax policy has been historically used to further the financial goals of the very wealthy and contributes to income and wealth inequality. (6) Proponents of lower tax responsibility contend tax reform is necessary to simplify the tax code, stimulate the economy, and provide economic efficiency. (7)

Politicizing tax policy contributes to the polarizing effects as politicians use their platforms to incite or satisfy their constituents. (8) Political affiliations influence beliefs and myths about tax policy, with taxpayers often supporting proposed policies consistent with their political ideologies. In his first presidential campaign, one of Donald Trump's platforms was "Tax Reform that Will Make America Great Again." (9) He indicated his tax reform would provide tax cuts for everyone, particularly the middle class. (10) On December 22, 2017, President Trump signed legislation, commonly referred to as the Tax Cuts and Jobs Act (TCJA), (11) claiming it as "the largest tax cuts in history." (12) While proponents of the TCJA claimed this legislation provided tax breaks for everyone, the prediction by most tax policy experts was that the provisions would predominantly benefit the wealthy. (13)

This Article asserts tax policy should reflect the values of society and benefit taxpayers who need assistance. The tax base should be modeled on historical justifications for determining tax responsibility, meaning, primarily imposed on the wealthiest taxpayers. (14) In short, tax policy should revert to its roots when tax rates were marginally and effectively progressive. By shifting tax responsibility to the wealthiest taxpayers, we can provide tax relief to middle-and low-income taxpayers. (15)

This Article will examine how tax law, particularly the TCJA, continues historical trends to bait taxpayers with proposed tax reform described as benefiting middle-and low-income households but that instead disproportionably benefits the wealthy. Additionally, this Article will address tax policies in the TCJA that exacerbate wealth and income inequality by focusing on two aspects of the TCJA: the transfer tax laws and the mortgage interest deduction (MID).

To effectively facilitate a burden shift, more tax responsibility must be borne by the wealthiest taxpayers in order to reduce rates and provide credits to middle-and low-income taxpayers. This Article proposes several reforms to facilitate this shift and make tax policy great again. First, the estate tax exemption should be reduced to three million dollars and the gift tax exemption should be reduced to four million dollars. Next, the Code section 1014 stepped-up basis provision and the MID must be eliminated. By implementing these measures, more tax responsibility will be shifted to taxpayers who can most afford it, thereby re-directing tax policy in the right direction, towards a more effective progressive tax system.

Part I of this Article will provide a brief historical review of the evolution of taxation and more explicitly of transfer taxes. Further, this Part will discuss relevant provisions of selected tax acts that negate pro-gressivity and will recommend proposals for reform focused on relevant provisions of the TCJA. Part II will discuss the historical use of the mortgage interest deduction, the regressive nature of this deduction, and proposals for reform focused on relevant provisions of the TCJA. Part III will engage in a big-picture analysis of income and wealth inequality and discuss the relevant tax provisions of the TCJA. A brief conclusion will follow.

1. EVOLUTION OF TAX POLICY

   1. Brief Historical Review

      Reviewing the origins of tax policy, it is evident the tax burdens were not originally intended for low-income taxpayers; instead; they were imposed on the wealthiest taxpayers. (16) As implemented, the U.S. tax system was based on a progressive schedule. (17) True progressive schedules are widely believed to be based on ability to pay and thus, generally perceived as a fair and aspirational tax system.

      The progressive structure is apparent in income and transfer taxes. From the inception, the estate and gift taxes were imposed on the wealthiest taxpayers. (18) The estate tax imposed a transfer tax on property that passed from a decedent to the beneficiaries of the estate. (19) The estate tax base was comprised of a decedent's estate and included some lifetime (gift) and death time (estate) transfers. (20)

      While estate and gift taxes were related, they had slightly different functions. (21) The estate tax was initially imposed as a source of revenue to finance wars and military conflicts. (22) After the estate tax became permanent, the gift tax was introduced, in part, as a mechanism to prevent lifetime transfers as a viable way to avoid the estate tax. (23) The estate and gift taxes have predominantly operated with separate structures and functions with common goals to raise revenue and combat wealth concentration. (24) Appropriately, transfer taxes were imposed on the wealthiest taxpayers.

      The income tax had a similar history. Initially, less than five percent of the population, referred to as "economic royalists" were subject to the income tax. (25) In the 1930s, proposals to expand the tax base beyond the wealthiest taxpayers were not well received by the general public. (26) The wars, particularly World War II, created budget shortfalls and economic disparity, and Congress was forced to increase the tax base to raise revenue. (27) By the 1960s, the income tax had clearly transformed from a tax on the elite to a tax on virtually all income levels. (28) The expanded tax base was necessary to raise additional revenue, not to relieve the burden on the highest income taxpayers. (29)

      Also, during the 1960s, in addition to expanding the tax base, tax laws decreased the top marginal rate for income taxes and imposed higher average tax rates on low-income taxpayers. (30) During the early 1960s, the top marginal income tax rate was over 90% and substantially decreased over time. (31) Since the 1960s, data also revealed that income share for the top taxpayers increased substantially with income heavily concentrated in the top one percent. (32) The United States has led the world with the "highest level of income inequality among the advanced countries." (33) Without intervention, the wealthiest taxpayers will continue to reap the benefits of tax policies, and the rest of the population may remain stagnant or regress to a lower income group.

   2. Intentional and Structural Regressiveness

      While both income and transfer taxes are progressive in structure, they have elements and provisions that make them regressive in application. The two types of regressivity relevant to this discussion are situational and structural, as described by Professors Nichols and Wempe. (34) They describe situational regressiveness as not a deliberate feature of a tax system but instead arising because of differences in taxpayers' circumstances, activities, or behaviors. (35) For example, the total sales tax liability of any taxpayer is determined by the taxpayer's spending habits, not by expressed provisions in the tax code. Consequently, the tax paid is determined without regard to ability to pay.

      Professors Nichols and Wempe describe structural regressiveness as intentional regressive provisions imposed by the tax system. (36) For example, deductions are designed to reduce tax liability and, therefore, to impact the overall effective tax rate a taxpayer pays. The U.S. federal tax system exhibits both situational and structural regressiveness. Structural regressiveness is demonstrated through various tax acts that provide tax relief for high income taxpayers. For instance, major tax changes occurred under the Reagan presidency with the Economic Recovery Tax Act of 1981 (ERTA) that made the tax system less progressive. (37)

      When ERTA was implemented, it represented one of the greatest tax reductions in history, where the top marginal rate was reduced from 70% to 50%. (38) On the other hand, taxpayers in the lowest income brackets experienced trivial tax relief. (39) While the marginal tax rates were still classified as progressive, the substantially reduced rates provided significant tax relief for high-income taxpayers, leaving them with more disposable income.

      Likewise, tax deductions and exemptions contribute to situational and structural regressivity of the U.S. tax system by reducing the amount of taxable income and ultimate tax liability for high-income taxpayers. For instance, taxpayers who earn the same income may have the same marginal tax rates before deductions are applied. Deductions are built into the system, and any taxpayer may exercise the option...