Update 218: GOP Double-Down on Trick Down Tax Bill: Rebates for Families, Windfalls for Cos.

This morning, Speaker Ryan, House Ways and Means Chair Brady, and senior Republicans on the Committee formally introduced the Tax Cuts and Jobs Act.  The legislation is 429 pages of substantial changes to the tax code affecting corporations and individual taxpayers of every stripe.  And in strikingly different ways.

House Republicans tout their legislation as transformational.  They are right: a windfall of $100 billion per year for US businesses and corporations and a rebate of only $1,182 for the average family is transformational in its wholly inequitable impact.  It is also transformational for a Republican Party that once stood vigilant against legislation promising to add trillions to the national debt.  Details below.

Best,

Dana

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Individual Taxation

The Republican tax bill delivers to wealthy individuals much more than rebates.   The legislation immediately doubles the exemption from the estate tax, gradually phasing the tax out entirely in five years, and repeals the alternative minimum tax outright.  The lowered pass-through rate is likely to benefit corporate executives regardless of the safeguards introduced in the bill and does little for mom and pop store owners.

Brackets:  The introduction of a four-bracket tax system rather than a seven-bracket one is the most important structural reform in the individual tax portion of the GOP’s Tax Cuts and Jobs Act.  The definition of the brackets is as follows:

  • At 12 percent: Joint filers range from $24,001 to $90,000 while single filers range from $12,001 to $45,000

  • At 25 percent: Joint filers range from $90,001 to $260,000 while single filers range from $45,001 to $200,000

  • At 35 percent: Joint filers range from $260,001 to $1,000,000 while single filers range from $200,001 to $500,000

  • At 39.6 percent: Joint filers range from $1,000,001 and above while single filers range from $500,001 and above

In order to stop an en masse movement of American executives to the 25 percent pass-through rate, the bill considers earnings from professional services firms to be 100 percent wages and subject to normal taxation.  For other firms, 70 percent of earnings would be taxed normally as wages and 30 percent taxed at the pass-through rate.

The middle and working classes on the other hand can take home a six percent increase in the Child Tax Credit (a smaller increase than the one proposed earlier this year by Sens. Rubio and Lee), a new “family credit”, and the unaltered benefits of the Earned Income Tax Credit.

The relief provided to the wealthy in this tax bill  plentiful.  A key feature in this restructured system is an increased threshold for the 39.6 percent bracket.  According to the current system, joint filers qualify for the top bracket at $470,701 and above.  Households incomes between $153,101 and $260,000 would also benefit, dropping from 28 to 25 percent.

Republicans propose a near-doubling of the standard deduction for middle-income Americans ($24,400 for couples and $12,200 for individuals in the tax bill released today). However, these middle-class gains are offset the elimination and limitation of various itemized deductions:

  • State and local tax deductions are eliminated. Local property taxes can still be deducted, but at a $10,000 cap

  • Mortgage Interest deductions are capped at $500,000

  • Repeals of the deductions for medical expenses, student loan interest, and the adoption credit

State and Local, Mortgage Interest Deductions: Moving forward with bill is made difficult by these provisions.   Republicans from states like New York, New Jersey and California who have been begun to speak out against the first of them.  The National Association of Home Builders have already vowed to oppose the bill on the basis of r second one, throwing considerable clout into the opposition corner.

Corporate Taxes

The Committee for a Responsible Federal Budget estimates that American businesses will see their taxes cut by $1 trillion over ten years, compared to only $300 billion on the individual tax side.  This $100 billion per year corporate windfall compares favorably with the $1,182 rebates many families at a median income level would receive.

The legislation reduces the corporate tax rate to 20 percent from the current 35. Republicans have claimed this will boost worker wages by $4,000, but there is no evidence to support this.  To the contrary, the Tax Policy Center estimates 70 percent of the burden would be passed to workers.  Expect corporations to use these breaks on higher executive compensation and stock buybacks.  This corporate tax cut alone will cost $1.5 trillion over ten years.   Besides rate relief, the bill replaces 50 percent expensing with 100 percent expensing for businesses for non-real estate property and equipment, costing hundreds of billions more.    With this and a series of minor deductions limitations and credit eliminations, the House GOP is paying lip service to fiscal responsibility — they will not nearly make up for the revenue loss.

  • Business Interest Deduction — To raise revenue, the legislation limits the amount allowed as a business interest deduction to a taxpayer’s business interest income plus 30 percent of adjusted taxable income.  The bill caps the deduction.

  • Repeal of Domestic Production Activities Deduction — This would generate a $100 billion in revenue over ten years, but that is only a dent in the large deficit the GOP would create.

  • Repeal of Employer-Provided Child Care Credit — The legislation repeals a credit for employer-provided child care. With one hand the GOP giveth (expanding the child tax credit), with another it taketh away (reducing the credit for employer-paid for child care).

  • Repeal of Work Opportunity Tax Credit — This credit incentivized businesses to hire employees from groups like veterans, ex-felons, TANF recipients, SSI recipients, qualified long-term unemployed people, and more.

  • Repeal of Credit for Expenditures to Provide Access to Disabled Individuals — To raise revenue, Republicans turn to chopping off a credit that incentivize businesses to hire the disabled.

  • University Endowment Excise Tax —  The legislation taxes university endowments of schools with assets averages $100,000 per student at 1.4 percent. This previously did not exist, but endowments grew by 11.3 percent  for colleges in FY17, making them a target of Republican tax writers. It is hard to expect this to make it to final passage, and hard to estimate how much revenue it would generate

International Taxation

As expected, the House tax bill calls for a shift to a territorial system of taxation.  Republicans argue  that territoriality will incentivize American multinationals to repatriate trillions of dollars in assets currently held overseas.  Practically, this means that multinationals would pay the twenty percent corporate tax rate on domestic earning and nothing on foreign profits.

To transition to such a system, the House bill calls for a one-time repatriation tax that will be upwards of twelve percent for cash and five percent for non-cash assets— significantly higher figures than both President Trump or Speaker Ryan had been calling for.

Moving to a system in which only domestic earnings are taxed would incentivize businesses to shift their income so that it appears to be foreign-based.  GOP lawmakers developed a laundry list of new rules that they claim will stop such evasive techniques and broaden the corporate tax base.  These include a ten percent tax of companies’ high-profit foreign units and and interest provision aimed at eliminating earnings stripping.  They also introduced a surprise excise tax, applicable to payments to foreign affiliates; this will not be supported by the business community.

Fiscal Impact

Mere weeks ago, the House passed offered original budget proposal that would have paired revenue neutral tax reform with some $200 billion in spending cuts.  Today’s tax bill will add at least $1.5 trillion dollars to the federal deficit over ten years, passing a huge bill to future generations.

Republicans will be quick to argue that the bill’s deficit gap will be made up for by tax reform’s positive growth impacts.  Most economists not named Kevin Hassett are skeptical of such claims. A 2014 Brookings study found that tax reform’s net impact on GDP growth is “either small or negative.”  Bruce Bartlett, a domestic policy advisor for the Reagan administration, argued: “In reality, there’s no evidence that a tax cut now would spur growth.”

Sunsetting;  Few of the House bill’s provisions sunset after ten years, meaning the tax bill will likely have a negative fiscal impact far beyond the ten-year budget window.  Senate Republicans will  have to work hard to massage the plan so as not violate the Byrd Rule, the Senate rule requiring that budget provisions not to add to deficit after ten-years.  Some experts estimate that most, if not all, of the House provisions will have to sunset for the package to be Byrd Rule-compliant.

Next Steps

Draft bill in hand, the Ways and Means Committee will move quickly to begin the amendment process next week. Republicans have tentatively scheduled next Monday for amendments and aim to pass their tax bill on either Tuesday, November 7, or Wednesday, November 8.  This, they hope, will allow them to pass the tax bill before the Thanksgiving recess, a breakneck timetable for a bill this size.

With the Senate a few steps behind the House, any delay by Senate Finance in considering its own bill will likely delay a final vote on the tax bill until 2018.  Republicans regard failure as fatal, but the Party is on thin ice as it cannot withstand opposition by more than two or three Republican Senators, even under reconciliation.  They have embarked now on a long-haul legislative tightrope act.