Finishing Touches on Tax (Dec. 19)

Update 237 — Finishing Touches on Tax;

Bills Will Be Passed, onto the Next Generation

Today, the House voted to adopt the final version of the Tax Cuts and Jobs Act despite overwhelming public opposition. But it ran into a parliamentary hurdle in the Senate — three Byrd Rule violations amounting to a minor procedural speed bump. The Senate will amend the defective provisions and vote on final passage later tonight before sending it back to the House.  The GOP is still well on its way to getting President Trump his Christmas tax bill.

Since the founding of our country, Americans have been famously suspicious of — or downright hostile to — taxation. Yet we have the spectacle a tax bill billed as a middle-class cut Americans oppose by 2 to 1. Is this shift circumstantial or tectonic? Below, we examine why a people so historically disdainful of taxation is so opposed to the bill.

Best,

Dana

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Individual Side:  Disparate Impact Statement

 

Bill’s Estimated Effect in 2018

Bill’s Estimated effect in 2027

Polls show that the majority of American voters see the GOP tax bill as a generous handout to the wealthy and large corporations on the back of an eventual tax hike for the middle class.

Republicans spent the past week tinkering with the individual side of their bill to try to improve the equity picture, but largely failed.  Despite minor changes to the Child Tax Credit (CTC) and the retention of some popular deductions, the Tax Cuts and Jobs Act still overwhelming favors wealthy individuals. The doubling of the estate tax exemption is a $200 billion example that will be enjoyed by a small number of the nation’s wealthiest families.

  • New brackets, old gimmicks — The Conference Committee accepted the Senate bill’s approach and maintained seven tax brackets. While each bracket will see a rate reduction, the big winners are the highest income earners, who will see their taxes fall from 39.6 percent to 37 percent.  Reportedly, conferees decided to reduce the top marginal tax rate after after receiving pushback wealthy contributors in high tax states who were unhappy about the proposed cap on state and local tax deductions. Even worse, the individual rate cuts sunset at the end of 2025. This means that while middle income earners would see an average tax cut of $900 next year, the wealthiest 1 percent would see an average cut of $51,000.
  • CTC breadcrumbs — Senator Rubio made waves last week by threatening to withhold support for the bill if tax writers did not include more generous provisions for the CTC. He succeeded in winning concessions, but they were relatively minor. In the final bill, the CTC is doubled from current law, from $1,000 to $2,000.  Of this, $1,400 would be refundable and indexed to inflation. Despite these last-minute changes, 31 million children in low and moderate income families will still miss out of the full value of the doubled credit due to the partial refund-ability.
  • Estate Tax Doubled — The Tax Cuts and Jobs Act would about double the estate tax exemption from the current $5.6 million to $11 million. Republicans have repeatedly argued that this is necessary to protect farmers who want to pass family businesses onto their children. This is transparently misleading, and American voters have seen through the ruse. In 2016, only 682 taxable estates reported having any farm income, and even those assets represent a marginal percent of the gross estate values.
  • Healthcare — The bill zeros out the Affordable Care Act’s individual mandate penalty for not buying health insurance, essentially eliminating it. CBO estimates this will cause 13 million fewer people to have health insurance by 2028.  Those who are able to keep their insurance will see their premiums rise by 10 percent over this period. While the individual mandate is an unpopular provision, voters are increasingly supportive of the ACA overall. Blowing up premiums might well come back to haunt Republicans.
  • State and Local Deductions Capped — The bill caps SALT deductions at $10,000 and allows individuals to count a mix of sales, income, and property tax towards this total. The cap primarily hurts filers in high-tax blue states, and Republican tax writers had to drop the top marginal rate in order to placate furious contributors in places like New York and California.

Corporate Side:  The Burden Lightens

Cutting rates for corporations is not a good way to win public support.  An ABC News poll revealed 65 percent of people believe corporations pay too little in taxes. Still, Republicans were forthright about their effort to slash the corporate tax rate. The President began pushing for a 15 percent tax rate over the summer. Speaker Ryan and Chairman Brady have long pushed for a corporate rate in the low 20s. It goes from 35 to 21 percent.

Americans know that corporate preferential treatment does not stop here.  In addition to the rate cut, businesses also get immediate full expensing on short-run capital investments. And the corporate AMT, which would have limited additional breaks for corporations to guarantee at least a 20 percent tax rate, did not make it to final passage. The corporate tax cuts are permanent; the individual tax cuts are subset.

Small Business:  Pass-through Loopholes

Republicans argue that pass-through tax reform is necessary to support small business owners. As with most provisions in the bill, however, the benefits of their reduced pass through rate primarily benefits the wealthy. Negotiators settled on a 20 percent deduction for pass-through filters on the first $157,500 of individual and $315,000 of joint pass-through entity income.

The Conference bill expanded the deduction based on a formula that takes into account investment in the flow-through, thereby opening it up to real estate firms with few employees. Senator Corker sparked outrage over the weekend when it was reported that he had exchanged his vote for the expanded deduction, which would allow him to receive the deduction for his own real estate holdings. Whether or not these accusation are true, the news will do little to challenge the perception that this tax bill was written primarily with the wealthy in mind.

The Conference Report also notes that restrictions on larger businesses are structured to discourage wealthy taxpayers from gaming the new pass-through system. Many experts have already raised concerns about these protections, however, and worry that the new rules will be insufficient to stop wealthy filers from converting their salary into business income, or operating through corporations taxable at the 21 percent rate, especially given the amount of administrative guidance and enforcement this bill will require. For an IRS that already faces a massive budget shortfall this will be a gargantuan task that will inevitably lead to under-collection.

International Side:  Territoriality and Jobs

The general view among Americans is that wealthy multinational companies have managed to store away nearly $3 trillion worth of assets in offshore accounts to avoid the tax rates of the current tax system, which have taxed foreign assets at 35 percent. Republicans have latched onto the idea of a territorial tax system, rather than a worldwide to lure multinational profits back home.

But the lower rates that would be applied to repatriated funds could instead encourage offshore profiting, putting millions of workers at risk as multinationals aim to benefit from a tax rate 6 percent lower than the proposed corporate tax rate of 21 percent. The House bill’s repatriation tax would have been 14 percent and 7 percent for liquid and illiquid assets respectively, the Senate suggested rates of 14.5 percent and 7.5 percent, and the final bill upholds 15.5 percent and 8 percent. Republicans are nonetheless promoting repatriated funds that would likely to be funneled to stock buybacks and shareholders, if history and current corporate finance practices are a hint.

To combat tax avoidance and base erosion, the final bill introduces the global intangible low-taxed income (GILTI) tax and the base erosion and anti-abuse tax (BEAT).  The GILTI tax is a 10 percent minimum tax rate while the BEAT would limit deductions to foreign affiliates and be applied to companies making at least $500 million in gross revenue. These changes are meant to enhance the system, but the complex provisions also included affect corporate tax credit and deduction system and may introduce new dangers. Notably, the BEAT will likely discourage corporate investments in areas such as low-income housing and renewable energy for tax credit.

The Fiscal Picture

  • Interest Expense — With a trigger rule that would raise tax rates in the future out of the picture, the tax bill will increase total federal debt substantially within the next ten years. If interest rate payments on national debt are added to the price tag of the Tax Cuts and Jobs Act, the overall cost could be $2.05 trillion rather than $1.78 trillion, statically. To help lower expenses, individual tax rates are expected to sunset in 2026. However, some Republicans have advocated for an extension of this period for these rates. Considering the expenses to come, the cost of cutting taxes today is higher than the cost that will be incurred by 2027.
  • Generational Looting — The American people know this bill is a generational looting of those who have not yet reached the age of 55. Step one for Republicans: $1.5 trillion deficit-financed tax cuts. Step two: pointing to the gargantuan deficit as a justification for spending cuts. What this means: Social Security, Medicaid, SNAP, unemployment insurance, and more will not be there for Americans who need them in the future. In addition, according to the Tax Policy Center, 53 percent of Americans will get a tax hike by 2027 — just when millennials are planning to hit their stride in their careers.

Next Steps:

This afternoon, the Senate Parliamentarian ruled that three provisions in the Tax Cuts and Jobs Act violates the Byrd Rule. That means that the Senate will have to amend the offending provisions before voting for final passage. Because reconciliation rules requires both the House and Senate to pass identical legislation, the bill will then be sent back to House for a another vote tomorrow morning.

Images source: Tax Policy Center.

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