Taxing the Future, a GOP Trilogy (July 27)

Update 288 — Taxing the Future, a GOP Trilogy; Does Tax Reform 2.0, ff. = Triple-Down Economics?

House Ways and Means Committee Chair Brady is on a mission to make tax cuts a winning issue for Republicans in the fall.  His legislative vehicle is “Tax Reform 2.0.” The Tax Cuts and Jobs Act (TCJA), signed last December, has been less popular than expected and most Republicans up for re-election have given up even mentioning it on the campaign trail.  The original tax cuts contained embarrassing mistakes and the many and sizable kinks still need to be ironed out with a technical corrections act in the works.

All the same, Republicans in the House are marching on with a new trilogy of tax bills that they hope will resonate with their voters in November, while the Senate leadership sees no urgency.  What comprises this trilogy and what are its prospects? Fresh intel in ample detail below.

Good weekends, all…

Best,

Dana

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Recent Legislative Developments

Chair Brady indicates that House Republicans are planning to divide the package into three separate bills: permanency, savings, and innovation.  Dividing the bills increases the chances that they are passed, if not all together, then separately, but creates a false illusion that they won’t aggressively try to pass all three.  Ways and Means is set to markup the bills in mid-September with the intention of passing them by the end of that month. In the Senate, the package is unlikely to be taken up before the lame duck session.

The Post-TCJA Economy

President Trump’s tax cuts, which permanently reduced the standard corporate rate from 35 to 21 percent, have already had a considerable negative economic effect, with the New York Times reporting this week that “the amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted.”

While corporate tax payments between January and June fell by 33 percent compared to the same period last year, corporate tax receipts as a share of the economy have fallen to 1.3 percent, nearing a 75-year low.

The Road to Hell is Paved with Permanence

Tax Reform 2.0 is a decisively political move by Republicans to make permanent the changes they enacted in 2017 that are set to expire at the end of 2025 and to introduce other tax changes.  Although there is still no bill language, the rhetoric around the release implies that Republican leadership wants to perpetuate all of the individual income tax changes in the TCJA. These changes include:

  • tax cuts for individuals and pass-through businesses
  • SALT deduction cap
  • Alternative Minimum Tax (AMT) cut
  • standard deduction and child tax credits

Republicans are working on the idea that it will be hard for Democrats to vote against making the individual tax cuts permanent. They believe it is harder for Democrats to vote against individual tax cuts than the corporate ones that were included in TCJA. They also include a variety of new proposals designed to appeal to Democrats.  

A Wolf in Sheep’s Clothing

The new proposals in Tax Reform 2.0 are meant to provide benefits to the middle class at a comparable significance to those in TCJA that clearly favored the wealthiest Americans. These proposals aimed at the middle class are divided into two categories — savings and innovation.

Savings

  • creating a Universal Savings Account (USA), which is basically a significantly improved Roth Individual Retirement Account (Roth-IRA), that individuals could contribute some of their after-tax income to annually — there is speculation on income contribution limits but nothing has been confirmed yet.  Withdrawals from the USA could be made at any time or for any reason without tax or penalty. Like a Roth-IRA, the USA’s earnings would not be subject to tax. The goal is to incentivize Americans to save more.
  • expanding the popular, tax-free 529 college savings accounts so it could also be used to pay for apprenticeship fees and home schooling expenses, as well as student debt.
  • allowing workers to tap into their retirement savings accounts without penalty to cover expenses from the birth of a child or an adoption.

Innovation

So far there is only one clearly identified idea under this category:

  • permitting start-up businesses to write off more of their initial costs to remove barriers to growth.

Although these measures seem to help the middle class, they are unlikely to be sufficient to offset the higher interest rates. The middle class will be subject to these higher rates on mortgages and student and car loans as the result of the ballooning deficit due to TCJA’s tax cuts for corporations and the wealthy.

A Tax Cut Catastrophe

Some of the provisions in the Tax Reform 2.0 package would put a further strain on tax revenues at a time when social benefit systems are in dire need of assistance. The Congressional Budget Office (CBO) estimates that extending the individual tax cuts would increase deficits by an additional $650 billion—this at a time when social security had to dip into its trust fund for the first time in 36 years and the federal budget deficit is set to surpass $1 trillion two years earlier than estimated, by 2020.

The TJCA was clear in its “reverse Robin Hood” regressivity. Tax Reform 2.0 is not as blatant, but enacting more provisions that deprive the federal government of vital tax revenue that it needs to fund critical social services is socially irresponsible.

Tax Reform 2.0 also includes provisions that allow for more cuts to the deduction for owners of noncorporate businesses known as “pass-throughs” and larger exemptions to the estate tax and the alternative minimum tax for individuals. Given the predilection of the well-to-do for tax avoidance, this reform makes policies permanent that encourage such activities and suggest that gaming the system is not only good, but recommended. In fact, the lower the pass-through rate, the more attractive abusing the tax code becomes.

Political Lens

With the 2018 midterm election looming, House Republicans are eager to make their individual tax cuts permanent before the Democrats take back control (knock on wood) and they are no longer able to.  Were that to happen, at the end of 2025, corporate tax breaks would remain in place and individual tax cuts would expire, making for very bad optics for the Republican party, if it exists then. So even though Chair Brady is planning to introduce the package as three separate bills, passing the permanency of individual tax cuts will be crucial for him and the future of his party.

Sen. McConnell seems to have hit upon a legislative strategy that serves both Senate and House Republicans regarding Tax Reform 2.0.  The House will pass the bills as a package and be able to pick up political capital; Republican senators (who are in un-gerrymandered and therefore more purple jurisdictions) won’t have to take a difficult vote on these bills before the midterms.  Sen. McConnell won’t take the GOP trilogy up until the lame duck session, enabling the House to have its cake (have its vote), but the Senate doesn’t have to eat it too (swallow a tough vote).

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