Assessing Republican Tax Plan

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As reflected in several entries on the subject, SAFE hasn't been a big fan of the tax overhaul that is brewing in Congress.

Republicans pivot to tax reform,
Status of Republican Tax Plan,
Republican tax plan lurches ahead,

We did sign a
9/15/17 letter in favor of comprehensive, pro-growth tax reform, which attracted support from 88 conservative groups.

But we declined to sign a second letter, which was released last week. 40 conservative groups rally behind GOP tax bill, Joseph Lawler, Washington Examiner,

The House tax bill wouldn’t be “a victory for the middle class,” in our view, nor would it represent a true tax reform package. And Republicans may be making a mistake in setting up this proposal as their “make or break” issue for this session of Congress – as they seem bent on doing. See, e.g., The anti-Trump wave, Wall Street Journal,

Mr. Trump won’t change, so the only GOP antidote to a Democratic wave is legislative accomplishment. Democrats will be motivated to vote no matter what Congress does. But Republicans will stay home unless the House and Senate fulfill their campaign promises. This means passing a pro-growth tax reform that will accelerate the expansion. Republicans should also realize how much damage they have done to themselves by failing to repeal even a part of Obamacare.

And here are some particulars in support of these reservations.

A. Sales pitch - Messaging for the Republican tax plan has stressed that it would provide a big tax cut for middle class taxpayers, but business tax cuts actually loom larger (particularly in the House bill). Based on static estimates (we’ll get to dynamic scoring later) of the Joint Committee of Taxation, here’s the projected breakdown. House Bill 11/3/17, Senate Bill 11/9/17, (download PDFs).

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Middle class taxpayers would get a modest tax cut on average, but there would also be some losers (primarily taxpayers who currently itemize their tax deductions) in the mix. McConnell joins Ryan in walking back false promise on tax bill, Steven Dennis,, 11/10/17.

•House Speaker Paul Ryan had said in a radio interview that “even though there’s a lot of false information out there, everybody gets a tax cut." Actually, millions of people who currently itemize their deductions would wind up paying more taxes. A modified statement was issued the next day: "At every income level, there is a tax cut for the average family.”

• Senate Majority Leader Mitch McConnell had stated in an MSNBC appearance that "nobody in the middle class is going to get a tax increase." He acknowledged in a New York Times interview that this was only true for every income group on average. “You can’t guarantee that absolutely no one sees a tax increase,” he told the Times.

Here’s a chart showing the estimated effect of the Senate bill on the 2018 tax liabilities of American taxpayers based on the NYT analysis. The percentage of Americans whose tax liability would go up varies by income level, but is high enough to detract from the rosy picture that Republicans have been trying to paint. Senate plan could increase taxes on some middle-class workers, Jim Tankersly & Ben Casselman, New York Times, 11/10/17.

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It has also been argued that the business tax cuts would benefit working Americans by boosting the economy, thereby creating jobs and boosting average annual wages by $4,000 or more. These claims are disputed, however, and few Americans will feel inclined to study the esoteric economic arguments. Also, the purported wage increases would take a few years to materialize, and who has the patience to wait for that? Republican Tax Plan lurches ahead, section II,

Hmm, sounds a bit like “trickledown economics,” a derisive liberal label for economic gains that aren’t immediately realized by workers. But if the objective is to boost the economy, rather than gratifying American workers who would naturally prefer to pay lower taxes, then Republicans are right to put the prime focus on cutting business taxes.

Democrats have slammed the Republican tax plan as a giveaway to affluent Americans and the owners of large corporations. This claim isn’t necessarily valid, but it can’t readily be disproved. The debate is likely to end in a draw.

B. The goal – Given the government’s fiscal problems (over $20 trillion in debt, $668 billion deficit for fiscal year 2017), one might wonder whether this is an opportune time for a big tax cut. Republicans claim to be the party of fiscal responsibility, so why don’t they play that role by pursuing a plan to balance the budget by cutting spending, raising taxes, or a combination of both?

Perhaps this sounds like political suicide, but many Americans realize that our national leaders have been falling down on the job. Republicans might actually get some credit for proposing to do the right thing after 16 years of irresponsible fiscal management, and their political opponents would be hard pressed to deny that the fiscal problem is real.

Another angle is that tax cuts could potentially contribute to resolving the fiscal problem by boosting the economy. At a minimum, the resulting revenue losses should be mitigated by higher economic output, employment and wages. See, e.g., Preliminary details and analysis of the Senate’s 2017 Tax Cuts and Jobs Act, Tax Foundation,

The Senate’s version of the Tax Cuts and Jobs Act is a pro-growth tax plan, which, when fully implemented, would spur an additional $1.26 trillion in federal revenues from economic growth. These new revenues would reduce the cost of the plan substantially.

It’s arguable that the fiscal problem can’t be solved in any other way, moreover, because our political leaders are simply not interested in cutting spending. [Budget Director Mick] Mulvaney: Short-term tax [revenue deficiency], deficits worth return to healthy economy, Cathy Burke,,

Mulvaney on “Meet the Press”: “I’ve come to the realization that Washington is not going to solve the debt problem, the deficit problem, through spending [discipline]. *** I think that's the only way you're going to get out of this is to grow your way out of it. We're willing to have short-term tax [revenue deficiencies] and deficits in order to get back to that real healthy American economy. Remember, if you're 30 years old, you've never had a job as an adult in this country with a healthy economy, and we're trying to get back to that.”

But the notion that modest tax cuts could make the fiscal problem go away seems a little bit too convenient, i.e., smacks of wishful thinking. Perhaps the circumstances call for a bolder approach. The GOP income tax plan is too clever by half, Daniel Horowitz,,

Republicans should] either cut spending, create a real tax cut, or preferably both. But to keep spending high and box themselves into a revenue-neutral tax cut will result in the worst political and policy outcomes imaginable.

Here’s a hybrid approach that most Americans would understand and our political leaders should be capable of remembering. Simpler tax simplification, John Stossel,,

Ideally, tax cuts should be accompanied by even larger spending cuts to avoid expanding that $20 trillion debt. But that's not happening. How about a variation on Trump's two-for-one regulation rule (cut two regulations for each new one you propose)? Cut two dollars from the budget for every dollar in tax reduction. That way we won't end up deeper in the hole.

C. Other issues – Back in 2010, SAFE published a tax plan that we called the SimpleTax. Certain features of this plan might represent an improvement over the Republican tax bill that is being developed, including the following.

#TAX BRACKETS/PREFERENCES – The House bill includes 4 tax brackets with a top tax rate of 39.6% (the current top rate) plus a “bubble rate” to recapture the benefit of a 12% tax bracket; the Senate bill has 7 tax brackets with a top rate of 38.5% (slightly lower than the current top rate).

In 2010, SAFE proposed a roundly 5 percentage point rate cut for higher income levels, combined with a minimum 5% tax rate for lower income levels, resulting in the following tax brackets (joint return).

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The tax rate reduction was to be “paid for” by eliminating essentially all tax preferences (exemptions, deductions and credits) in the tax code, with the exception of a $1,000 per person tax exemption, business tax deductions for sole proprietorships and pass-through entities, and foreign tax credit.

Imposition of 5% tax on the 0-$30K bracket was intended to cure the current “free rider” problem in that millions of American workers pay nothing (or even get a refund for taxes they didn’t pay) towards the general support of the US government and therefore have no reason to be concerned about the cost of government programs. The House and Senate bills would probably exacerbate this problem by doubling the size of the standard deduction.

The House and Senate bills would eliminate some tax preferences, but many would remain in place and the Child Tax Credit would be increased instead of being eliminated. Overall tax return complexity would not be significantly reduced.

#CORPORATE TAX RATE/PREFERENCES – Both the House and Senate bills propose a top corporate rate of 20%. So did SAFE in 2010, but we also proposed the elimination of all corporate tax preferences except foreign tax credit, which would help to offset the lower rates and eliminate distortions in the operation of the US economy.

Both the House and Senate bills would prune some corporate tax preferences, but many preferences would survive. The wind production tax credit would be curtailed under the House bill, for example, and left as is under the Senate bill. Big wind and tax reform, Wall Street Journal,

Since 1992 the wind industry has lived off a “production tax credit” that begins with construction of a turbine and lasts 10 years. The original value of the credit was 1.5 cents a kilowatt hour but the law included an annual inflation adjustment. *** By 2015 the credit was up to 2.4 cents per kilowatt hour at a cost to the feds of $2.6 billion. That’s when Congress passed legislation to reduce the production tax credit 20% a year, starting in 2017, with a goal of ending the subsidy after 2020—though a turbine that qualifies up to that last year would continue to receive credits for 10 years. *** In its draft tax reform the House proposes to cut the value of the wind subsidy to its 1992 level of 1.5 cents per kilowatt hour and to stick with the phase out schedule agreed to in 2015. *** Iowa’s Chuck Grassley has released a statement rejecting the House proposal, and the Senate’s draft tax bill sticks with the current production credit.

This is not a minor issue. As discussed last week, government incentives for wind power are contributing to problems in the electric power sector that could impair the stability and reliability of the power grid. Reliable versus intermittent energy sources,

#DIVIDENDS/CAPITAL GAINS – To eliminate double taxation of business income earned by corporations, which has enhanced the popularity of pass-through entities that are taxed only at the owner level, SAFE proposed elimination of shareholder taxation on dividends and capital gains (on corporate stock). The House and Senate bills don’t address the double taxation issue, but they should.

#PASS-THROUGH BUSINESS INCOME – It is currently proposed to establish reduced tax for business income earned by pass-through entities, e.g., top rate reduced from 39.6% to 25% in the House bill and a 17.4% exemption in the Senate bill. A slew of complex rules would be involved as to exactly what portion of pass-through income would be viewed as business rather than personal in nature.

Under the SAFE proposal, pass-through income would have been taxed at the same reduced rates as other taxpayer income, a substantially simpler arrangement.

#DEATH TAX – Instead of simply boosting the already high exemption from the federal estate tax (as the House and Senate bills would do, followed by repeal six years later under the House bill), SAFE proposed to cleanly eliminate the death tax. The rationale was that this tax represents double taxation, generates surprisingly little revenue, and is very expensive to administer. A lifetime of taxes is enough, Stephen Moore,,

In 2014, the estate tax collected -- hold on to your hats -- roughly $19 billion, about 0.6 percent of all federal revenues. Liberals counter that only a tiny percentage of Americans pay the tax. But a tax that collects $19 billion and costs the economy multiple times that amount of money in lost investment and complicated estate tax-planning schemes invented by estate-tax attorneys and accountants is a dumb tax.

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Here’s a query for congressional Republicans: Is the Tax Cuts and Jobs Act the best you can do?


#It seems a bit harsh to say the “GOP tax plan is poorly explained,” as it is not finished yet. – SAFE director

Comment: Clearly many details of the tax bill remain to be determined, but the Republican messaging (which emphasizes a promise of individual tax cuts that in many cases won’t materialize, while downplaying business tax cuts that are far more likely to boost the economy) is basically cast in concrete – as is the Democratic response that the tax plan is a giveaway to affluent Americans and the owners of large corporations. With the argument framed in that way, the rhetorical outcome is likely to be a draw.

#I agree -- but let me add two more truisms: (1) successful politics (like life itself) depends on compromise, and (2) we should not let the perfect be the enemy of the good.

Please advise -- if possible in some detail-- what your tax plan would look like. And, by the way, we should not forget that nearly 50% of the American population pay no federal income tax at all. - Retired judge

Comment: Here’s the link to our SimpleTax proposal, which was developed a few years ago but still seems generally applicable. Among other things, this plan would effectively cure the “free rider” problem (which means that a large portion of the population has no personal stake in controlling the level of government spending) by (a) eliminating essentially all of the current tax preferences for individual taxpayers while cutting tax rates (net effect about a wash), and (b) imposing a 5% income tax on taxable income in the $ 0-30K range. In contrast, the GOP tax plan would probably exacerbate this problem by doubling the standard deduction.

#It seems that the GOP is stuck. – SAFE member (MD)

#Things don't always go smoothly for our elected reps. This tax bill is like deja vu -- all over again! – Family connection

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