Republican pivot to tax reform
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Given limited legislative accomplishments during the current administration (despite control of both houses of Congress by the president’s party) and a host of embarrassing distractions, tax reform is being viewed as a make or break issue for Republicans. And if it’s too late for true tax reform (which might require lengthy discussions about various provisions of the tax code), say political strategists, then Republicans should at least cut taxes to boost the economy and gratify the party faithful. Pass GOP tax cuts by Thanksgiving or get ready for Speaker Pelosi, Newt Gingrich & Brad Anderson, usatoday.com, 8/2/17.
To regain their legislative momentum and keep their majority, Republicans must clearly demonstrate they are fighting for the country’s hardworking taxpayers. This means passing a major tax cut by Thanksgiving — and making it retroactive to the start of this year. By 2018, the tax cuts will have spurred economic growth and wage increases, giving Republicans substantial momentum and a popular record of success to tout during their campaigns.
Mr. Gingrich has since suggested that Republicans refrain from announcing a deadline when they put a tax plan on the table, lest confidence be shaken if the deadline isn’t met. Gingrich to GOP: Don’t set a deadline for tax reform, Anna Giaritelli, Washington Examiner, 8/10/17.
Republicans reportedly have a tax plan ready to go – developed based on a dialog between administration officials and GOP congressional leaders – although the details remain under wraps and could be adjusted during the legislative process. [Treasury Secretary Steven] Mnuchin: We have a “very detailed” tax plan ready that should be passed this year, Jeff Cox, financeyahoo.com, 8/31/17.
"The House and the Senate are now socializing the plan with their members," Mnuchin said in a live interview. "We're going to release a blueprint, it's going to go to committee and we're going to turn this into a bill that the president will sign."
Last week the president kicked off the campaign in a talk at a factory located near Route 66 (a famous highway from Chicago to Los Angeles). President’s remarks on tax reform (transcript), Springfield, MO, 8/30/17.
This speech raised more questions than it answered, and much the same could be said about Democratic statements on tax reform. So instead of taking a position on the merits at this point, our plan is to pose some questions that come to mind – juxtaposed with the statements to which they relate - and hope that informative answers will be forthcoming in due course.
A. The president’s principles for tax reform (Springfield, MO)
#FIRST, “we need a tax code that is simple, fair, and easy to understand. That means getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests.”
•How did those loopholes get enacted in the first place? And is the administration planning to abolish all of them, or are only certain ones on the chopping block? If the latter is true, which loopholes would go and which would be perpetuated?
•Is it true that “loopholes” primarily benefit the wealthiest Americans and special interests? What about the exemption of employer-provided healthcare benefits from taxable income, or the refundable Earned Income Tax Credit that enables millions of lower income Americans to draw “refunds” from the US Treasury for taxes they never paid in the first place?
#SECOND, “we need a competitive tax code that creates more jobs and higher wages for Americans. It’s time to give American workers the pay raise that they've been looking for for many, many years.”
Notably, the US has the top corporate income tax rate (35%) in the world, which encourages offshoring of US business operations and gives a competitive advantage to foreign firms. Ideally (“and I say this for our secretary of the Treasury”), the top corporate rate should be cut from 35% to 15%.
•How can other nations be at a competitive advantage versus the US when they levy massive (about a 20% rate) value added taxes that have no US equivalent?
•To what extent would the envisioned reduction in the US corporate income tax rate be offset by curbing tax preferences, e.g., the deduction for interest expense?
•If corporations paid less income tax, would they necessarily pay higher wages to their workers? Aren’t wage levels determined by labor supply and demand versus corporate profits, i.e., isn’t this just an example of the oft maligned “trickledown” economics theory?
•Cutting the corporate tax rate could be considered a boon for investors, who are faring well already (witness record stock market prices). Who ultimately pays for corporate [income] taxes [some say most of the cost is passed on to consumers, but there is no way to prove this]? The answer may color the Republican overhaul, Richard Rubin, Wall Street Journal, 8/8/17.
•On the other hand, shouldn’t we stop double taxing business income? That’s what levying a corporate income tax does as dividends and capital gains based on corporate income is taxed again at the shareholder level. No wonder more and more business income is being routed through “pass through” entities e.g., Subchapter C corporations, LLC corporations, and partnerships.
•Speaking of pass through entities, are any reductions in their tax rates envisioned in connection with the goal of making the US tax code more competitive?
#THIRD, we need “tax relief for middle-class families. In a way -- and I’ve been saying this for a long time -- they've been sort of the forgotten people, but they're not forgotten any longer.” And if middle-income Americans “keep more of their hard-earned paychecks” *** “they’ll go out, and they’ll spend their money” to buy more products, ideally made in the USA. Also, parents will be able “to afford childcare and the cost of raising a family,” which is very important to my daughter Ivanka and everyone else.
•In what sense would tax law changes designed to promote consumer spending represent tax reform? It sounds more like a dose of Keynesian economics just when the US economy finally seems to be picking up steam (estimated GDP growth for the 2nd quarter was 3%).
•Do working Americans truly feel overtaxed, or do they view other issues as more important? See, e.g., Trump stutter-steps Obamacare, border [wall] for tax reform – yawn, Cheryl Chumley, Washington Times, 8/31/17.
That’s a political in-fight best left to the pocket-protector people. Put another way: Americans just aren’t going to leap from their seats in excitement over changes to the tax code.
•Exactly how big would those tax cuts be, by the way, and how can the government afford them when it’s already over $20 trillion in debt (normalized basis) and running a deficit of over $0.5 trillion per year?
•Isn’t there something immoral about borrowing money to cut taxes for current workers with the certain knowledge that the cost involved will be borne by future generations?
•Considering that entitlement programs have been the prime driver for the fiscal problem, how can the president be seriously proposing to create a new one? Child tax credit back in Republican tax reform talks, Joseph Lawler, Washington Examiner, 9/1/17.
An estimate of one version of the child benefits from the Tax Foundation placed a $500 billion price tag on it, over a decade. Another calculation from the Tax Policy Center, a different outside group, pegged the cost at $115 billion. If the child care benefit is included, those are revenues that would not be available to lowering tax rates, the main Republican goal.
# FOURTH, “we want to bring back trillions of dollars [said to be anywhere from $3 to $5 trillion] in wealth that's parked overseas. Because of our high tax rate and horrible, outdated, bureaucratic rules, large companies that do business overseas will often park their profits offshore to avoid paying a high United States tax if the money is brought back home.”
•The typical guesstimate for accumulated foreign earnings is $2-2.5 trillion. What’s the basis for thinking the total may be considerably higher?
•What rate of tax would be imposed on the funds when repatriated?
•What tax law change(s) would be made for future foreign earnings? The answer (a shift to a territorial system for foreign earnings, like most other countries) should probably be stated in the interest of completeness.
#CALL FOR ACTION - The president closed by characterizing tax reform as a project that should transcend partisan differences.
•So today I’m calling on all members of Congress -- Democrat, Republican and independent -- to support pro- American tax reform. They have to do it. It’s time.
•What could possibly be more bipartisan than allowing families to keep more of what they earn and creating an environment for real job and wage growth in the country that we love so much? So let’s put -- or at least try to put -- the partisan posturing behind us and come together as Americans to create the 21st century tax code that our people deserve.
Earlier in the speech, however, the president expressed a view that was probably more in line with his true feelings (not to mention political reality).
The Dems are looking to obstruct tax cuts and tax reform, just like they obstructed so many other things, including administration appointments and healthcare. Not one vote. We got not one vote to try and fix healthcare and get rid of Obamacare.
B. The Democratic position on tax reform
#TAKING A STAND - All but three Senate Democrats signed a letter before the August recess that objected to tax cuts that would benefit the affluent and/or add to the deficit. The letter further condemned GOP plans to pass its tax bill via the reconciliation process in order to evade the Senate filibuster rule. Democrats will oppose tax reform that cuts taxes for the top 1 percent, Joseph Lawler, Washington Examiner, 8/1/17.
•How can our income tax system be considered fair, when nearly 50% of all US workers are contributing nothing to the general cost of the federal government (they do pay payroll taxes, which partially cover the cost of their future Social Security and Medicare benefits)?
•If taxes are going to be cut, why shouldn’t taxpayers who pay the highest effective rates share in the reductions?
•How would deficit neutrality be measured, and would acceleration of economic growth as a result of tax reforms be considered?
One of the measurement issues is whether the projected revenue with proposed tax cuts should be compared to an existing policy baseline (which assumes temporary tax preferences will be renewed, as they usually are) or an existing law baseline (which assumes temporary tax preferences will be allowed to expire, thereby overstating likely future tax revenues). Give tax cuts a fighting chance, Ed Feulner, Heritage Foundation, 8/29/17.
Those increases won’t materialize. But if Congress assumes for budgetary purposes that they will, it makes tax relief that much harder to enact. Why? Because tax-cut opponents can point to a much larger deficit prediction and say, sorry, we can’t afford it. Using the higher baseline could mean almost a half-trillion dollars less in tax cuts over 10 years.
#QUESTIONING GOP APPROACH - A column by former Senator Ted Kaufman claims, among other things, that (1) the US economy is one of the most competitive in the world so there is no pressing need to cut the corporate income tax rate, and (2) “best estimates” indicate about half of the benefits of the administration’s tax plan would go to taxpayers in the top 1 percent. Tax reform isn’t going to happen, News Journal, 8/22/17.
•If the US economy is so competitive, why are the economies of some other countries – notably China – growing much faster?
•Wouldn’t it make sense to await a definitive tax plan before attempting to estimate how the benefit would be distributed?
•How was the benefit from reducing corporate income taxes distributed? Was any acceleration in wage growth or reduced inflation assumed, which would seemingly benefit working Americans?
#PUBLIC OUTREACH - Hours before the president’s speech in Springfield, Senate Minority Leader Chuck Schumer threw down the gauntlet. Schumer: Democrats are ready for a big fight over taxes, Joseph Lawler, Washington Examiner, 8/30/17.
"This is going to be one of the biggest fights of the next three, four months, and Democrats are ready for it," the New York senator told reporters on a call hosted by a left-leaning group organized to oppose tax cuts for high earners. [Tax March, MoveOn.org, et al. have contributed to a “Not One Penny More” advertising campaign.]
•Do Democrats plan to vote “no” on the Republican tax plan without offering any counter proposals?
•If so, doesn’t that mean the Republican tax plan must be pursued through the reconciliation process in order to even be brought up for discussion in the US Senate?
•With all Senate Democrats voting “no,” how likely is it that Senate Republicans will unite behind a real tax reform bill? Won’t the likely upshot be passage of politically popular tax cuts – without much in the way of reforms - thereby exacerbating an already serious fiscal problem?
#Vote them all out. – SAFE member (DE)
#In any business, if an employee refuses to do the work, he gets fired. It is now past time for term limits. Throw the bums out!! All the alligators in that swamp are not Democrats! – SAFE member (DE)
#I’m not convinced that attempting to test the reasoning of our political leaders by asking them questions will accomplish much because their positions are based primarily on perceived self-interest. – SAFE director
#Many seniors might pay higher taxes under the Republican plan versus getting the promised tax cut. Doubling the standard deduction may not make up for losing ability to deduct for medical expenses (above the limit) and state and local tax deductions. Effect of reducing the number of tax brackets is unclear, won’t necessarily result in lower tax liability. – SAFE director
You may well be right. Government cannot afford a big tax cut overall, so however they slice it cuts in one area will tend to be offset by increases in others. However, no way to be sure what’s up until the tax plan is laid on the table.