Republican Tax Plan lurches ahead

To avoid a Senate filibuster of the tax bill they hope to pass, Republicans are planning to use the reconciliation process. The first step was to pass House and Senate budget resolutions with reconciliation instructions re spending cuts and tax legislation. A different kind of president, section B, 10/23/17.

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Last week, the House adopted the Senate budget resolution – thereby abandoning the idea of “revenue neutral” tax reform and clearing the way for tax legislation that would add to the federal debt increases that are already projected. House passes Senate budget, moving tax reform process forward, David Sherfinski, Washington Times, 10/26/17.

It’s understood that a House tax bill will be made public on Nov. 1 (and a Senate version on Nov. 6), after which there will be a full court press to push a tax bill through Congress by, say, mid-December. House passes $4T budget in step forward for Trump tax plan, Andrew Taylor,,

Ways and Means Committee Chairman Kevin Brady, R-Texas, said immediately after the vote that he’ll release the tax measure on Nov. 1 and a panel vote is expected the week of Nov. 6 in hopes of a House vote before Thanksgiving. That timetable is ambitious as numerous details, including ways to raise revenues to help finance cuts to individual and corporate tax rates, remain unresolved.

There will be two key issues in the ensuing congressional review. (1) Are the proposed tax cuts affordable? (2) Who will derive most of the benefits? Here’s our take based on the information currently available.

1. Affordability - Some observers believe a big tax cut is needed to boost the economy, which leads them to be supportive of the Tax Plan that is being developed. As one reader put it last week:

For growth, we are probably going to have to take on some more debt. To say we can make cuts and keep a balanced budget and stay deficit neutral while growing is a joke. This is a scheme that prevents growth and guarantees a stagnant economy, as the Dems want.

See also the comments of supply side economists who maintain that a big tax cut could boost the average economic growth rate to 3% per year or better. Trump’s incentive-packed tax plan, Larry Kudlow,,

The argument that the U.S. is doomed to two percent or less growth -- "secular stagnation" no matter what we do in terms of tax policy -- is nonsense. Across-the-board tax cuts produced 5 percent annual growth during the JFK period. And after-tax cuts were fully implemented in 1983, real growth averaged 4.6 percent for the remainder of Reagan's presidency.

And Budget Director Mick Mulvaney asserts that the obvious strategy of balancing the budget by cutting spending isn’t feasible because the congressional appetite for spending reductions seems to be “very low.” Therefore, he says, the only hope to balance the budget that he can see is to grow the economy faster. OMB: Top 20% pay 95% of taxes, Paul Bedard, video (4:29, sorry about the ad), Washington Examiner,

Fiscal conservatives are reluctant to endorse a Tax Plan that would substantially cut taxes, however, perceiving higher deficits as the inevitable result (even with dynamic scoring). Tax reform debate taxing Republicans’ negotiating skills, Veronique de Rugy,,

It's obvious that Congress and the White House are unwilling to cut or even restrain spending to pay for tax reform. *** As a result, there's little leeway to mix tax cuts with tax reform. Moreover, failing to restrain spending today while cutting taxes means that taxes will have to go up in the future to pay for larger deficits.

There are even a few moderate Democrats in the House who delight in accusing Republicans of abandoning their principles. Blue Dog leaders ask Republicans: what happened to fiscal discipline? Rep. Jim Costa et al., Washington Examiner,

As a result of the growing debt, Americans will see slower wage growth, higher interest payments, and fewer jobs. An increasing debt will also constrain funding to ensure a strong military, hamper diplomacy, and reduce the resources we need in order to maintain our soft power influence around the world.

So who is right? If the government approves X level of spending, it will necessarily pay the price– either currently or in the future as debt comes due and lenders cut off the government’s credit. So if one doesn’t think Americans should be asked to pay X level of taxes, the sensible course is to insist that the government reduce its spending.

No doubt this logic is over-simplified, but many economists seem to reach similar conclusions. Survey of 42 economists conducted by the University of Chicago, Booth Business School, responses weighted by each economist’s level of confidence,

•Since 1980, whenever substantial growth effects have been required to make a tax reform plan revenue neutral, the actual outcome has invariably been a fall in tax revenue as a share of GDP? – Strongly agree 44%, agree 53%, uncertain 3%.

•The tax reform plan proposed by President Trump this week would likely pay for itself through higher economic growth? – Strongly agree 6%, disagree 12%, strongly disagree 82%.

It may be argued that “this time is different,” as Democrats effectively did in pushing for the immediate enactment of an $800 billion package of spending increases and tax cuts in 2009, but we opposed that package for three reasons. (1) It’s not necessary to act immediately; (2) Other ways to bolster the economy should be considered; (3) This is a spending bill, not a stimulus bill. Economic stimulus package: what’s the rush?

A deficit is a deficit, and cutting taxes to stimulate the economy isn’t necessarily superior to increasing spending for that purpose – one needs to consider how the incremental funds will be used. Even following the precepts of Keynesian economics, moreover, economic stimulus isn’t indicated at a time when the US economy is finally perking up (big stock market gains since the 2016 elections, two straight quarters of 3% growth).

From either a policy or political standpoint, Republicans would be ill advised to offer a Tax Plan that would substantially ramp up the deficit. Accordingly, tax rate cuts should be offset – to the maximum extent feasible – by eliminating tax preferences.

For example, SAFE is on record as suggesting the following changes in corporate income taxes. Internal Revenue Code 2.0,

The clearest way to improve matters without substantially reducing tax revenue would be to cut the corporate tax rate sharply, say to a top rate of 20% [emphasis added], while eliminating a host of special exemptions, deductions and tax credits (other than the foreign tax credit) that are currently in effect.

Don’t make the R&D tax credit permanent, eliminate it – a tax deduction for the expense should be good enough. Say goodbye to energy tax credits, percentage depletion for oil and gas, low-income housing tax credits, and the special domestic production deduction to subsidize US-based manufacturing. Also repeal corporate AMT, which forces many companies to calculate their taxes in two ways without raising much additional tax revenue.

Perhaps the GOP will throw caution to the winds and push through a massive overall tax cut, as the president has seemingly been promising, but it’s rumored that Republicans are scrambling to find offsets for the tax cuts they want to offer.

•“To do tax reform, you need money. And right now, even as we speak, they appear to be going wobbly on some of the issues they’ve raised with great certainty in previous weeks,” said top Ways and Means panel Democrat Richard Neal of Massachusetts. “They’ve got a revenue problem, a real revenue problem. And you have to make some dramatic changes to benefits that people across America have come to expect and enjoy.” House passes $4T budget, op. cit.

“In 1981,” said David Stockman (first budget director in the Reagan administration), “the debt was only $940 billion… there was plenty of room to have a giant tax cut that was paid for by borrowing. Today they have to find pay-fors, loopholes, [and] base broadeners. They can’t find any. Even in the state and local tax savings, which allegedly was $1.3 trillion over ten years, is falling by the wayside day-by-day,” he said, adding that “they are going to end up with no tax bill or one that is so minor that it will have very little impact on the economy.” David Stockman: White House “notion of a big, big tax cut is a pipe dream,” F. McGuire,, 10/20/17.

•[Senator Bob Corker, R-TN] told reporters in Washington on Wednesday that while he supports lower taxes, he won’t back legislation that increases deficits -- a certainty under a Republican plan whose outlines were unveiled on Wednesday. To satisfy Corker, lawmakers would have to scrap some planned cuts or eliminate loopholes. They could also cut spending to offset about $4 trillion in reduced revenue. “With realistic growth projections, it cannot produce a deficit,” Corker said. “There is no way in hell I’m voting for it.” Corker’s focus on deficit may force GOP to scale back tax cuts, Erik Wasson,, 9/27/17.

In courting support for the vote on the Senate budget resolution, which authorized tax cuts up to $1.5 trillion (over 10 years), House Republican leaders made several promises to fiscal conservatives. GOP budget poised for passage despite some Republican “no” votes, Susan Ferrechio, Washington Examiner,

[Rep. Mark] Walker [R-NC, leader of the Republican Study Committee] told the Washington Examiner his members were reluctant to vote for the Senate budget plan because it does not cut federal spending or reform mandatory program costs. But in exchange for the RSC's support, Republican leaders promised to hold a vote on a balanced budget amendment as well as votes on "two or three pieces of legislation" by next spring that would be aimed at reducing the deficit, including provisions that would reform mandatory spending.

These seem like empty promises to us, particularly as any measures passed by the House could die in the Senate, but we’d be delighted to be proven wrong.

II. Incidence of benefits – The primary argument against the Republican Tax Plan – which Democrats unleashed several months ago - is that the TP would primarily serve to benefit the affluent and well connected. This suggests a rationale for a majority of Americans to oppose the TP. It also harmonizes with the liberal theory that the prime economic challenge for developed countries is redistributing wealth versus growing it. A clever but deeply flawed rationale for Robin Hood economics, 5/12/14.

Given the political potency of class envy, it behooves Republicans to market the TP as a middle-class tax cut. Not for nothing has the president visited various “flyover” states to tell middle class audiences that the GOP tax cut would put money in their pockets. Republicans pivot to tax reform,

Despite claims that they are not paying their “fair share,” however, high earners already pay a disproportionate share of the total individual income tax collected. Based on the latest data published by the IRS, for example, taxpayers in the top 1% (Adjusted Gross Income of $480,930 or more) paid 39% of the total tax on 21% of the total income. In contrast, taxpayers in the bottom 75% (AGI of $79,654 or less) paid 13% of the total tax on 31% of the total income. Who pays income taxes 2015,
National Taxpayer’s Union Foundation.

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Although there seems to be no plausible reason for making the tax tables even more progressive, Republican tax writers are reportedly considering a fourth tax bracket that would establish a top tax rate for “millionaires” even higher than the current 39.6%. A million-dollar mistake, Wall Street Journal, 10/27/17.

House Speaker Paul Ryan has said tax reform will include a fourth tax bracket for millionaires above the top rate of 35% in the GOP framework, and now we hear it could be as high as 42%-44%. This bow to the lords of political envy would be a million-dollar mistake that undermines the purpose and much of the benefit of tax reform.

With or without a 4th bracket, the ballyhooed middle-class tax cut isn’t likely to look very impressive when the details are revealed – and many middle-class Americans who currently itemize their tax deductions may wind up paying more tax instead of less. Status of Republican Tax Plan,

Accordingly, supporters of the Tax Plan are stressing that middle-class Americans would derive economic benefits (in effect a big pay raise) from the corporate tax cut that is contemplated even if they don’t own stock and their own tax payments wouldn’t change all that much. New report: Tax reform will raise wages at least $4,000 on average,,

Tax reform is all about more jobs, fairer taxes, and bigger paychecks. That last one is particularly important. Pro-growth reform means a pay raise for American workers. And a new report from the Council of Economic Advisers (CEA) shows just how much they stand to gain from our plan. The study finds that as a result of corporate tax reform alone, on average, American families will see a wage increase of at least $4,000 annually.

The underlying CEA study suggests, moreover, that this estimate is “conservative” and the actual benefits – from a corporate tax rate cut plus bringing back offshore corporate earnings and current expensing of investment outlays – could be considerably higher. Corporate tax reform and wages: Theory and evidence, Council of Economic Advisers, October 2017.
Ibid (download PDF).

Using 2016 household income as the baseline, these effects translate into an increase in average household income from $83,143 in 2016 to between $87,520 and $92,222, an increase of $4,000 to $9,000 in wage and salary income alone. (See Figure 2.) For households at the median, the effects would bring household income from $59,039 in 2016 to between $62,147 and $65,486, for a boost of between $3,000 and $7,000. These are the long-run, recurring values measured in 2016 dollars; households would receive these benefits each year once the changes in the corporate tax have been fully absorbed by the economy.

The report is loaded with economist jargon and citations to supporting studies, so surely these claims can be relied on with confidence. But wait, because other economists claim the purported wage gains are vastly exaggerated. No, the GOP Tax Plan won’t give you a $9,000 raise, Jason Furman (former chair of the CEA, 2013-17), Wall Street Journal,

The White House claims that the average household would see between $4,000 and $9,000 more in its paychecks every year. But if all 125 million households got a raise like that, it would amount to an annual increase in total wages of between $550 billion and $1.1 trillion. That’s between 275% and 550% of the total cost of the $200 billion corporate tax cut—implying a supply-side effect that’s more than a little far-fetched.

A rebuttal followed, which noted among other things that the Obama administration had favored the idea of cutting the corporate tax rate. Why then were the former president's chief economic advisers (Lawrence Summers and Jason Furman) trashing the idea now? A turnabout on corporate taxes, Casey Mulligan & Tomas Philipson, Wall Street Journal,

In 2012, President Obama and his advisers proposed lowering the corporate tax rate because it “creates good jobs with good wages for the middle-class folks who work at those businesses.” In 2013, Lawrence Summers, President Clinton’s Treasury secretary and chairman of Mr. Obama’s Economic Council, argued that the tax on corporate profits creates a burden without commensurate revenues for the government, and that changing it “is as close to a free lunch as tax reformers will ever get.”

We have not read any of the studies being cited, and can’t claim to know how much wages might rise as a result of cutting corporate taxes. It does seem logical that wage gains would result from a higher level of economic activity, however, and the real issue probably comes down to timing versus amount – as the economist responsible for the CEA report has essentially admitted. White House economist: Middle class will benefit from business tax cuts in 3 to 5 years, Rick Newman,,

“This is the disappointing answer in terms of timing,” Kevin Hassett, chairman of the White House Council of Economic Advisers, said at the Yahoo Finance All-Market Summit on October 25. “If you go to the optimistic side of the literature, it could take 3 to 5 years. If you go to the pessimistic side, it would about double that.”

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.

III. Assessment – SAFE plans to withhold any endorsement of the Republican Tax Plan until the details are on the table and we have had time to review them. But at this point, we would offer the following suggestions to the Republican majority (if they want to continue to enjoy that position).

FIRST, don’t overdo the revenue loss. It won't be possible to please everyone, no matter how much taxes are cut, and whatever immediate level of revenue loss is accepted should be directed to the areas that will boost investment versus simply promoting consumption.

SECOND, eliminate as many special tax preferences as possible – simplification can make the tax code easier to administer and minimize distortion of economic decision-making.

THIRD, get to work on cutting spending. This effort will require top level support; it should not be left to the budget director to “take care of.” See the
Spending page of this website for some ideas on where cuts should be made.

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