Aspects of Tax Reform: What Media/Experts Say
Republicans promised tax cuts for the wealthy and corporations and Trump promised tax cuts for all. Although there is more negotiation occurring around the issues of tax reform, whose tax cuts will prevail has yet to be determined. Just recently Bannon almost convinced Trump to raise taxes on the wealthy but the Republicans were horrified and quickly said that Trump did not really intend to do any such thing. Both the GOP and Mr. Trump would like to do tax reform and to make filing simpler by ending some tax loopholes and tax breaks but leaving the ones that benefit the wealthy the most. Their slogan is “lower the rates, broaden the base, which means cut tax rates, but also eliminate loopholes that shield some income from being taxed altogether.”
Republicans have also been fierce about requiring “pay-fors”. If you make cuts you need a way to increase revenue to avoid raising our deficits or debt. But recently they are beginning to let go of some of the principles that were deemed most important to Republican tax reform/tax cuts including finding revenue to pay for cuts.
Deficit Neutral/ Raise Economic Growth Rate
“The White House has argued that tax cuts would spur economic growth, which would boost revenue and pay for cuts; economists on the right and left overwhelmingly reject that claim.”
“The White House insists that economic growth will cover the cost, which could be as high as $7 trillion over a decade. But the questions, says the NY Times, will dog Republicans and could fracture their party as they face the prospect of endorsing a plan that many economists and budget analysts warn will increase the deficit. After years of fiscal hawkishness, conservatives now face a moment of truth about whether they truly believe America’s economy is drowning in debt.”
From the same article we are told: “It seems the administration is using economic growth like magic beans: the cheap solution to all our problems,”…Mr. Trump’s plan could reduce federal tax revenue by $3 trillion to $7 trillion over a decade. The economy would need to grow at a rate of 4.5 percent – more than double its projected rate, an unlikely prospect – to make the plan self-financing.” (Says Maya MacGuineas, president of Committee for a Responsible Federal Budget.)
“This is fool’s gold that you’ll cut taxes, everybody will work harder, more money will come and you’ll erase the fiscal impact,” said Steve Bell, who was a Republican staff director of the Senate Budget Committee from 1981-1986. “It never happens.”
Doug Elmendorf, former Congressional Budget Office director, says, in the Washington Post article, pushing back on the Trump administration’s claim that this or any other tax cut will raise the growth rate by half (from 2 percent to 3 percent) says “The evidence shows clearly that no feasible tax reform in this country will raise economic growth to 3 percent on a sustained basis given our current demographics”
In this same article from the Washington Post by Jared Bernstein, Bernstein goes on to say that the slowing of our labor force “is largely a function of our aging demographics…Aging demographics not only have negative growth implications but also mean we’re going to need more, not less, revenue in the future.”
While Steven Mnuchin claimed that we got a new President because the old one could not get us to 3% growth (I’m paraphrasing), Bernstein says, “First, the president doesn’t set the growth rate. Not even the Federal Reserve does that, though that would be a bit closer to reality.” Then he gets a bit snide (and I don’t mind). He says, “Yes, when the stars align, policy can add or subtract from growth. Countercyclical government spending in recessions or investments in physical (infrastructure) or human capital (education) can boost growth. Conversely, austerity measures and disinvestment in public goods can harm growth. But we’re talking basis points (hundredths of a percent), not percentage points.”
Bernstein goes on to cite the comments of Neil Irwin in The Upshot. “It is striking how many (items in the tax plan)…affect the president and his family. He is a high-income earner. He receives income from 564 business entities, according to his financial disclosure form, and could take advantage of the low rate on ‘pass-through’ companies. According to his leaked 2005 tax return, he paid an extra $31 million because of the alternative minimum tax that he seeks to eliminate. And his heirs could eventually enjoy his enormous assets tax-free.” (Since both Trump and the Republicans plan to end the death tax.)
The Border Tax Adjustment
One way this administration hoped to make this tax plan revenue neutral and have cuts equal revenues was to place a tax on imports coming over our borders but not on exports crossing the other way. But, according to another article, this time in the NY Times “the idea drew the ire of retailers, energy companies, and the billionaire Koch brothers, who invested heavily to undermine it…To the glee of the border tax skeptics, on Thursday the provision officially died.
“Full expensing means allowing companies to deduct all new investments from their taxable income in the year they are made. Under the current code, companies must depreciate investments over a course of years, according to a complicated schedule” says Joseph Lawler in the Washington Examiner on July 29, 2017.
Although the Ways and Means Committee says that this is still a goal, Tim Phillips of Americans for Prosperity said “his group would be advocating rate cuts, as opposed to full expensing, both of which cost revenue. We do think full expensing is not the right way to go, as it chooses a certain kind of economic activity to reward. Start-ups and established companies make differing levels of new investments.”
So although full expensing would simplify the tax code it has enough push-back that it is unlikely to be included in the final plan.
Permanent v. Temporary Change to the Tax Code/Reconciliation
Ryan wished to make these changes to the Tax Code permanent “so that businesses can plan along 10 to 20 year timelines” says the article in the Washington Examiner.
The article goes on to say, “Using the legislative process known as reconciliation Republicans can pass a tax bill without the Democrats. But under the procedure a permanent change to taxes could not add to long term deficits. Some Republicans would rather cut taxes deeply, even if that meant that the changes to the code would have to be temporary.”
Since it looks like there is no way to make the tax plan deficit neutral or to pass the bill without using reconciliation permanent change is unlikely to be doable at this time.
Conclusions: For Now
Even with all the lost aspects of the tax reform plan, the last statements on the subject made by Ryan and Pence before the August break pleased some Conservatives:
“…Ryan pledged to take on ‘defenders of the status quo’- and then proceeded to defend many of the status quo’s worst aspects. He pledged to get rid of ‘special interest carve-outs’ except for those that ‘make the most sense’ – such as the deduction for mortgage interest. Actually this distortion of the real estate market says the Editorial Board of the Washington Post, is one of the tax code’s least sensible features, but it is politically sacrosanct due to the power of the real estate lobby. The only major individual tax break Mr. Ryan seemed to leave on the chopping block was the deduction for state and local taxes, which disproportionately favors states that send Democrats to Congress. Any GOP tax plan would eliminate the estate tax, Mr. Ryan insisted – thus entrenching the concentration of wealth in the United States.”
The editorial board goes on to say, “Mr. Ryan … alluded to the need for ‘tax cuts’. That made the week’s GOP messaging unanimous and reinforced suspicions that, for all their talk of reform, slashing taxes, mainly for the wealthy and corporations is the one policy that Republicans agree on and therefore the only policy they are actually going to enact.”
“This is a thing of beauty, a thing of wonder,” Grover Norquist, the president of Americans for Tax Reform, said of Mr. Trump’s one page plan, ‘Growth, growth, growth!” (But the more satisfied Grover Norquist is with a tax plan the less likely I am to think that such a plan will benefit “we the people”.)
Now that the repeal of the Affordable Care Act did not pass (I’m being kind for ego’s sake) Congress may have to revisit health care if 45 makes them. Since neither the Trump tax plan nor the Ryan tax plan is deficit neutral it cannot hope to pass until there is a budget. So the new order of operations is. Health Care first (maybe). Then the debt ceiling needs to be raised and then the budget must be passed before Congress can tackle the tax plan. At least that is what one source is saying at the moment. This year could be a long slog for Congress, for “we the people” and for the resistance.
Tax Reform Article 1: https://www.thearmchairobserver.com/tax-reformtax-cuts-trump-plan-republican-plan/
Tax Reform Article 2: https://www.thearmchairobserver.com/tax-plans-talk-budgets/