A few certainties about the tax rewrite
Republican efforts to change the federal tax code by the end of the year face a long and winding road, one that may come to a dead end.
The House approved its version of the attempt last Thursday. Iowa’s three Republican House members voted yes, and the lone Democrat from Iowa voted no.
The Senate finance committee approved its version a few hours later, with Iowa Republican Sen. Chuck Grassley, a committee member, voting yes.
And President Trump has weighed in with tweaks he would like to see.
Each of the three proposals has its own pluses and minuses. My eyes glaze over when I try to consider all the possibilities, and there’s no point in listing all the permutations in this column. I’m writing it on Tuesday of this week, and there’s still plenty of time for changes and amendments to the bills.
But some general conclusions are clear.
One is that the various bills under consideration would all exacerbate the gap between rich and poor in the United States, a gap that today is bigger than at any time for nearly a century.
That’s because each of the proposed bills is more favorable on Americans’ taxes by a larger percentage as the rungs on the income ladder rise. Not just in actual dollar terms, but in percentage terms as well.
A nonpartisan agency’s estimate finds that average taxpayers in the lowest one-fifth category according to income would get a break of no more than one-half of one percent, if that, while those in the top one percent income bracket would enjoy an average 8.5 percent break.
Even though the proposals would increase the standard deduction and a number of personal exemptions, a third of Americans have incomes below the level where those provisions matter. They wouldn’t benefit at all from those changes.
About two-thirds of the tax cuts, amounting to $1 trillion over 10 years, would go to corporations and businesses.
The theory is that businesses will thereupon invest and boost wages to grow the economy, and that the increased tax revenues that result will restore the lost revenue to the federal treasury.
Believe it if you wish. Most economists don’t.
It’s impressive that last week more than 400 American millionaires and billionaires sent a letter to Congress, urging lawmakers not to cut their taxes. They say they don’t need it.
Another general conclusion is that the proposed versions would increase the federal debt by about $1.5 trillion over the next 10 years. Such an increase would result in higher interest rates for borrowers, of which the U.S. government is the nation’s largest.
So at a time when the level of federal debt is rising, so would both the level of federal borrowing and the interest rate on that debt. That combination would snowball the growth of the federal debt, which today stands about $20 trillion.
It’s also admitted, by bill drafters and analysts alike, that despite campaign promises, not everyone will see their taxes reduced.
The Joint Committee on Taxation, a nonpartisan congressional committee, finds that under the proposals, about 60 percent of taxpayers would get a tax cut in 2019. But by 2027, fewer than 50 percent of Americans would have a tax cut of $100 or more, and some 20 percent would actually see a tax increase.
Another result of the tax change efforts (I prefer not to use the phrase “tax reform”) is that swarms of lobbyists have descended on Capitol Hill in even greater numbers than usual, desperately trying to preserve their clients’ particular current tax breaks (or loopholes, if you prefer).
One informed estimate is that lobbyists will take in a cool $1 billion over and above their standard receipts as a result of the tax rewrite attempt.
Another fact, unavoidable under current congressional rules: riders unrelated to tax law will be proposed to add to the rewrite bills. At least two big ones already garner some support.
One of those, included in the current version of the Senate bill, would eliminate the Obamacare mandate that all Americans have health insurance or pay a fine. The other would repeal the so-called Johnson Amendment, enacted in 1954, that prohibits non-profit charities (501(c)3s) from endorsing and funding political candidates.
If such riders survive into the final tax change bill, their chances of success will be significant. Republicans are under intense pressure to rewrite the tax code. They would find it hard to vote against a final bill, even if some of them would be reluctant to approve such individual riders as stand-alone bills.
Another certainty regarding the tax bill process, in my opinion, is that the Senate will have a tougher time approving a version than did the House. That’s because under Senate rules, a tax rewrite can be passed with a simple majority only if it doesn’t raise the federal debt after 10 years (the so-called “reconciliation” process).
The House bill would raise the debt by an estimated $1.5 trillion. Senate approval of the House bill would therefore require 60 “yes” votes. With 48 Democrats in the 100-member Senate, that’s not going to happen.
That means the Senate has to come up with a bill that would hold steady on the federal debt. That’s a heavy lift.
So what the bill approved by the Senate finance committee does is to make the tax cuts for individuals temporary, but the business tax cuts would be permanent. So by supposedly ending some of the personal tax cuts before the 10-year limit, say in 2025 or so, the Senate version manages, on paper, to hold the federal debt with no increase.
It’s universally acknowledged, by Republicans and Democrats alike, that Congress will be expected to extend the cuts when those deadlines arrive. But meanwhile the damage has been done, and the debt grows sharply. If the personal tax cuts are indeed extended, the debt would rise even more, by at least $2.2 trillion.
One final thing is certain.
Middle-class Americans, if they want to know whether the final tax rewrite (if one is actually achieved) would benefit them or not, will need to examine carefully the bill’s various provisions.
That’s not the case for the wealthy. They know for certain they will get a big-time windfall.