Update 264 — GOP Double-Down Hair-Doo:
Liked the Tax Cut? How about a Perm?
While today marks the last day Americans will file their taxes under the old tax code, a number of Americans have already seen their paychecks influenced by lower tax withholdings. Republicans wasted little time celebrating the Tax Cuts and Jobs Act (TCJA) before turning to tax reform 2.0 — the next round of tax cuts.
On the theory that nothing succeeds like success, the GOP seems to be staging a sequel. What does entail substantively and will Americans want to see this movie again. And again…?
Tax Cuts Round Two
Lead by Rep. Mark Meadows, Chair of the House Freedom Caucus, Republican leadership is grating up a “phase two” of tax slashing in anticipation of the upcoming midterm elections. This tax cut 2.0 is likely to be rolled out on two fronts: individual permanence and the indexing of capital gains.
The TCJA was a massive restructuring of the American tax code that significantly cut corporate taxes and provided more modest relief for individual filers. Because no Democrats could be sold on it, the GOP had to pass the tax Act along party lines through the reconciliation process. Using reconciliation required tax drafters to adhere to the Byrd rule and ensure that their legislation did not add to the deficit beyond a ten-year window.
Making the individual tax cuts permanent would cost approximately $1.5 trillion in the decade after 2025. Republicans hope this maneuver will put Democrats in an awkward position come November, because allowing the cuts to expire in 2025 would see the bottom 80 percent of income earners paying higher taxes than if the law had never passed in the first place (see more below). This is a dangerous political game, however, as such a ploy would double the cost of the TCJA and further balloon the deficit.
Indexing Capital Gains
Beyond individual rate permanence, Republicans also seek to reduce the capital gains rate in a second round of tax cuts. One initiative spearheaded by Sen. Ted Cruz would deflate capital gains for inflation. GOP lawmakers have long sought to slash the capital gains rate in the name of increasing investment. But Trump railed against the preference on the campaign trail. National Economic Council Director Larry Kudlow has gone so far as to argue that the President could index capital gains via executive order.
Such an effort would only serve to make the Republican tax reform effort less equitable. According to the Tax Policy Center, nearly two-thirds of the gains from the Tax Cuts and Jobs Act will accrue to the top 20 percent of earners. Increasing the preference on capital gains will double down on this upward redistribution because nearly 70 percent of all capital gains income is claimed by households making at least $1 million.
Gratuitous, if Deficit-Financed, Stimulus
CBO estimated this month that the country will hit trillion-dollar annual deficits by 2020, mostly thanks to Republican tax efforts and the recently passed omnibus. Many economists view this level of stimulus as risky given where we are in the business cycle. The Fed is likely to continue to raise interest rates as the unemployment rate hits four percent, and rising debt combined with rising interest rates means rising interest costs.
The GOP has already started deflecting blame for its fiscal profligacy, with House Ways and Means Chair Kevin Brady claiming that “we don’t have a revenue problem in Washington, we have a spending problem.” Brady then pointed to entitlement spending as an example of out-of-control spending, an indication that Republicans plan on making the middle class pay for their tax cuts twice – straddling future generations with huge deficits, and contemporary ones with entitlement cuts.
Politics of Tax 2.0
• GOP Fecklessness — This new round of tax cuts is additional evidence of a fundamental truth: it is in the Republican DNA to cut taxes. The GOP has shown that its fiscal hawkishness during the Obama administration was nothing more than a political ruse. Since assuming power they championed tax legislation that will increase the debt by $1.5 trillion over a decade and next negotiated a spending Act that will bring the deficit to $1 trillion in the next fiscal year. All told CBO expects the debt to balloon to $33 trillion by fiscal 2028.
• Legislation in the Works — Legislation to make individual rate cuts permanent has been introduced in both houses. Senator Ted Cruz introduced a Senate bill to this effect, while Congressman Rodney Davis introduced a House version that makes pass-through rates permanent in addition to individual rates. Republicans will use this legislation to chide Democratic candidates who decried the fact that the TCJA’s made corporate cuts permanent while setting individual cuts expiration date at 2025. GOP leadership will suggest this is the Democrats’ opportunity to support making individual rates permanent. Don’t expect Democrats to bite.
• The Democrats’ Take — Democrats are currently not going to support anything that does not fix more fundamental problems with the TCJA. As Rep. Lloyd Doggett, member of the Ways and Means Committee, stated, the Republican proposals only “will make this debt situation even worse.” Senate Democrats have introduced legislation to roll back major parts of the TJCA.
Tax Plays Into Midterms
The push for a second round of tax cuts is nothing more than a political re-run in an election year. As in the first round, Republicans did not involve Democrats in these talks. While they did not need Democratic support to pass the original TCJA, they need 60 votes this time around – a threshold they surely will not clear. In short, Republicans always knew individual rate cuts would expire while corporate cuts would be permanent.
Nevertheless, polling trends indicate Democrats should prepare for the tax cuts’ growing popularity. In December, the TCJA polled poorly, with just 33 percent approving. By January, that figure had increased to 46 percent approving somewhat or strongly. February polls revealed a shrinking Democratic lead in generic Congressional control surveys alongside approval ratings for the TCJA reaching over 50 percent. Since February, approval for the Act has leveled off marginally, with just four in ten Americans saying they like it.
By reopening the tax debate, Republicans run the risk of suffering the consequences after a winter where they were viewed as doing the bidding of the wealthiest. It is hard to know which direction public opinion on taxes will go after tax day, but as always, but it is unlikely the Act will be resoundingly popular and a fair chance it may be associated with voters with entitlement reform and retirement insecurity.