GOP Puts Tax Outline on Table (Sep. 28)

Update 208 – GOP Puts Tax Outline on Table; Many Details and Months of Debate to Follow

Yesterday, after several false starts and months of manufactured distractions, GOP leadership in Congress and the Trump Administration finally tabled a framework for a tax plan that would lower rates across the board and cost the nation billions of dollars, possibly and if so only partially paid for.

So many basic details are missing from the plan that an accurate “score” of its cost is impossible.  For this reason, the political viability of the plan cannot yet be assessed.  But Sen. Corker says, “I’m not about to vote for any bill that increases our deficit, period,” and the best estimate of the plan’s additional debt cost is north of $2 trillion over ten years.  The plan faces a long slog ahead.

Here’s an initial assessment of the framework, considering its equity and distributive consequences, the fiscal outcomes, the impact on jobs and labor, and the likelihood of eventual passage.

Best,

Dana

——————–

Yesterday afternoon in Indianapolis, President Trump announced details of his tax framework. The provisions were the product of months of talks amongst the Big Six Republican negotiators: Treasury Secretary Steve Mnuchin, NEC Director Gary Cohn, Senate Majority Leader Mitch McConnell, Senate Finance Chair Orrin Hatch, House Speaker Paul Ryan, and Ways & Means Chair Kevin Brady.

Caveats

An analysis of the GOP tax plan at this stage is necessarily incomplete.  Among the missing details that limit the analysis:

• definition of the income ranges the new individual rates will apply to;
• identification of all deduction eliminations beyond SALT (state and local); and
• details on which businesses will qualify for the new, 25 percent pass-through rate.

The distributive and fiscal consequences of the plan are somewhat obscured by the absent specifics.  But the main outlines are clear enough.

The Plan’s Basic Provisions

Rates 

• Corporate:  reduces the corporate tax rate to 20 percent.  A number of deductions and credits would be eliminated to broaden the tax base.  The research and development credit would remain in place in order to incentivize U.S. development of intellectual property.  The domestic manufacturing deduction would be repealed in favor of a lower rate.  The corporate alternative minimum tax would be repealed.
• Pass-Through Entities: creates a top tax rate of 25 percent on pass-throughs, minus compensation.
• Individual:  sets the top individual tax rate at 35 percent, with the possibility of an unspecified higher rate, reducing the number of tax brackets from seven to three at rates of 12, 25, and 35 percent.  It offers a near-doubling of the standard deduction to $12,000 for individual and $24,000 for families and an expansion of the Child Tax Credit. The plan would preserve the low-income housing credit.  The AMT, estate tax, and the generation-skipping transfer tax would be eliminated.

Deductions 

• Corporate:  allows immediate expensing of capital business investments for at least five years, partially limits the net interest expense deduction for C corporations, and suggests that some business interest deductions may be disallowed for pass throughs.  Current deductions for new depreciable assets investments other than structures would remain in place another five years.  The framework preserves credits for R&D and low-income housing investments.
• Individual:  eliminates most itemized deductions – including state and local taxes – except for home mortgage interest and charitable contributions; provides a near-doubling of the standard deduction, and consolidates the current seven brackets to three for individuals.

International

A territorial system of corporate taxation but with a minimum tax rate targeted at shifting profits to tax haven jurisdictions. A one-time repatriation tax on corporate earnings held overseas with yet-unspecified rates with respect to liquid and illiquid assets will be applied. Under this “territorial” tax system, international corporations will not be taxed for the repatriation of their after-tax incomes.

The framework contemplates a minimum tax on the foreign earnings of U.S. multinationals. Trump has conceded that without a minimum tax or much stronger repatriation rules, a territorial system would allow U.S. multinationals avoid all tax on foreign-source income. Democrats will likely seek to constrain top executives and wealthy shareholders’ stock buy backs and investment abroad.

Code’s Progressivity Degraded 

The framework restructured the individual tax code by reducing the number of tax brackets from seven to three at rates of 12, 25, and 35 percent.  It cuts taxes on the top and raise them on the bottom, though it does offer taxpayers a near-doubling of the standard deduction, a denial of state and local deductions, and an expansion of the Child Tax Credit.

CBPP estimates that almost 70 percent of taxpayers who now have pass-through income already pay a maximum rate of 15 percent. TPC estimates only 2 percent of households with income below $100,000 would get any tax cut from this proposal and that the top earners in the country would save $584 billion by claiming that more of their income comes from pass-through business.

One of the most regressive aspects of this new proposal is a 20 percent increase in the lowest tax rate.  Though some progressive benefits do exist, such as increases to the Child Tax Credit and the “zero tax bracket,” these are largely smokescreens.  Beyond this, the elimination of the estate tax would overwhelmingly benefit high-income earners and the wealthiest one percent.

Most Americans aren’t clamoring for lower taxes, probably because most of us don’t pay very much in federal income taxes. Our tax burden has rarely been lower.  The latest data show that the 60 percent of families in the middle of the income distribution — those between about $32,000 and about $140,000 — pay an average of just 2.5 percent of their income in federal income taxes.

The Fiscal Perspective

Is this the right macroeconomic time for a large-scale deficit-financed tax cut?   The President’s approach to corporate taxation would seriously worsen our fiscal condition.  According to the Joint Committee on Taxation, corporate rate cut from 35 to 20 percent in 2018, 2019, and 2020 would bring about a one-third decline in total revenues collected during those years.

The elimination of repatriation taxes will reduce revenues by several tens of billions of dollars per-year.  The plan does include a one-time tax on all foreign profits currently held abroad – but at a sharply reduced tax rate.

Also absent is any provision to stop corporations from shifting their most profitable assets – mainly patents – to foreign subsidiaries in low-tax countries, so most licensing income permanently escapes taxation.

In total, the framework would add about $2.2 trillion to the nation’s debt by 2027, according to independent estimates by the Institute on Taxation and Economic Policy and the Center on Budget and Policy Priorities.

Tax Policy as a Job Creation Tool

There is no evidence that corporations will use this rate reduction to invest in wage growth of job creation or increased investment.  Despite having record profits in recent years, American companies have largely focused on stock buybacks, mergers and acquisitions, and bigger dividends, not creating jobs, increasing wages, or new investments.  Incentivizing U.S. companies to move investment offshore, a territorial tax system would tangibly reduce the health of the labor market. The Administration’s ambition to spur job growth is undermined by a policy that blatantly redirects money abroad.

Political Viability

Obstacles in the House include the freedom caucus’ response to the substantial fiscal hit and the moderate GOP’s take on the sharp rate reduction. Obstacles in the Senate include Senator John McCain’s commitment to regular order and bipartisanship, much like his approach to health care. As few Democrats would agree to the sharp corporate rate reduction, this proposal would not survive under regular order.

A reduction of top marginal rates will preempt any Democratic participation in the process and all but guarantees Republican lawmakers will have to rely on reconciliation to move their tax agenda. If the GOP’s ongoing healthcare embarrassment is any indication, 51 votes are far from guaranteed.

Hearings in the House Ways and Means Committee will continue in the near term, with legislative language of the House proposal expected to follow before markup and with passage expected to occur in the House by Thanksgiving. The Senate is likely to continue its efforts simultaneously but will take up legislation after the House.

A recent Gallup poll shows what people they think is the most important problem in America: taxes don’t make the top 10 list; only 2 percent of Americans mention taxes as one of the nation’s top ten problems.