Health Care, Death, & Taxes (Jul. 19)

The Devil You Don’t Know Yet… Hatching 

Yesterday, Senate Finance and today House Ways and Means held hearings to examine tax reform.  Republicans have been meeting regularly in secret for months working on a plan as costly in fiscal terms as the GOP health care bill is in human terms.   The sneak previews to date promise a GOP tax writing process that is equally hidden and a product that is equally heinous.  

Secretary Mnuchin is probably biting off more than he can chew if he thinks he can craft a tax plan by September, as promised.   With the help of a furtive five, Mnuchin and the administration have been gathering tax reform wish lists from firms by the hundreds.   Maybe he can make it.  

Below, a peek inside the work of the secretive six, in all, whose task is to avoid a second stink bomb stalling its agenda the way health care has.

Best,

Dana

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Old-school conservative columnist George Will has pointed out (goo.gl/PKwAJg) that the GOP’s tax drafting process is just as exclusionary as the writing of its health care plan.  

The “Secret Six” — Gary Cohn, Steve Mnuchin, Mitch McConnell, Paul Ryan, Orrin Hatch, and Kevin Brady — has hidden from view its plan to rewrite our tax code.  Whereas Congress spent years negotiating the last comprehensive tax reform in a bipartisan manner in regular order, the secret six are all Republicans planning to sneak their ultimate product into law through the reconciliation process.  

We are all hoping to be able to go on our previously scheduled vacations, but Trump and the Republicans may have something else in mind.  It is likely Sen. McConnell will delay or cancel the recess at “Trump’s urging,” helping anyone avoiding his or her constituents at all costs. 

 

Like its healthcare plan, the GOP tax agenda is severe, picking the pockets of the average wage-earner to make the rich richer.  The current code generates about $3.3 trillion per year, around 18 percent of GDP.  We are left with deficit of $5 trillion over ten years.  Wages continue to stagnate, but Republicans seek a massive reverse wealth-transfer payment of billions of dollars to the wealthiest.  

This is, by the way, a direct violation of the erstwhile Mnuchin Rule codified in confirmation colloquy with Senate Finance Ranking Member Wyden:  no absolute tax cuts for the wealthy

Just a few months after swearing to honor his own Rule, the Secretary publicly admitted last month than he plans to renege, that he would like to “walk it back” — In brazen disregard of the promise made in a Senate Banking confirmation hearing, or just plain ignorance?

History

The 1986 comprehensive tax reform took two years through a bipartisan process; today’s GOP seems intent on passing a tax bill through reconciliation, which only requires 51 votes and limits debate to 20 hours.  The 1986 package was debated for over 100 hours and 23 days.  As with health care, today’s Republicans are forcing through changes to the tax system and planning to shift the tax burden from the highest-income taxpayers onto everyone else.   

Process and Permanence 

Reconciliation also means tax changes would be temporary, with a life expectancy of only 10 years.  The 1986 package was designed to be permanent and has served as the foundation of the system since.  This demonstrates the GOP’s lack of seriousness about permanent reforms. The entire panel at the Senate Finance hearing echoed the view that permanent reforms give businesses and families a far better sense of certainty and that impermanence is bad for business.

Transparency

Chairman Hatch refused to commit to a hearing on whatever the Secret Six produces, appearing to suggest that it is Sen. McConnell’s job to decide what hearings Senate Finance holds and when.   Hatch has served on the Committee since 1991.  

This would be a surprising relinquishing of the Chair’s authority.   

Neutrality Neutered

What they are hatching for tax is just as unfair as the GOP health care plan.  Republicans have been salivating to cut taxes to reward the rich for years.  Seeing their chance, the White House and the House seek substantial reductions.  They will cost the country trillions in revenue:

•  Corporate Rate — Based on the one-pager released this spring, the president seeks to cut the corporate rate from 35 percent to 15 percent. Senator Cardin pointed out that a ten percent corporate rate cut would reduce revenues by $1 trillion.  Trump’s policy would cost the federal government well over $2 trillion in revenues.  Paul Ryan’s 2016 plan would reduce the rate to 20 percent, costing the federal government at least $1.5 Trillion in revenue just to reward the wealthiest 1 percent.

•  Pass-Throughs — Based on the one-pager released this spring, the president seeks to cut the pass-through rate on partnerships and limited liability corporations from 35 percent to 15 percent.  Senator Cardin pointed out that a ten percent pass-through rate would cost the federal government 1.6 trillion in revenue.  Pass-through reductions would be costly and prone to abuse, and a payroll tax credit instead of a rate reduction would encourage job growth.  The Trump plan on pass-throughs would cost $3.2 trillion in revenue, an astounding figure. Paul Ryan’s 2016 plan would reduce the pass-through rate to 25 percent, costing the federal government $1 trillion in revenue.

Read My Lips:  No New Revenue

Each GOP revenue-generating proposal is highly partisan, a non-starter in Congress, politically unviable, and/or drastically insufficient to compensate for the severe loss in revenue from the aforementioned cuts.

•  State/Local Deduction — Eliminating State and Local deduction is an unfunded mandate on the tax side because it makes it more difficult for states to raise revenue.  It could have an indirect effect on the charitable and other itemized deductions and hits major blue states the hardest.  Its elimination would likely fail as Republicans in these states have already written a letter objecting to the policy.  If adopted, eliminating the deduction would raise $1.3 trillion in federal revenue over 10 years, not enough to make up for the pass through and corporate rate reductions.

•  Interest Expense Deduction — The White House and the House GOP have disagreed on the interest deduction for business. Secretary Mnuchin promoted maintaining it. The House GOP blueprint eliminates it in order to allow for a full write-off of investment expenses. Neither the Mnuchin approach (leaving it be) nor the House approach would generate enough revenue over ten years to accommodate revenue cuts. The Tax Policy Center projects the net gain in tax revenue over the next 20 years would be just $100 billion, after a whopping $1 trillion loss in the first 10 years.

•  Repatriation —  Next time you hear a witness testify that the U.S. international corporate tax rate is the highest in the world, remember that the effective rate puts them in the middle of the pack after deductions, deferrals, and loopholes.  For instance, the CBPP found that after subsidies and tax avoidance measures, Pfizer paid a rate of about 7.5 percent on its $12 billion in worldwide pre-tax income in 2014.  Trump and the GOP have proposed a change to repatriation law to allow American firms to bring back their earnings from overseas without penalty or tax. 

Under current law, American firms can “defer American corporate taxes until oney earned overseas is returned.  More than 2 trillion dollars are locked overseas. The House proposal could return those 2 trillion dollars to the US before the 2018 election.  The Secret Six’s current stance on repatriation is unknown, but one of the witnesses in yesterday’s hearing echoed the need to eliminate repatriation to reduce the incentive for American firms to move offshore. 

House Hearing Adds Little

The hearing in House Ways and Means today lacked specifics. The only discernible proposals were made by the chairman of the subcommittee on Tax Policy, Chairman Roskam proposed: 

—  eliminating two deductions

—  reducing the seven brackets to three, lowering tax rates “for all”

—  pairing the standard and additional standard deduction and personal exemption

—  combining child tax credit with personal exemption for children/dependents into one larger credit

I’d Pay The Devil to Know

We do not know when and where the Secret Six meets.  We do not know if they care about the national debt, or permanence, or the principle of progressivity.  We will not know what they will produce until September — their self-imposed deadline.  Worst of all for official Washington, nothing is reliably known regarding the August recess.  We may have to wait until September.