Update 180 — Lights, Camera, Inaction
Now Playing: No Country For Tax Reform
Lost in the din and clatter of all things Russia last week was a House Ways & Means hearing that showcased the coming attractions of a feature-length Congressional GOP tax production. But no mention was made of a release date beyond “this year,” endlessly repeated by Committee Chair Brady.
What kind of show was it — noir? farce? comedy? We won’t keep you in suspense — see the Cliff Notes version below.
Happy Memorial Day weekend, everyone.
The White House and the House GOP do not agree enough to produce tax reform. What they do agree on is a penchant for fanciful growth projections. While the House GOP continues to flog the border-adjustment taxation, the White House and the Senate remain opposed to the idea. So the only revenue-generating House GOP idea is implausible politically.
We are left with a handful of deficit-ballooning proposals the GOP seems convinced will jumpstart economic growth to unrealistic levels. These include writing off business expensing, implementing bonus depreciation, lowering corporate rates, and lowering pass-through rates. None are in keeping with the GOP’s rhetorical commitments: deficit neutrality and tax changes that do not benefit the wealthy. Steven Rattner’s testimony in the hearing makes clear look how GOP proposals make bad policy.
Massive Reverse Transfer Payment
GOP proposals render laughable Secretary Mnuchin’s commitment not to cut taxes for the wealthy. The House has already passed an average tax cut of $50,000 per year to families who make more than $1 million a year, through the American Health Care Act. This did not earn a mention at last week’s hearing.
But favors to the rich won’t stop there. The Tax Policy Center finds that 76 percent of the benefits contained in Speaker Paul Ryan’s “Better Way” tax proposal go to the top one percent. 47 percent of the plan’s total benefit goes to the top .01 percent.
Magic Growth Formula: Write-Offs
During the hearing, Brady promoted a tax write off for business investment in buildings, equipment, software, and technology. Where the White House projected sustained three percent economic growth in their budget, Brady went further. “This provision alone,” he asserts, would by itself boost economic growth to more than five percent over the next decade, create one million full-time jobs and raise wages and paychecks significantly.” This is the most astounding growth estimate seen of late.
Rep. Sander Levin (D-MI) pointed out that bonus depreciation is meant as a recession booster, unhelpful under normal economic conditions. Even former GOP Chairman Dave Camp left bonus depreciation out of his 2014 proposal. Sens. Warren and Baldwin have targeted the policy in the upper chamber, as it represents a middle-class subsidy for corporate office bonuses.
In addition to full expensing of business investment, House Republicans seek a 20 percent corporate rate, down from 35 percent. Witness John Stephens, Chief Financial Officer at AT&T, argued burdensome corporate rates have brought about wage stagnation for workers. Rep. Levin responded it is hard to blame corporate rates when corporate profits have been at record highs for decades. It is unlikely executives would increase wages instead of padding profits under a corporate rate reduction. Stephens also claimed writing off business investments would represent the biggest pro-jobs policy possible. Delbene countered by referring to the fact that AT&T has been shifting its operations to more of a digital and computing-based model. The congresswoman quoted a New York Times article, which read, “eventually AT&T can get by with 1/3 fewer workers,” suggesting “new [business] investments may not mean new jobs.”
The House plan would reduce rates on pass-through income, business income from non-corporations claimed on individual tax returns, from 35 to 25 percent. Why do Republicans focus on pass-through income? Half of all pass-through income goes to the top 1 percent. Lowering the pass-through rate would cut off massive streams of revenue, as scores of individual taxpayers would reclassify themselves pass-through filers in large-scale tax avoidance.
• Deficit Neutrality
Republicans offered no serious “pay-for” to make up for tax reductions at last week’s hearing, despite the GOP commitment to entirely eliminate the deficit in a decade. Rattner targeted the president’s one-pager, believing it to cost $5 to $6 trillion over a decade. The House framework is fiscally unhealthy as well. The Tax Policy Center found that the Ryan tax plan would cost over $2.5 trillion in revenues over ten years. The inability to levy the BAT leaves the GOP out of options for revenues anywhere close to compensating for the loss.
Over the course of the hearing, Rattner excoriated the unfairness of GOP proposals. Where Republican witnesses spoke of supply-side solutions, Rattner pointed out the demand-side –middle-class taxpayers – were being ignored. He argued working class families deserved relief. With more economic freedom, such families would spend more on goods and services, bringing about a more significant growth impact than trickle-down policies. Rattner objected to eliminating the 3.8% tax on investment income, the estate tax, and the Alternative Minimum Tax. Such policies indicate the Republicans are working to make the rich richer.
• Tax Cuts and Undynamic Growth
Increased investment incentives harm the economy. Rattner argues consequent rising interest rates would crowd out private investment and ultimately reduce GDP by half a percent after ten years and four percent after twenty, the opposite of the GOP growth projection.
• Effective International Rates
Rattner cast GOP claims of a diminished competitive position for the US company as misleading. He emphasized that while the American corporate rate is 35 percent, many pay far less than that through loopholes and avoidance. It is important any tax reform effort take into account the unfair advantage US corporations have over average Americans and close loopholes and deductions that codify this advantage.
• The Lesson of the Bush Tax Cuts
Republicans demonstrate a short memory on the impact of tax cuts to the wealthy. Suzane Delbene (D) pointed out such cuts under George W. Bush did not create outcomes Republicans advertised. Median household income was lower after the Bush tax cuts in 2007 than it was before them in 2000. Employment, wage, and salary growth were each lower than in any post World-War-Two expansion. Mr. Rattner added those tax cuts brought about deficits, squandering surpluses inherited from the Clinton administration.
Throughout the hearing, witnesses spoke of the need for permanent tax reform. Procedurally, that would all but require deficit neutrality. As no Republican proposal from the White House or the House achieves deficit neutrality, the GOP can probably only muster short-term, deficit-deepening tax cuts.