Update 199 — Trump’s Tax Speech:
Are We Staring at a Vanishing Point?
Donald Trump went to Springfield, MO yesterday to tout a putative tax plan — the one he expects Congress to deliver to his desk this fall. As usual, Trump provided almost no specifics but guaranteed the plan will produce the best business tax rate in the world, the biggest rate cut ever, produce record economic growth, and bring jobs (back) to America in droves.
Why bother looking at this, yet another pass at tax policy by the president and nothing new — no proposal and no timetable for one? Because this policy area is at the core of his principal promise since he announced his candidacy two years ago to unleash the American economy through torn up treaties and tax relief. But are we staring at a vanishing point? Details below.
Happy Labor Day weekends, everyone,
Promises to the Middle Class
Trump told the same old story that the system is rigged in favor of the elites, and that his tax changes will offer relief for middle class families.
The hypocrisy here is blatant, as the policy he has hinted at cuts taxes for the top one percent significantly with the net effect of shifting tax burdens onto, not away from working taxpayers and their families.
And American corporations are enjoying record profits. But we are not seeing those profits invested in plants or employees. Firms are sitting on piles of capital, so why expect corporate tax cuts to benefit workers in the form of pay hikes or additional benefits?
While it may be tempting to write off the president and Congress after their failure to repeal and replace the Affordable Care Act, there is a legislative path to a win on tax policy available that could ultimately represent Trump’s biggest betrayal of the middle class, a politically error on the scale of the health care debacle.
Tax Cuts for the Rich
Trump once again branded himself as the champion to reverse a rigged system that rewards elites through the tax code. His headline promises: a 15 percent cut (considered DOA on the Hill) in the corporate tax rate and a tax cut for the top individual rate. The Institute on Taxation and Economic Policy has estimated that under Trump’s principles, over 60 percent of the tax relief would go to the richest one percent of households. Meanwhile, households with annual incomes over $1 million would receive an average tax cut of over $210,000.
Growth Rates Falsehood
Trump doubled down on this tax dodge with similarly misleading claims about his economic achievements as president. He celebrated the three percent quarterly growth figure for the second quarter of 2017 by making the claim that the previous administration never managed a threefold percent annual economic growth rate. Ignorance or intentional deception, you can decide but as a matter of non-alternative fact, under Obama, US GDP annualized growth reached 3 percent on a quarterly basis eight times.
Corporate Rate Falsehoods
Trump repeated the canard that American business pays the highest tax in the world, at 35 percent. American business pays rightly half this amount effectively, because of trillions in loopholes, deductions, credits, deferrals, etc. Trump added that in some states, corporations pay a rate as high as 40 percent. US corporations pay an effective rate of 18.6 percent, all in. Corporations pay more in Argentina, Japan, Britain, and roughly half the rest of the world.
Territoriality and “America First”
Trump insisted his tax plan will raise wages for American workers. But territoriality, the exemption from taxes on the foreign profits of U.S. multinational corporations that Trump knows is of utmost importance to the American multinationals, could incentivize these corporations to move investments offshore. This would directly harm US worker wages by diverting funds away from the US labor market.
If Trump expects to convince anyone that a comprehensive, revenue neutral, tax package can get done by the end of the calendar year, he is wasting his time. Eight months in, there is no legislative proposal on the table. It’s hard to imagine a Congressional proposal before October. Given the congested schedule on the Hill in September, it would be foolhardy.
Given political challenges, Republicans will likely end up proposing mere marginal tax cuts, not actual comprehensive tax reform. In order to pass even modest tax cuts, Republicans will probably have to do so through reconciliation, a procedural move allowing just 51 votes for passage in the Senate. Under reconciliation, policies can only be in place over a set window of time. Recent Joint Committee on Taxation scores suggest that a corporate rate cut could only last three years before it must return to the baseline level. The GOP is considering extending the statutory ten-year projection requirement for scoring proposals, the Byrd rule, to 15 or 20 years to prolong the budget window, to give them more room for fiscal policy maneuver.
Calling Out Congress
Trump employed a peculiar strategy during his speech, trying to pressure home state Sen. Claire McCaskill, up for to reelection in 2018, to support his tax agenda: “We must lower our taxes. And your Senator — Claire McCaskill — must do this for you. And if she doesn’t do this for you, you have to vote her out of office. She’s got to make that commitment. She’s got to make that commitment. And if she doesn’t do it, we just can’t do this anymore with obstructionists.”
Trump also expressed his frustration with Republicans in Congress. He looked right at the Missouri congressional delegation members present and said “I don’t want to be disappointed by congress this time. I think Congress is going to make a comeback. I hope so. The country is counting on it.”
Business Interest Deductibility
Trump might have made news on one score, hinting at one concession to fiscal responsibility that seems to be the flavor of the month for revenue raising ideas –replacing the badly beaten BAT. The GOP is likely inclined use the elimination of the business interest deduction to demonstrate bona fides fiscal responsibility to attract House Freedom Caucus and other congressional votes.
Will this provision survive? Will we see anytime in the way of a tax proposal — cuts or comprehensive reform –from Congress or the administration this year? Watch this space… with the caveat that it may turn out to be a vanishing point.