Friday, November 03, 2017

The Tax Cut Mess

by Neil H. Buchanan



Changing the size of the standard deduction, or eliminating some preferences while expanding others, or even changing the number of tax brackets, is merely changing things within the same basic system.  Some of the Republicans' proposals (especially on the business side) are expensive and bad policy, but they do not change the structure or logic of the tax code.

I hasten to add that this is most definitely a good thing.  It is certainly better to stick with our current flawed income tax system than to allow Republicans to enact what would be true reform of the worst kind, such as eliminating the income tax entirely and replacing it with a regressive consumption tax.

In fact, I recently argued that the best thing to do is to leave the tax code alone for the time being, given that every idea that could possibly be enacted by this Congress would take us in the wrong direction.  This applies not just to fundamental reform of the type that Republicans often say they prefer but also to hodgepodges like the new House bill.  Better a flawed status quo than a disastrous "reform."

The widely (if excessively) applauded 1986 tax reform bill was revenue-neutral, which meant that it was an effort to do something other than starve the Treasury.  I have no doubt that the Republicans will point to the various provisions in their plan that would eliminate some deductions as proof that they are "cleaning up" the tax code.  But the 1986 bill was an exercise in eliminating deductions in a coordinated way, while the current slapdash effort eliminates deductions seemingly at random.

The House plan, then, manages to do nothing to change the basic nature of the system (which, again, is good), while making a large number of changes that will mostly confuse people.  There is no apparent unifying principle that drives the plan -- except, of course, that Republicans want to lavish tax cuts on wealthy people and large corporations.  (Even the most well known --and very conservative -- small business lobbying group came out against it.)

But perhaps this is mere semantics.  If so, however, the press is apparently happy to play the role of enabler.  The New York Times continues to use the word "sweeping" to describe everything the Republicans propose on taxes.  Their main story after the bill was released began: "Republican lawmakers unveiled a sweeping rewrite of the tax code on Thursday."

Interestingly, that article originally ran under the headline, "House Tax Plan Tilts Toward Business, with Sweeping Cuts."  (Note: the article at the link provided carries a different headline, for some reason.)  So is it the cuts that are sweeping, or the rewrite?  Both?  The cuts are actually not sweeping at all, because whether or not they are a good idea, their size is not especially impressive.

And this is why the semantics matter.  In the world that Republicans inhabit, and especially where Trump is concerned, impressive size is important.  They are all committed to the idea that they have to do something huuuuge to prove that they can govern.  They claim to have big ideas about how to reform the tax system, but all they end up with (after years of promises) is a melange of changes that worsens inequality and relies on long-since-disproved trickle-down promises.

As The Washington Post's Philip Bump pointed out yesterday, however, almost no one actually wants Congress to be spending its time trying to change the tax system, even in the abstract (much less this mess).  According to recent polling, even Republicans (outside of Congress) show at best tepid support for a tax bill.

This is especially ridiculous because there is simply no good case for a tax cut right now, much less a regressive one.  The economy is strong enough that the Federal Reserve is in the process of increasing interest rates, which means that they will accelerate their plans if a tax cut were somehow actually to stimulate the economy.

Moreover, less than a month ago the International Monetary Fund -- not an organization known for its collectivist tendencies -- warned that regressive tax cuts actually have a depressing effect on the economy.  And Warren Buffett is not the only rich guy who has warned that Republican-style trickle-down is exactly the wrong way to increase long-term growth.

Trump and the Republicans. however, want their tax cuts.  As Bump notes, the people who are most furiously pushing for a big tax cut are Republicans' political donors.  They have succeeded in promulgating the lie that the party will be a failure if they do not deliver on their signature issue.  Asking why tax cuts should continue to be their signature issue is not permitted.

All of which is why we are now staring at this non-sweeping non-reform mishmash of a tax bill.  House Republicans have proposed eliminating the deductions for moving expenses and alimony.  Why?  To pay for the rest of the bill.  They also would eliminate the very limited deductions for college tuition, which are currently capped such that they only help middle- and lower-income students and their families.  Is there a sweeping principle here, other than not caring about regular people?

Perhaps the most amusing aspect of all of this is the replay of what might be my favorite Washington event: the running of the fake moderates.  Some Republicans want to claim that they are not in the pocket of the wealthy, so party leaders decided to leave the 39.6% top marginal rate in place for taxable incomes above one million dollars annually.

Of course, this still gives people with taxable incomes between $470,000 (which is where the top marginal rate currently begins) and one million dollars a rate cut, to 35%.  Good thing those moderate Republicans are looking out for the struggling $750,000-a-year crowd!

It reminds me of the reputed moderate Republicans who, during the multiple debates earlier this year over health care bills, were trying to reduce the number of people who would lose health coverage from 23 million to something less than that.  Yes, fewer is better in that context.  But if all it takes to be a reasonable moderate is to be slightly less awful than Ted Cruz, it is time for a reality check.

Luckily, there is a very good likelihood that most or all of what is in this bill will never become law.  Bruce Bartlett predicted a few days ago that Republicans will fail to pass any tax bill this year, and maybe even next year.  Even Senate Republicans are already making noises that suggest trouble for the House's plan.  As I argued above, legislative stasis is the best we can hope for.

Even so, it seems foolish to bet against something that is desperately desired by Trump, Republican leaders in Congress, and their most ideologically extreme donors.  True, that group failed miserably on health care, but the old disclaimer applies: past performance is no guarantee of future results.


Joe said...

Having one flawed credible party and one mess is not a great situation.

Shag from Brookline said...

How about a contest of titles for this tax bill. My entry would be: "DONOR CLA$$ POLITICAL TITHING TAX BILL of 2017."

David Ricardo said...

While the analysis in this post is accurate I would strongly advise against the conclusion that a tax bill cannot be passed either late this year or early into next year. It is clear that while the White House and most Republicans don't really care what is in the bill, aside from a massive tax cut to large corporations and a massive tax cut to wealthy individuals in one form or another, they do care strongly that a bill is passed. At the end of the day any Republicans voting against the bill are essentially signaling the end of their political careers.

Add to this the likely positive votes of Democratic senators from West Virginia, Indiana, South Dakota and possibly Missouri and you have a nice cushion in the Senate. And remember the policy positions of Flake and Corker line up with basic Republican dogma. Their quarrel is with Trump the person, not Trump the policy advocate. And if the repeal of the individual mandate is included that will free up according to one report about $400 billion to be added as goodies for any recalcitrant Republicans.

So unless someone joins Rand Paul look for a version of this bill, with the individual brackets, the tax cut for corporations, the convoluted rules for pass throughs and the repeal of the Estate Tax (while retaining stepped up basis) to be law in 2 to 4 months.

The Billionaires Protection Act of 2017 (or 2018 if calendar issues get in the way) will almsot certainly be law.

Joe said...

BTW, Happy Birthday to Mike (Dukakis) from Brookline.

Shag from Brookline said...

Another suggested title for the "CUT, CUT CUT TAX BILL OF 2017":


By the way, speaking of true reform, Mike Dukakis brought true reform to MA. Pre-Duke, politics at many levels of MA and local government was not, to put it kindly, very nice. I saw this in my early years of practice before moving from Boston to Brookline. Post-Duke, there have been some relatively minor slippages. The Duke made popular the Greek expression: "The fish rots from the head down." And watching Greek sausage being made discloses how orange zest adds great flavor. Alas, at the federal level, orange at the head of the fish does not.

tjchiang said...

What is random about the elimination of deductions? Best I can see, they have a pretty clear animating principle of "eliminating deductions that disproportionately benefit upper-middle-class professionals living in coastal blue states." That is a terrible animating principle with which to write tax legislation (not only because virtually everyone who reads this blog will fit that category), but random it is not.

Shag from Brookline said...

Here's another title:

"THE REVERSEI-ROBIN HOOD TAX BILL of 2017." [H/T Sen. Sanders]

And another:


John Barron said...

Spent the last day or so lobbying Congress wrt the "BRIBING CONGRESS PAYS ACT OF 2017." Jaw-dropping. Goodies in there for all who could afford the bribe.

The modern AMT was known as the "real estate developer's tax," aimed at developers that abused lavish depreciation rules (all of them). Trump gave himself a staggering tax cut.

That flushing sound is the 10-15% loss of value in your home. The tax benefits of home ownership are factored into the price of your house, and they are essentially gone. The increased standard deduction, along with the repeal of deductions for medical expenses and state taxes, makes them essentially worthless. The best thing working stiffs can do is rent out their houses and rent someone else's.

And boy, did they fuck Grandma! The primary beneficiaries of the medical expense deduction are people in nursing homes.

The tax-favored status of "business income" is another WTF moment. Why silver-breasted coupon-clippers' passive income (can you say Donald Trump?) should receive tax-favored status is not at all clear.

A weird provision was an indefinite NOL carryforward. The only conceivable beneficiary would be a real estate developer like Donald Trump, who would have benefited hugely had it been in place when his casino ventures imploded.

What we didn't see was a shift to water's edge taxation for multinational corporations, which could have brought an end to double-Dutch Irish sandwiches, the Burger King-Tim Horton's merger, and other weirdness. There was no actual reform in the bill-just a lot of hand-outs.

All the bill does is make the world safer for plutocracy.

Shag from Brookline said...

Another title for the 2017 tax bill:



aka "TRUMP TAX BILL of 2017' [H/T JB]


From a personal standpoint, my children are checking actuarial tables for one-eyed 87 year old males to figure the odds of their benefiting from repeal of the Estate Tax. Perhaps my kids won't be tempted to step on my air hose for at least six years.

John Barron said...

shag: "Might those voices I'm hearing be Randy's spirits"

You persist in the same old fallacy, letting the perfect be the enemy of the better.

Imagine a citizen, filing criminal charges against the Koch network for bribery and their servants in Congress for honest services fraud in the Southern District of NY:
see The grand jury gets to decide the law and in specific, to ignore the corrupt SCOTUS's corruption-friendly narrow interpretation of honest services fraud. Odds of an indictment: 100%. Would get to quote Robert Bork in the argument, too.

That was possible under the Framers' Constitution. And you still think letting judges rewrite it to benefit the powerful is a good thing?

John Barron said...

Depending on your situation, they might be better off if they interred you quickly. ;)

Unless your estate >$5M, any assets you have would receive a step-up in basis without a corresponding tax (if it is close, there's a lot you can do.) No estate tax, no taxable event, and no step-up. This plan screws the 1% f/b/o the top 0.01%.

Getting old sucks; I'm old enough to know that I don't want to live to be 87. Another 10-15 years or so would be plenty.

Shag from Brookline said...

Lobbyists against the tax bill have urged me to offer prizes for the best titles for the current tax bill. So here goes:

FIRST PRIZE: An all expenses paid round of golf with John Barron.

SECOND PRIZE: Two (2) all expenses paid rounds of golf with John Barron. [H/T W. C. Fields]

I'm not eligible but John and his altar-ego [sick!] are. Judges will be the posters at this Blog, Mike, Neil and Eric, basing their decisions on originality, and perhaps even faith. Judges' decisions will be final.

John Barron said...

shag: "I'm not eligible"

Why make lack of senility a condition?

shag: "An all expenses paid round of golf"

Looking forward to you picking up the tab for me. Price is reasonable (about $250 US), but that business-class airfare won't be cheap.

Shag from Brookline said...

The silence of contest entries is defining. Perhaps potential entrants are concerned that John Barron is the alleged press agent of Donald Trump referenced in this item that appeared during the 2016 campaign:

But that John Barron was praising The Donald in calls to newspapers whereas this John Barron disparages Trump, his tax bill and even the late Antonin Scalia's hypocrisy, as well as senile old men. This John Barron has displayed some progressive thoughts.

So if some visitors to this Blog have appropriate names for the Trump tax bill, submit an entry. But winners are "fore" warned, this John Barron will seek a lot of Mulligans, and stew if he doesn't get them.

John Barron said...

Or just maybe, no one is impressed with your Donald Trump impression.

John Barron said...

Shag: "This John Barron has displayed some progressive thoughts."

Facts matter. Forty years of hard data shows that trickle-down economics does not work, a fact that both the IMF and S&P have acknowledged. Kansas and California are recent examples (good and bad). The "Reagan Recovery" was pure Keynesianism. Even Reaganite Bruce Bartlett turned state's evidence: Why fight the facts?

(FWIW, I adopted the moniker to piss Dolt45 off. He and I HAVE crossed swords.)

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Shag from Brookline said...

Perhaps the "lucky" contest winners might learn during those rounds of golf exactly how our progressive John Barron crossed swords with Dolt45. It's public knowledge that The Donald throughout his adult life has fancied himself a "swordsman." Perhaps our progressive John Barron challenged with his rapier wit. En garde!