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November 29, 2017

The Senate’s Taxing Debate

There’s been some progress, but the areas of disagreement could still sink the whole plan.

What if there was a tax cut and nobody got anything out of it? A corporate tax rate cut that is too shallow to stimulate growth, or individual rate tinkering that leaves people exactly where they started, or maybe worse? This is one potential outcome that lay ahead as the Senate does battle over its version of tax reform this week. That plan cleared the Budget Committee Tuesday. Now for the next test.

There are some places of agreement between the House and Senate versions of the tax cut bill, but it is the areas of disagreement that could still sink the whole plan.

The Republicans hold a vote margin in the Senate that leaves little room for error. Only if the GOP works in lock-step are they likely to have a shot at success. Their track record for 2017 has not indicated that this level of cohesion is likely.

One of the voices of unity is actually Rand Paul. The man who helped sink the first ObamaCare repeal bill because it didn’t go far enough is now calling for Republicans to get on board with the tax plan and not let the perfect be the enemy of the good. Paul supports the tax bill in large part because it repeals the individual mandate for which he fought. We’re glad he’s come around.

In some ways, anything that promises to change the nation’s 74,000-page tax code sounds good. Everyone wants to pay lower taxes. However, it’s at moments like this when people actually start throwing out proposals that the backsliding and broken promises begin.

Paul calls for unity, but other Republican senators have their own plans. Ron Johnson of Wisconsin opposed the House package from the start. He is holding out support in the Senate in exchange for changes to how pass-through entities are handled to help larger small businesses be competitive with corporations.

Susan Collins of Maine wants to tinker with the widely agreed-upon 20% corporate tax rate (President Donald Trump claims he will not accept any rate higher than 20%). She wants to bump it up to 22% in order to keep at least a portion of the state and local tax (SALT) deduction, which she believes will help middle-class earners. The Senate plan calls for repealing SALT completely, a deduction that flows up the tax food chain, not to low or middle-class earners. The Tax Policy Center found “about 10% of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81% of tax filers with incomes exceeding $100,000.”

Johnson and Collins are but two examples of the haggling that is going on right now in Washington. Bob Corker of Tennessee is another. Worried about the federal deficit, Corker reportedly worked out a deal “in principle” for a “trigger” that revokes some tax cuts if revenues dip too low. We have a better idea: How about spending triggers? Corker’s foolish pitch would not only fail to address the spending problem, it would remove the economic incentives provided by tax cuts because those cuts could be gone soon.

The GOP leadership is desperately in need of a victory to close 2017. To what lengths they will go to achieve it is hard to say. Thanks to the convoluted tax code, virtually every promise made to one constituency cuts another constituency short. That’s not to mention the rules the Senate has made for itself regarding how to “pay for” a tax cut. This does not lead to a cohesive tax package.

Or a particularly conservative one. For example, there’s the bubble tax proposal — a 6% surcharge for families making between $1.2 million and $1.6 million. After that, they are charged at the top rate of 39.6%. The idea is to earn back what upper income taxpayers save by paying a 12% marginal rate on earlier income. This puts their effective tax rate at 45.6%, or 49.4% if you consider the ObamaCare individual mandate that remains in the House bill.

Republicans should be embarrassed to be seriously considering a bubble tax bracket, a scheme that is all politics and no substance. In fact, many believe that it will come back to bite them in the future. The Reagan tax cuts of 1986 included a bubble tax bracket for much the same reason — to level out the amount wealthy taxpayers paid by charging more later based on what they saved earlier.

The outcome, as noted by Investor’s Business Daily, was disastrous. Democrats railed against the supposed unfairness of the bubble tax, and then pushed for a tax increase that used the current bubble rate as a baseline for a top rate hike. That was in 1990, and tax hikes just got bigger and bolder for the next decade.

There is no reason to think that Democrats won’t go the same route again. The CBO score on the tax package did not bring Republicans any good news. But that shouldn’t come as a surprise. Democrats immediately started using it as a cudgel to beat the supposedly heartless lackeys of the rich across the aisle. Whether it’s passed or not, Democrats’ rallying cry for the next elections will be to hit the GOP for tax cuts.

But there’s hope. As The Wall Street Journal notes, “For all the drama, the real news is that the GOP is moving toward the most pro-growth tax reform in 30 years, developed in an open process under regular order. This is no time to go wobbly.”

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