Tax Reform and Fiscal Responsibility

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Republicans in Congress have decided that with their embarrassing failure to "reform and replace" Obamacare, they absolutely must produce one popular legislative achievement to present to voters a year from now. Tax reform is an imperative. There's not much else coming down the legislative pipeline.

The one tax law change that almost everyone agrees on is reducing the corporate tax rate for repatriating $2.6 trillion in overseas profits that American multinational corporations have stashed away in foreign accounts, to avoid having to pay the present 35% tax for bringing it home (and investing it here.) At one time or another, even Democratic leaders Sen. Chuck Schumer and Rep. Nancy Pelosi have proposed some reduction of the repatriation tax barrier as well as the corporate tax rate on domestic profits.

But Republicans and Democrats are playing the partisan game of "OK, we'll agree to do that, but only if it's in a package that includes A, B, C and D." And of course, each party lists different A, B, C, and Ds.

If the Democrats stand united against the Republican bill, and it fails, the Democrats win big, because the Republicans are likely to take a beating in the 2018 elections. The Republicans must hold all of their own to squeak something through to the President's desk. They'll attempt to do this by inserting and removing provisions, raising or lowering percentages, shortening or lengthening time frames, and when all else fails, resorting to pork barrel spending or even less savory political arrangements to buy needed votes.

The opposition (Pelosi) has already charged that "The GOP will give the wealthiest one percent tax breaks worth trillions of dollars, but Republicans want to force millions of hard working American families to pay more in taxes." This is not factually supportable, but the Democrats are pushing this line hard to generate maximum outrage among voters.

To counter this, the Republicans have agreed to keep the top (Obama) individual income tax rate, paid by taxpayers with over $480,000 in taxable income, at 39.6%. Their bill also doubles the standard deduction (to $12,200 for individuals, $24,200 for couples), which will give real relief to middle income families without large deductions.

The Republican bill also increases the refundable child tax credit from $1000 to $1600 per child, plus $300 for each non-dependent adult. Trump has boasted that the Republican plan will increase the number of households that owe zero federal income tax from the present 40 million to 71 million.

Not a surprise: the rich will benefit too. The repatriation amnesty offer and the permanent 20% rate on corporate profits will make stocks more valuable and dividends more likely. The estate tax exemption, now $5.6 million, will increase over the ten year period, and then the tax will expire. The unworkable alternative minimum tax will finally be repealed. Taken all in all, the bill's combination of benefits and loophole closings are well-chosen and defensible.

The estimated revenue loss from these provisions (and many others) totals to $1.5 trillion over ten years. Greg Ip of the Wall Street Journal correctly observes that "Administration officials assert the tax cuts will spur so much growth they will pay for themselves, an argument largely lacking in historical precedent or empirical support.

Will spending cuts, plus revenues from new growth cover the revenue losses of "tax reform", whatever they turn out to be? Ip observes, mildly, that "Congressional Republicans say they'll cut spending, especially on entitlements. Yet they have shown little appetite to do so and Mr. Trump has ruled out tampering with Medicare or Social Security."

Nick Gillespie of Reason fingers the ignored problem. "For decades now, the feds have been spending far more in any given year than they take in via taxes. Last year, for instance, the government spent 20 percent more than it took in, and between 2009 and 2013, it spent 33 percent more than it brought in. Hence annual deficits [$666 billion in FY 2017] and ballooning national debt [now 77% of Gross Domestic Product, heading toward 91%]."

George Will succinctly explains: "(We have a) bipartisan consensus: We shall have a generous entitlement state and not pay for it. Instead, we shall offload onto future generations a substantial portion of the costs of our current consumption of government." That's the sobering, indeed shocking, summary of the abandonment of national fiscal responsibility.

We are, alas, well into the era of bitter partisan conflict with high stakes, improbable revenue projections, irreducible Federal spending, and steadily growing national debt. The current bill will make large and worthwhile changes in the tax code, but falls short of restoring a bright fiscal future.

John McClaughry is vice president of the Ethan Allen Institute.

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