To borrow Rep. Nancy Pelosi’s much maligned (and much misunderstood) formulation about Obamacare, now that the Republicans have passed their tax cut bill, we get to find out what’s in it.
To some extent, it’s literally true that its provisions are something of a mystery, probably even to those voting on it. The bill has been rushed through at such speed — and with a bevvy of last-minute changes and handwritten amendments — that experts trying to figure out what it all means are having what a former George W. Bush administration treasury official referred to as “Holy crap, what’s this?” moments. Even after the bill cleared the House on Tuesday, objections by the Senate parliamentarian knocked out three provisions (including a problematic one to allow 529 savings plans to be used to fund private K-12 education and even to cover homeschooling expenses) forcing the lower chamber to vote on the legislation again today.
But in a broader sense, we now get to see how Republican theories about tax policy intersect with reality, and both experience and reason suggest this bill is going to present a host of unintended consequences.
Seven years after the Citizens United decision made corporations into people, the Republican tax bill may make a lot of people want to turn themselves into corporations — or, more precisely, LLCs. In a break from how the tax code has worked in the past, the new Republican version provides substantial advantages to those who earn money as an owner or partner in a firm rather than an employee. Those who are officially considered independent contractors could find substantial tax advantages over co-workers who are classified as employees, even if they earn the same amount and do the same kind of work.
Rather than putting H&R Block out of business by making Americans’ taxes simple, as President Donald Trump promised his plan would do, this bill sets up a massive opportunity for some fancy accounting to help people avoid taxes. Will that happen? History says yes. Kansas made a similar change in 2012 as part of Republican Gov. Sam Brownback’s massive tax cut plan. It exempted pass-through income altogether from state income taxes, and the result — surprise! — was a lot more people started reporting their income that way. The most famous example was University of Kansas football coach David Beaty, who saved an estimated $37,000 a year in state income taxes by funneling most of his earnings through an LLC, but he wasn’t alone. The Tax Foundation (by no means a liberal group) analyzed the numbers and found a spike in pass-through entity formation and in the amount of income reported as being earned by such entities in the years after the Brownback cuts, leading to a drop of about $200 million to $300 million in state revenue. That’s as much as 5 percent of the state’s operating budget at the time.
Multiply that out to the entire nation (and with a benefit that’s potentially much greater than Kansas taxpayers were getting), and the result is a disaster for the United States. It is, however, a boon for the Trump family, whose businesses are already structured in this way.
But that’s just the beginning of the potential consequences. The tax plan not only slashes corporate tax rates but also provides even steeper cuts for companies that repatriate profits being stashed overseas. We’ve tried that before. It cost the treasury a bundle and fostered virtually no economic benefits. The bill eliminates the individual mandate provision of the Affordable Care Act, which will lead to millions more uninsured and higher insurance rates for the rest of us. The legislation changes the inflation calculation used to adjust tax brackets, with the effect that they will rise more slowly and consequently push people into paying at a higher rate. Analysts have found scenarios in which marginal income could be taxed at a rate exceeding 100 percent. Given that the economy is already near full employment, many Federal Reserve watchers expect that the deficit-financed additional stimulus provided by the tax cut bill will lead to steeper rate hikes than the fed would otherwise have approved — possibly even leading to a recession.
And finally, there’s the magic asterisk in this bill. It calls for the corporate tax cuts to be permanent but for the individual cuts to expire after 2025. That was necessary to keep the cost of the bill under the $1.5 trillion figure that allowed the GOP to avoid a Democratic filibuster in the Senate, and Republicans openly assume that a future Congress will make the rates permanent. But doing so would increase the cost of the proposal by as much as $725 billion. How would Republicans accommodate that? They’re also not shy about that answer — slashing the social safety net. House Speaker Paul Ryan this month said next up on the agenda is to reform (read: to cut) entitlement programs to help control the deficit. You know, the one he and his colleagues just voted to increase.
Republican groups are getting ready to fund a massive campaign to convince a skeptical public that this tax plan is good for them. But people can tell when they’ve been sold a bill of goods. President Trump promised a tax plan that helped working Americans, not the wealthy, while making taxes simpler and fairer. He and his party have just delivered the opposite, and the public knows it.
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