In order to understand what’s up with the Republican tax cut framework that was released last week, you have to keep in mind that their number one priority is to lower the statutory corporate tax rate. In their current proposal, it is reduced from 35 percent to 20 percent. A second priority is to eliminate the estate tax, which is something Republicans wanted to do since they started calling it the “death tax” years ago. To prepare for those, as well as other changes in the tax code, the current Senate budget resolution has incorporated an increase in the federal budget deficit of $1.5 trillion over 10 years.
With that in mind, Republicans have three possible responses:
- Close the loopholes that individuals and businesses use to lower their taxes,
- Reduce spending to offset lower revenue, or
- Claim that deficits don’t matter.
The first is actually something that President Obama and the Democrats proposed. They were willing to lower the corporate tax rate to 25 percent in exchange for closing loopholes. As I wrote previously, that would have brought the statutory (on the books) and effective (what is actually paid) corporate tax rates into closer alignment.
The tax cut framework suggests that Republicans will eventually define some corporate tax loopholes to close. They haven’t done so yet because that will unleash a host of corporate lobbyists to fight against them, which is all the proof we should need that the statutory tax rate, as it exists today, is meaningless. The real juice is in the loopholes. A study completed by the Institute on Taxation and Economic Policy last March found that, “Eighteen of the corporations, including General Electric, International Paper, Priceline.com and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period.”
Just to demonstrate how weak Republicans are in finding a way to close loopholes, the framework includes the elimination of one that would affect a lot of individuals—the deduction for state and local taxes. Sahil Kapur reports this:
On Friday — two days after the tax framework was rolled out — National Economic Council Director Gary Cohn said that ending the state and local tax break was negotiable.
In other words, the idea that Republicans will ever close loopholes as a way to offset the tax cuts is laughable.
The framework doesn’t address #2 (cutting spending) at all. Perhaps we just haven’t gotten there yet. But it could also be because the Trump administration seems to be going all-in on #3. Here is a fascinating statement from White House Budget Director Mick Mulvaney.
I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth, Chris. If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.
That is astounding—especially coming from Mulvaney—who was a fire-breathing deficit hawk in the House before getting this job in the White House. He’s not only saying that, when it comes to tax cuts for corporations and the wealthy, deficits are tolerable. He’s saying that they are necessary.
That kind of talk is already a problem for someone like Sen. Bob Corker, who is insisting that the tax cut plan be deficit-neutral in order to get his support. We’ll have to see if any other Republicans join him.
Kapur notes yet another challenge this tax plan will face in Congress. This one is all about process.
Despite the unified framework that enjoyed broadly positive reviews from within the party last week, the House and Senate are still likely to pass separate tax bills, according to Senator Pat Toomey, a Pennsylvania Republican. Then, they’ll have to be merged into one bill in a conference committee that can pass both chambers.
That is a long haul, but nothing terribly new for Congress. Here’s the catch:
Under-appreciated obstacle on taxes—House Rs feel burned by the Senate on ACA repeal & don't want to fall on their sword only to fail again.
— Sahil Kapur (@sahilkapur) October 3, 2017
I’m not sure how that one will play out, but the sentiment isn’t surprising.
Those are just some of the ways that the Republican tax cut framework is already in trouble. Stay tuned for more.