The Senate’s Magical Disappearing Tax Cut

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The tax bill proposed by Senate Republicans differs in at least two noteworthy ways from the version already passed by the House: It repeals the individual mandate in the Affordable Care Act, and it makes the tax cuts for individuals expire after only eight years. These provisions make the bill an even worse deal for the middle class than the House version, which was already bad enough.

The individual mandate

What is another attempt to repeal Obamacare doing in a tax bill? Technically, it can be there, because the mandate to buy health insurance depends on tax penalties for failing to do so. The tax penalties also give the mandate a legal basis in the government’s power to tax, instead of just in the government’s power to regulate interstate commerce, an argument that proved decisive when the Supreme Court found the law constitutional. Without those tax penalties, most experts worry that too few healthy people will choose to carry insurance, forcing insurance companies to raise premiums on those with pre-existing conditions. If millions of them go without coverage too, that will defeat the whole purpose of the law. According to the Congressional Budget Office, “Healthier people would be less likely to obtain insurance; especially in the nongroup market, the resulting increases in premiums would cause more people to not purchase insurance.” The CBO estimated that the number of insured Americans would drop by 13 million.

Republicans have a twofold purpose in slipping this into their tax bill. Not only do they strike another blow against Obamacare, but they save the government an estimated $318 billion they can use to carry out their prime objective–tax breaks for corporations and the wealthy. If fewer people sign up for health insurance, the government pays out that much less to subsidize their premiums.

Tax cuts, permanent and temporary

Both the House and Senate bills cut the corporate tax rate from 35% to 20%. The Senate bill starts the cut one year later, but makes the cuts permanent from then on. For the individual tax changes, however, the Senate bill includes sunset provisions to end them after 2026. That applies to the rate cuts, the increase in the standard deduction, the elimination or scaling back of certain itemized deductions, the repeal of personal exemptions, and the cuts in estate taxes. It even applies to the tax cuts for small businesses such as partnerships and S-corporations, which currently pass through their income to individuals to be taxed at individual rates. Large corporations get a permanent tax cut, while small businesses get only a temporary one.

The reason for these differences is both fiscal and political. Republican tax writers found that they couldn’t make all the cuts permanent without adding more to the federal deficit than is allowed by the budget reconciliation process. The bill can only add $1.5 trillion to the deficit over ten years and no more after that. Only if they play by the rules of reconciliation can they pass the bill with a simple majority, so they can do it with Republican votes alone and prevent a Democratic filibuster.

On a deeper level, this is an admission that the country cannot really afford both the corporate and individual cuts. Republicans are evading this truth by assuring the country that the individual cuts can be made permanent later. Treasury Secretary Steven Mnuchin has said that he has “every expectation that down the road Congress will extend them.” The Republicans want to have their cake and eat it too, describing the cuts as temporary for purposes of squeaking the bill through Congress, but describing them as permanent for purposes of selling the bill to the public.

When “later” actually arrives, the country will face a stark choice: Either raise taxes by letting the cuts expire, or allow the kind of massive deficits that Republicans have always claimed to be against, or cut popular programs like Medicaid and Medicare (which many Republicans would love to do but hate to admit it publicly). In any case, this curious bill is an admission that they do not know how to fulfill President Trump’s promises for massive middle-class tax relief, debt reduction, and protection of entitlement programs. They are no closer to pulling that off than they are to creating a better health insurance system to replace Obamacare.

Winners and losers

The Tax Policy Center has released its independent analysis of the Senate bill. It shows that upper-income taxpayers gain more than the middle class, even before the individual tax cuts expire.

In 2019, 76% of taxpayers would get at least some tax cut. One reason why that percentage isn’t even higher is that some taxpayers lose more in itemized deductions than they gain in lower tax rates, especially because the Senate bill eliminates the deduction for state and local taxes. On the average, taxpayers in the middle quintile (40th to 60th percentiles of the income distribution) see a cut of $850 and an increase of 1.4% in after-tax income. But taxpayers in the richest quintile (top 20%) see a cut of $5,740 and an increase of 2.2% in after-tax income. Overall, 63.2% of the individual tax cuts go to the richest 20%.

In 2027, after most of the individual tax changes expire, only 28% of taxpayers still get a cut, while 50% pay a little more than they would under current law. One reason for that is that the bill changes the way tax brackets are indexed for inflation, and does it in a way that favors the government. In the middle quintile, after-tax income would be only slightly lower than it is now. But in the top quintile, after-tax income would be 0.6% higher, for an average gain of $2,230. That’s probably because the top quintile owns about 80% of the corporate stock, and so they benefit most from the permanent cut in corporate taxes.

The Congressional Budget Office has done a different kind of distributional analysis, focusing on how much it will cost the government to provide tax-cuts affecting different income groups. The CBO found that most of the cost–85% in 2019 and 100% by 2027–will be incurred by providing tax cuts for people with incomes over $75,000. Little is actually devoted to tax relief for the mid-to-lower part of the distribution.

A successful con?

In the name of tax reform and simplification, Senate Republicans have produced a masterpiece of obfuscation that shortchanges those it claims to benefit. They are aided in this effort by a President who speaks regularly in oversimplifications, exaggerations, and outright lies. Essentially, Senate Republicans are cutting taxes for corporations and the wealthy, while letting their Con-Man-in-Chief tout the bill as the biggest middle-class tax cut ever, which it certainly is not. All that the middle class actually gets is a small, temporary tax reduction. That is supposed to fool them into supporting a permanent corporate tax cut that will primarily benefit wealthy shareholders. When the day of fiscal reckoning comes, middle- and lower-income people will bear the brunt of the program cuts required to manage the debt.

Part of the con is the endless repetition of the dubious claims of “trickle-down economics.” Very little evidence supports the idea that corporations will use their tax cut to raise wages or hire more workers. Because of the numerous tax breaks already in the code, most of which are left standing in the proposed legislation, the average corporation pays far less than the official 35% rate. The effective tax rate on US corporations is not out of line with other wealthy countries. The corporate share of the federal tax burden has already declined dramatically since the mid-twentieth century, when the economy flourished despite high taxes.

As of this writing, polls show that most Americans are not being fooled by this proposal. Whether that will make any difference is not clear, since so many Republicans listen to their wealthy donors more than to the public. If the Senate does pass this Thanksgiving turkey, one can only hope that there is hell to pay in 2018 and 2020.

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