On Thursday the Republican “Big 6” on Tax Reform—Ryan, Brady, McConnell, Hatch, Mnuchen and Cohn issued a six paragraph set of principals for the effort.
www.treasury.gov/…
It’s pretty ugly stuff, if you know what to look for. They claim that they are going for permanent change, which would qualify for reconciliation and need only 51 votes in the Senate. They claim that it would be focused on the middle class. But, as usual, the devil is in the details.
1) They want deep cuts in corporate tax rates, but even deeper cuts in tax rates for “small businesses”—probably to a tax rate of 20% or so, versus a max of 35% for individuals who work elsewhere. The definition of “small businesses” is going to be a huge issue in this fight. The standard definition is a “pass-through” company that doesn’t pay taxes directly, but passes on its taxable income to its owners. The list includes limited liability corporations, Subchapter S Corporations, and partnerships. What’s wrong with this? Well, every sole proprietor and tiny little business—doctors, lawyers, accountants, you name it—would magically transform itself to a pass-through and cut the owner’s maximum tax rate from around 40% to that new 20% or so.
2) Benefits for small businesses is also a catchword for elimination of estate taxes, under the claim that these hurt small businesses. Since the exemption under current law is $5.49 million for a single individual and $11.98 million for a couple, that is pretty much a lie—no surprise.
3) There will almost certainly be another shot at eliminating the Medicare tax, thereby squeezing the budget for healthcare.
4) Based upon initial signals, it seems likely that they will eliminate deductibility of interest on debt for corporations, but then define ALL interest earned, as well as capital gains and dividends as “capital income,” taxable at half of the investor’s ordinary income tax rate. So, we would have three different maximum tax rates—around 35% for wage earners, around 20% for owners of pass-throughs, and around 17 1/2% for people living off of income on accumulated wealth. The implications for after-tax income and wealth disparity would be massive, especially when taken in conjunction with the likely elimination of estate taxes.
5) In order to pay for all of this in a revenue neutral fashion, there will be an attempt to pressure the CBO and Joint Tax to adapt “dynamic scoring,” under which a) it would be assumed that all of this would be fabulously stimulative to economic growth, and b) the extra tax revenues resulting from the supposed extra growth would be included in the estimate of the revenue side of the plan. Pure supply side bullcrap.
6) Putting it all together, and there is very little benefit for the middle class, and all of the so-called benefits end up increasing the deficit, which means NO net benefits for the middle class, when their children and their children’s children are included. And, of course, any real world increases in the deficit when the figures don’t work out (oops!) would be used as an excuse to cut benefits that currently accrue to the middle class and below, including Medicare, Medicaid, food stamps, you name it. Trump/Mnuchen’s budget through the back door.
The political battles out of all of this will be spectacular, of course. However, some of it looks like “free stuff,” so the battles will not be easy. And the benefits for the wealthy and businesses would be massive, so the funding behind this mess will be huge. The best outcome would be non-revenue neutrality which requires 60 votes in the Senate, and then a pitched battle to explain why this isn’t good for the middle class and working poor. It won’t be easy to explain the lies and invalid assumptions, which will make it more difficult to fight.
And so we begin.