EVAN HOROWITZ | QUICK STUDY
Al Drago/New York Times
Everywhere Republicans turn in their quest for big tax cuts, they seem to hit another obstacle.
President Trump isn’t helping. Not only is he embroiled in high-profile fights with several NeverTrump senators whose votes he will eventually need, but he continues to offer muddy messages: promising that high earners won’t benefit, even as his own advisers admit that this is virtually inevitable.
Still, the biggest problem of all might be simple arithmetic.
The current plan is expensive. The so-called unified framework — slashing the corporate tax rate, reducing the number of individual tax brackets, eliminating the estate tax, and pursuing other costly cuts — would reduce government revenues by some $2.4 trillion over the next 10 years, according to an analysis from the nonpartisan Tax Policy Center. That number rises to $3.7 billion if you assume, as seems likely, that Republicans won’t try to eliminate the deductions for state and local taxes.
This isn’t OK, for two reasons. According to the budget Republicans have already passed, the tax bill can’t cost any more than $1.5 trillion over 10 years. Then, in years 11 through infinity, it can’t increase the deficit at all, lest it violate longstanding Senate rules.
To move forward, then, Republicans need both a short-term and a long-term payment plan.
In the short term, Republicans must fill the approximately $2.2 trillion gap between the deficit spending they’re allowing themselves and the price tag. Options are few.
Originally, the plan was to raise money by closing loopholes.
But every time a specific loophole comes under threat, there’s an angry backlash from those who rely on it to shrink their tax bills.
First on the list was the deduction from your federal tax bill of state and local taxes, or SALT.
Eliminating this SALT rule would have generated more than $1 trillion in new revenue, but the proposal was savaged by Republican legislators from wealthy states like New York and New Jersey, who realized that it would hit their constituents particularly hard.
Then this week, Republicans floated a proposal to limit tax-deferred contributions to 401(k) plans, effectively raising money by making retirement savers pay higher tax bills. Quickly, however, that idea drew condemnation from the president.
And while he seems to have left room for further discussion on this question, his misgivings might be enough to sink it.
Other possibilities have been ruled out virtually from the start, including two of the most lucrative deductions on the books: those allowing people to subtract their mortgage interest and charitable giving from their taxes.
It’s still possible that some of these loopholes will be narrowed, even if they’re not closed entirely.
A final bill could easily include some cap on SALT, or some new limit on 401(k) accounts. But now we’re talking about raising mere billions of dollars, when what’s needed is something much grander. Meanwhile, all the really substantial budget-balancing moves — like increasing taxes on capital gains, a national sales tax, or cuts to Medicare — seem off-limits.
Look beyond the 10-year window, and the problem gets even more challenging. At that point, it’s not enough for Republicans to minimize the deficit-busting impact of their tax cuts; they have to pay for every cent. That’s one of the parliamentary requirements for bills like this one, which is moving forward under the “reconciliation” process. On the one hand, such bills have the great advantage of being filibuster-proof, meaning they can pass with just 50 votes. On the other, they must be deficit-neutral over the long term.
One solution is to follow the lead of former President George W. Bush, who solved the long-term problem by making his tax cuts expire after 10 years. Trouble is, temporary cuts don’t pack the same economic punch, and you set up this chaotic situation where on Jan. 1, 2028, corporate taxes could jump back to 35 percent.
Perhaps the best remaining strategy for Republicans is gamesmanship. Rather than root around for new revenue, for instance, they might be able to hit their deficit targets by changing the way we count — and who does the counting.
Traditionally, the Congressional Budget Office has provided official estimates for the costs and effects of various programs. But that’s not a legal requirement. Congress could rely on some other estimate.
With enough tweaking, a more ideologically driven group might produce an analysis suggesting that the economic growth set off by the tax cuts would more than offset the cost.
Senators also have the option of changing the rules. Instead of requiring reconciliation bills to be deficit-neutral after 10 years, why not 20 or 30 years? That way Republicans could call their cuts temporary, keep them in place for decades, and then let them expire in the distant future.
Ultimately, that is, the obstacles facing Republicans might be high, but that doesn’t mean they’re insurmountable — especially if lawmakers are willing to walk under them. After the failure to repeal and replace Obamacare, the pressure to pass tax cuts is intense. And with great pressure comes great legislative creativity.
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