EVAN HOROWITZ | QUICK STUDY
Andrew Harnik/Associated Press
For months, the Republican party’s tax plan has been little more than a vague framework, rich with promise but bereft of detail. That changes Wednesday, when House Republicans are expected to release an actual bill — and the political fight begins in earnest.
A few things we already know, like the fact that President Trump and Republican leaders share a desire to slash the corporate tax, eliminate estate taxes, and approximately double the standard deduction for all taxpayers — a package whose benefits would overwhelmingly flow to the wealthiest Americans, according to the nonpartisan Tax Policy Center.
Many difficult choices have been put off, however, including the big question of how they plan to raise the trillions of dollars needed to pay for these cuts and keep the deficit from exploding.
When the new bill is finally unveiled, expect lobbyists from every interest group to have their reading glasses at the ready, eager to discover how their pet industry will be affected.
Already, the National Association of Homebuilders has come out in opposition, unhappy about the prospect of reduced tax incentives for home ownership. And that might be a harbinger. With every new regulation, and every closed loophole, comes the risk of vigorous opposition from those who stand to lose most.
Here are some of the key issues to watch for.
Cut taxes by $1, raise taxes 75 cents.
Inside this package of tax cuts are a number of changes designed to actually raise taxes, chiefly by closing loopholes and eliminating select deductions. That’s central to the effort because Republicans have already agreed not to add more than $1.5 trillion to the federal deficit over 10 years.
Trouble is, Republicans have had real difficulty agreeing on which deductions to rein in. Originally, the plan was to eliminate the deduction for state and local taxes, but that has been scaled back — as has a proposal to limit the amount of tax-deferred income people can add to 401(k) accounts each year. Likewise, while Republicans have consistently said they plan to limit the deduction businesses get for interest expenses, they haven’t shared much detail.
Are you a business?
Small partnerships, independent contractors, and some larger firms don’t pay corporate taxes. Instead, their profits are passed along to owners, who treat it like a salary and include it on their individual income tax filings.
Republicans are expected to introduce a new 25 percent rate for such “pass-through” entities. But that creates a serious tax avoidance problem because it means high-earning individuals can reduce their tax bill by pretending they’re a pass-through business.
When the state of Kansas cut rates for pass-through businesses, the head basketball and football coaches at the University of Kansas managed to minimize their tax bills by earning money through shell companies.
What happens to overseas earnings?
Perhaps the least-fleshed-out part of the Republican plan is the shift to a territorial tax system, where companies only pay taxes on profits they earn in the United States. That’s typical in other countries, but it also gives multinational firms a huge incentive to make it seem like their money is being made overseas.
To mitigate this risk, Republican plans have so far included vague language about applying a minimum tax on overseas profits. Say you’re a US company earning a lot of money in France. So long as you’re paying French taxes, that’s fine. But if you stash money in low-tax havens, then the IRS will send you a bill. This could work, in theory, but it would also be tricky to police.
House bill, Senate rules
Unless House members are mindful of their colleagues in the Senate, they could walk themselves into a dead end, passing a plan that stands no chance of ever becoming law.
It’s all about Senate rules, like the Byrd rule requiring bills like this to be deficit-neutral after 10 years. Translation: All these tax cuts must be fully paid for — or entirely eliminated — beginning around 2028.
No such requirement exists in the House, so in theory Speaker Paul Ryan could ignore the long-term deficit implications if it bought him some much-needed votes. But if he goes that route, he’ll be handing the Senate an unpassable bill, and complicating negotiations later on.
What, no leaks?
Given how well-publicized and highly anticipated this tax bill is, you’d generally expect to see some leaks by now, tidbits about the contents alongside tales of last-minute disputes. The fact that this hasn’t happened could be a sign of up-to-the-deadline negotiation or a testament to the tight-lipped discipline of Ryan’s team.
It doesn’t really matter, though. Soon enough, we’ll learn exactly what’s in this bill. And as lobbyists’ press releases pile up through the day, we’ll have a clearer sense for the political challenges ahead.
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