Politics

Evan Horowitz | Quick Study

Republican tax plan has 2 time bombs built in

The push for a massive tax cut by House Speaker Paul Ryan, President Trump, and Senate majority leader Mitch McConnell has led to a maneuver that will either lead to a tax increase on half of Americans in 10 years or blow a huge hole in the federal budget.
Associated Press/File 2017
The push for a tax cut by House Speaker Paul Ryan, President Trump, and Senate majority leader Mitch McConnell has led to a maneuver that will either lead to a tax increase on half of Americans in 10 years or blow a huge hole in the federal budget.

There are two time bombs in the Senate Republicans’ tax bill — and it’s possible to defuse only one of them.

Number one: Virtually all of the tax cuts that would help individuals and families are set to disappear after 2025, leaving half of American families with a tax increase.

Number two: If Congress tries to avoid this shock to family budgets by extending the cuts beyond 2025, it would blow a multitrillion-dollar hole in the federal Treasury.

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Choosing between these bad options has become the latest political headache for Republicans. Several senators have expressed deep concerns about the deficit-busting potential of the current proposal, potentially disrupting what was expected to be a week of rapid-fire lawmaking.

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And while President Trump sought to maintain momentum by meeting with several of the bills’ authors at the White House Monday, as yet it remains unclear how Republican leaders will resolve the inherent tensions in the bill — at least enough to win over concerned lawmakers.

How did Republicans back themselves into this corner?

To get a bill passed with their slim majority, Republicans are using procedural rules that prohibit the tax bill from increasing the deficit by more than $1.5 trillion over the first 10 years — and not at all in the years after that.

Since their ideal tax cuts were far too expensive to meet these requirements, Republicans are deploying a well-worn trick: letting the cuts expire after a few years.Officially, they won’t cost anything after that, which is why the bill just squeaks by the deficit rule with an estimated 10-year cost of $1.4 trillion, according to Congress’ own Joint Committee on Taxation.

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Meanwhile, the unofficial expectation is that future congresses will just go ahead make the cuts permanent anyway, and the deficit implications will be someone else’s problem.

When picking which cuts should expire, Republicans in the Senate focused on the ones aimed at helping individuals and families, as opposed to companies. So a big corporate tax cut would be permanent, but not lower rates for individuals or the increased standard deduction and child tax credits.

What this means is that within 10 years, one-third of low-income households and two-thirds of middle-income households would end up paying higher taxes under this measure, according to the Tax Policy Center.

Yet, Republicans have a perfectly sensible answer to the critique that their tax cut is actually a tax increase on half of America over the long term: It will never happen. These expiration dates, they say, exist only on paper. In the real world, Congress will eventually make them permanent so that families don’t end up paying more by 2027. House Speaker Paul Ryan has said as much, as has Kevin Hassett, chairman of the White House Council of Economic Advisers.

They may well be right. Temporary tax changes often get extended. In fact, there’s already a whole package of temporary rules called “tax extenders” that regularly get renewed. Or consider President George W. Bush’s suite of tax cuts. They were originally set to expire after 10 years, but most of them became permanent.

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But think what this would mean for the deficit. If the apparently temporary tax cuts in the Republican bill become permanent, than the total cost will be a lot higher than it currently seems. Particularly after the 10-year window, when lost revenue could amount to more than $200 billion annually, judging from estimates produced by the Penn Wharton Budget Model.

Senators Jeff Flake, Bob Corker, and John McCain have all expressed concern about the long-term impact, and Oklahoma Senator James Lankford is even floating the idea of a tax hike that would kick in if government debt grows too fast.

Rising deficits aren’t always bad for Republicans, though. They strengthen the familiar argument that government programs are unaffordable and must be cut — including Medicare and Social Security. Expensive tax cuts could add new fuel to this fire, even if those cuts are being proposed by Republicans.

At the same time, big deficits can do real damage to the economy. When tax revenues shrink, the government has to borrow more money, and that means less credit available for businesses to make productive investments.

There is no obvious way for Republicans to square this circle. Unless they change their priorities or pare back their ambitions, they have to make a choice. Either taxes will eventually go up for many Americans, or the deficit will.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com.