The GOP Tax Reform Plan That Almost No One Likes
FORECASTS & TRENDS E-LETTER
1. GOP to Cut Corporate Income Tax Sharply & Permanently
2. Individual Income Tax Rates to Decline for Most Americans
3. Tax Plan Difficult if Not Impossible to Pass as Written
4. Polls Show Support For GOP Tax Reform Plan is Sagging
Republican lawmakers unveiled a sweeping rewrite of the tax code on Thursday, outlining a $1.5 trillion plan that will deliver significant tax cuts for corporations and more modest savings for middle-class families while tilting the United States closer toward the kind of tax system long championed by businesses.
The hotly debated House plan immediately ignited a legislative and lobbying fight as business groups, special interests and Democrats began tearing into the proposal ahead of a Republican sprint to get the legislation passed and to President Trump’s desk by Christmas.
“With this plan, we are making pro-growth reforms, so that yes, America can compete with the rest of the world,” said House Speaker Paul Ryan of Wisconsin on Thursday.
Yet with the exception of most corporations, it’s hard to find just about anyone else that thinks the GOP tax reform plan is good. Democrats obviously don’t like it, but there are plenty of Republicans who have problems with it, too. And the general public overall is consistently opposed to reducing the corporate tax rate. We’ll talk about why as we go along today.
I’ll begin by summarizing the highlights of the plan below, without getting into the political implications. Then I’ll offer some thoughts on why so few are behind the most sweeping tax reform in 30 years. Keep in mind that the summary below is based on the GOP tax plan as of Thursday, and there may be significant changes over the next few weeks.
GOP to Cut Corporate Income Tax Sharply & Permanently
The bill is heavily weighted toward business, which would receive about $1 trillion in net tax cuts, or two-thirds of the total, according to calculations by the Joint Committee on Taxation. At its center is a proposal to permanently cut the corporate tax rate to 20% from 35% -- a change that is estimated to reduce federal revenues by $1.5 trillion over the next decade – unless economic growth increases by enough to cover it.
For the first time, the United States is proposing to levy a global minimum tax of 10% on corporations, which would apply to income that high-profit subsidiaries of American companies earn anywhere in the world. The effort is aimed at preventing companies from shifting profits abroad and grabbing back some of the tax revenue on income earned overseas.
Those profits are currently not taxed until they are returned to the United States, giving companies an incentive to keep that money offshore since they are taxed at the current corporate tax rate of 35%. It is currently estimated that US corporations have $2.5-$3.0 trillion in profits that are stashed offshore.
The new plan would allow companies to fully depreciate capital spending much quicker. Rather than depreciate major purchases over time, nearly all capital expenditures would be written down in Year One. This may be one part of the new tax plan that could most stimulate new jobs and higher wages.
Individual Income Tax Rates to Decline for Most Americans
For individuals, the plan reduces the current seven income brackets to four: 12%, 25%, 35% and 39.65% for those making a million dollars or more in yearly income. The bill would also eliminate the alternative minimum tax, which is expected to hit 4.5 million families in 2017.
The proposal roughly doubles the “standard deduction” for middle-class families, expanding it to $24,000 for married couples, from $12,700, and raising it to $12,000 for individuals, from $6,530 today. Republicans also plan to expand the child tax credit to $1,600 from $1,000.
Thus, those making up to $24,000 will pay no income tax. For married taxpayers filing jointly, earnings up to $90,000 would be taxed at the 12% bracket; earnings up to $260,000 would fall in the 25% bracket; and earnings up to $1 million would be taxed at the 35% rate. Again, those making over a million would be subject to the current 39.6% rate.
Republicans tried to keep their promise of lowering the tax rate for “pass through” businesses to 25%, down from as high as 39.6% in many cases. However, the language in this provision indicates that business owners can only claim the new lower rate on 30% of their income; the rest would be taxed at their individual rates. If this is where it ends up, that’s a disappointment since small businesses create over 50% of new jobs.
The GOP proposal would double the estate tax exemption to roughly $11 million, from $5.5 million today, meaning more families can avoid paying taxes on large inheritances. And it eventually repeals the so-called Death Tax altogether, phasing it out entirely in six years.
Americans will still be able to make both traditional, pretax contributions and ‘Roth’ contributions in the way that works best for them, according to the new plan. It would not, as many had feared, make any changes to the pretax treatment of 401(k) plans.
Tax Plan Difficult if Not Impossible to Pass as Written
The GOP tax reform package includes several land mines that could complicate its passage, including reducing the popular mortgage interest deduction on loans up to $500,000, down from $1 million currently. It also caps the state and local tax deduction at $10,000, which several Republicans from the high-tax states of New York, New Jersey, California and others will fight vigorously. Powerful trade groups representing the real estate industry and small businesses blasted the bill as ineffective and harmful to Americans.
Yet Representative Kevin Brady, Republican of Texas and the chairman of the House Ways and Means Committee, said that the House plan had the “full support” of President Trump and predicted that it would be on his desk this year.
As noted above, the bill is estimated to cost $1.5 trillion over a decade, but that assumes no additional growth in the economy as a result of the tax cuts. Lawmakers have been scrambling for days to find revenue to offset the tax cuts. That has prompted a host of proposed changes on the individual side, including repealing tax breaks for things like medical expenses, moving expenses, student loan interest and adoption, as well as making some business tax breaks temporary. No doubt, there will be big battles over all of these popular deductions.
The plan also tightens rules for claiming the child tax credit, a change that could hit immigrant parents whose children were born in the United States. Filers would need to provide a “work-eligible Social Security number” rather than just a taxpayer identification number in order to claim the credit. It remains to be seen if this requirement will make it into the final bill.
The bill includes a host of other changes that will affect taxpayers in different ways. For instance, it repeals certain tax credits, including a 15% credit for individuals aged 65 or over, or those who are retired on disability. Right now, those individuals can claim up to $7,500 for a joint return, $5,000 for an individual or $3,750 for a married individual filing a joint return.
The benefits for individual taxpayers will be mixed and depend largely on where they fall on the income scale, where they live and the types of tax breaks they tend to claim. Several Republican lawmakers have already said they would oppose the bill in its current form, including Representatives Leonard Lance and Frank LoBiondo of New Jersey.
Polls Show Support For GOP Tax Reform Plan is Sagging
As noted above, the Republicans are going to have a very hard time passing their tax reform plan as it is currently written. It may have a tough time even if meaningful changes are made in the weeks ahead. So, I will not be surprised if the GOP fails to deliver on tax reform, just as they failed to repeal and replace Obamacare.
Here’s the biggest problem in a nutshell: Public polling consistently shows that ordinary Americans think that taxes on big business should be higher, not lower. This despite numerous studies showing that lower corporate taxes will result in higher wages for workers and more jobs.
In September, the Pew Research Center found that 52% of Americans thought that corporate taxes should go up; just 24% thought they should go down. In April, 67% of adults told Gallup that corporations paid “too little” in taxes. Last week, CBS News found that 56% of its survey-takers favored a corporate tax hike, while only 17% backed a cut.
Even among the GOP’s base, corporate tax cuts simply aren’t that popular. Pew found that just 48% of conservatives who either identify as Republican or lean towards the party think that corporate taxes should come down; 49% thought they should go up or stay the same. Among all Republicans and leaners, including moderates, just 41% favored lowering the corporate tax burden.
Voters also seem skeptical of the Trump administration’s pitch that corporate cuts will trickle down to help their families. According to a recent Morning Consult poll, only 31% of Americans believe reducing corporate taxes will personally benefit them versus 47% who believe it won’t.
These numbers are simply stunning! But then again, the media has done its job of convincing the public that corporate tax cuts only benefit the wealthy.
While the Trump administration has touted optimistic forecasts suggesting that its business cuts will raise household incomes by thousands of dollars a year, there is plenty of disagreement among economists about whether, or by how much, lower corporate rates actually lead to higher wages for workers.
Given these poll results, you won’t be surprised to learn that relatively few Americans even think that corporate tax cuts are an urgent issue. Only 27% of all Americans -- and a bare majority of Republicans -- told CBS that passing a tax cut should be among the top priorities for Trump and Congress.
All of this seems to be reflected in the fact that the tax bill itself was already quite unpopular even before it was released on Thursday, based on the initial tax “framework” released a few weeks ago. The latest NBC/Wall Street Journal poll found only 25% of the public thought the plan was a good idea, while 35% said it was a bad one – this before the details were made public last week.
Making trade-offs on taxes is extremely hard. Making trade-offs when most people apparently don’t want them can turn out to be impossible.
Yet most Republicans have convinced themselves that they must try. The prevailing idea among GOP lawmakers seems to be that tax reform is a do-or-die task -- that if they don’t pass a tax cut, voters will abandon them come the mid-term elections next year. I’m not sure I agree with that.
Yet South Carolina Senator Lindsey Graham said just last week, “If we fail on taxes, that’s the end of the Republican Party’s governing majority in 2018.” I am no fan of Senator Graham, but his comment seems to sum-up the thinking in the Republican Party.
In conclusion, I don’t know what happens next. I just wanted to let clients and readers know that public support for cutting taxes – especially corporate taxes – is waning if the polls are to be believed. There was widespread support among the public when President Reagan led the charge for across-the-board tax cuts in the 1980s. Not so today.
The liberal media has done its job well over the last 30 years in convincing the public that tax cuts only benefit the wealthy.
Wishing you all the best,
Gary D. Halbert
ProFutures, Inc © 2018