There’s a reason Republicans in Congress want to pass tax cuts as fast as possible: The less time the rest of us have to examine the details, the better.
The rhetoric surrounding the GOP tax cut plans moving through the House and Senate touts the benefits for ordinary Americans. House Speaker Paul Ryan says a typical family with two kids will save nearly $1,200 per year under his plan. Senate Republicans promise “middle-class benefits all around” and say their plan will generate a $1,500 windfall for the typical family.
Here’s what they’re leaving out: Tax cuts for individuals would expire in a few years under the Senate plan, which means tax cuts today would end up being tax hikes tomorrow. Cuts in business taxes, however, would remain permanent. Republicans insist that cutting business taxes will itself help workers earn more, at some point in the future. But that’s based on old ideas that predate the digital, robot economy and most likely no longer apply.
Business tax cuts may not trickle down to individuals
As analysts run the numbers on the House and Senate plans, it’s becoming apparent that businesses will enjoy the lion’s share of the tax cuts, with individual taxpayers getting more of a token reduction in their tax bills. That’s not inherently bad. The business side of the U.S. tax code is the most broken, with a top rate of 35% that’s out of step with most other advanced economies, which have been lowering business taxes. The United States does, in fact, need a competitive business tax code, to reduce the incentive for U.S. firms to keep profits out of the country and relocate to other places.
If Republicans were being completely forthright, they’d acknowledge this. They’d admit there’s a large risk corporate tax cuts won’t trickle down to ordinary workers, as a roomful of CEOs seemed to indicate at a recent Wall Street Journal conference. They’d confirm analysis by groups such as the Committee for a Responsible Federal Budget showing that between 65% and 80% of the net tax cut will accrue to businesses, with only a small portion applying to working- and middle-class taxpayers. They might even stick their neck out and point out that the federal tax burden on the typical family has declined slightly in recent years, suggesting there’s no urgent need to cut taxes for most individuals.
But that would require more political courage than anybody in Congress seems capable of mustering. So, what we’re getting instead is a cynical charade in which the talking points say one thing but the numbers say another.
The Senate plan, for instance, would cut taxes for most but not all individual taxpayers, but only until 2025. Then, all the tax cuts would expire. “This is an obvious ruse to hide very real costs and make more room for debt-financed cuts and giveaways,” Maya MacGuineas of the Committee for a Responsible Federal Budget said in a statement. It’s also inherently bad policy. It would essentially guarantee a political showdown in 2025, as the deadline for expiration looms and many millions of Americans face a de facto tax increase. The thinking now is that politicians in the future will find a way to avert that tax hike, and extend the cuts. But creating this problem for future taxpayers and policymakers is utter cowardice and terrible planning.
What happens after tax cuts
We’ve been through this before. Tax cuts passed in 2001 and 2003 under President George W. Bush were also temporary, and due to expire at the end of 2012. That created the “fiscal cliff” drama that caused volatility in markets and led to a last-minute deal to extend most of those tax cuts, except for the wealthiest taxpayers. It sort of worked out, in the end. But we might not be so lucky next time. Federal debt as a percentage of GDP is only going up, and at some point, Congress will no longer be able to keep putting off the day of reckoning. Meanwhile, hardly any taxpayers are going to put money aside in anticipation of higher taxes in 2026, setting the stage for a national financial shock. In a word, this idea is just stupid. If tax cuts aren’t permanent, they shouldn’t be there.
Another wrinkle in the Senate plan would offset any tax savings for a certain group of taxpayers. The new provision to repeal the “Obamacare mandate,” which requires all Americans to have health insurance or obtain an exemption, would lead a few million generally healthy Americans to forego health insurance. So far, so good, as long as they don’t get sick or hurt. That measure would save the government about $30 billion per year, since it would pay less in subsidies to people who qualify for them but decide not to get insurance.
The problem is that older workers who don’t have an employer-provided plan and earn too much to qualify for Obamacare subsidies would get gut-smacked with premium hikes for coverage that is already exorbitant. Some customers in the so-called individual insurance market — typically those 50 and older — already pay $20,000 and up in annual premiums, not including out-of-pocket costs. With fewer healthy customers paying into the system, insurers will have no choice but to raise premiums for those who remain, and middle-income workers who get no help from subsidies will have to pay the full freight or go without.
A middle-class tax cut sure is complicated.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman