Tuesday (10/24/2017) Republicans the gridlock not tax cutting party

For a few days after Senate Republicans passed a 2018 budget, there was high optimism that Congress would now be able to come together to pass a significant tax reform package. That was then.

The reality as we go to press is the unedifying spectacle of a junior high school cafeteria food fight between President Trump and Republican Senator Corker. Nor has the House signed off yet on the Senate’s 2018 budget or reconciled it with their own.

The art of the second best — gridlock rather than good policy

This is provoking cynicism even among the President’s supporters. John Tamny, editor of the RealClearMarkets, writes

Let’s End the Pretense, the Republicans Are Not Cutting Taxes….[T]he Republicans will hopefully learn from all this that they are no longer capable of doing what they were allegedly put on this earth to do: reduce taxes…[But] all is not lost….[G]ridlock is – after good policy meant to actually reduce the burden of government – the next best friend of economic growth….The trick now is for Republicans to change their brand. As opposed to being the tax cutting Party, let’s say they were put on this earth to ensure that nothing of legislative importance happens in Washington.

The Republicans started out in September with a tax reform proposal that we reviewed and would have given an overall B- grade to. It’s now dying the death of a thousand cuts at the hands of Republican legislators.

The Republicans’ stated aim was to pass a tax package that would promote robust economic growth and the individual income increases that would be expected to accompany that growth. Most Republican economists agree that the best way to achieve this is to increase the incentives to save and invest. This can be best achieved by reducing marginal tax rates so that additional labor, savings, and investment are rewarded rather than penalized. This makes tax cutting an essential feature of a serious tax reform plan.

Since the rich pay the largest portion of Federal taxes and are the principal source of savings and investment, they must receive tax cuts too.

But as Tamny explains, this is not happening. A National Review article makes the same point. President Trump and House Majority Leader Ryan have signed on to the Democrats’ class war arguments that the rich must not get a tax cut, just the middle class.

Good policy: Hall-Rabushka

The gold standard of tax reform — the A+ program we didn’t get in September — is the famous Hall-Rabushka tax proposal from the 1980s and 1990s. Steve Forbes ran on it in the 1996 Republican primaries, and the plan even received favorable notice from California’s Jerry Brown and the New York Times. (That was then too.) Cato’s Dan Mitchell still advocates it, and it is reflected in recent analyses by the Heritage Foundation and the Tax Foundation.

Hall-Rabushka maximizes incentives to save and invest, taxes income once only, reduces tax filing to postcard simplicity, eliminates almost all special-interest deductions, and is revenue neutral. The Republicans’ September proposal is basically a stripped down, bowdlerized version of Hall-Rabushka. But since even the timid September plan is dying the death of a thousand cuts, it’s likely that the best that Congress will be able to achieve will be to tinker around the edges of the present tax mess.

Let’s review the possibilities.

Individual taxes

State and local tax deduction

 

Democrats are violently against removing this costly deduction despite the fact that it harms the party’s supposed working class constituency. So are unprincipled Republican Congressmen from high-tax “blue” states, such as NY’s Peter King. Congress may end up settling for a partial cut in the deduction.

 

 

Death tax

This is a tax assessed at death on income that has already been double or triple taxed or more. It mainly hits the savings and investments of the modestly rich. The super rich avoid it through foundations. Congress may just raise the floor above which it kicks in.

Required Minimum Distributions

This isn’t in the September Republican tax plan, but ending Required Minimum Distributions (RMDs) in IRAs might receive some bipartisan support. It would be a face-saver for Republicans if they abandon or dilute their more consequential proposals.

Mortgage interest deduction

This has often been called the “third rail” of tax reform that no Congress wants to touch. True to form, the National Association of Realtors has jumped in to save this deduction. Veronique de Rugy at George Mason University’s Mercatus Center demonstrates that this is a tax entitlement for the well-to-do financed by the not-so-well-to-do. It mainly serves to drive up housing prices in already overpriced neighborhoods.

Corporate taxes

Corporate tax rate

Reducing the corporate tax rate from 35% to 20% is at the center of the Trump-Republican tax plan. When the Democratic-Party-oriented Tax Policy Center (TPC) trashed this proposal, Kevin Hassett, the chair of President Trump’s Council of Economic Advisers, went to the TPC and gave a no-holds-barred critique of the TPC’s analysis. Larry Summers, President Clinton’s former Treasury Secretary and President Obama’s director of the National Economic Council, then blasted back at Hassett.

The rate cut will likely stem the flight of U.S. companies abroad and corporate inversions, in which a U.S. company lets itself be taken over by a foreign company facing a lower tax rate. A 25% corporate tax rate would more closely align the U.S. rate with the OECD average. It also would likely provide a wage boost for workers.

Expensing

The Trump-Republican tax plan proposes temporary (five years only) full expensing of short-term equipment — as opposed to present IRS policy which mandates complicated depreciation treatment over the alleged lifetime of the equipment. The proposal has been rightly criticized for being temporary and for not allowing full expensing of longer-term capital investments such as buildings. In short, the proposal is already quite watered down.

In conclusion, we hope we’re wrong, but it looks like a badly damaged Republican tax reform is in the offing– or gridlock, that second-best outcome for a government-beleaguered citizenry. If so, this will be a another argument for replacing the Republican Party with a new one with better ideas and more backbone.

Click here to view yesterday’s issue of Founders Broadsheet.