Why the Republican House is pushing “Tax Reform 2.0”

Republican legislators in the House of Representatives have announced that they will hold a vote before the end of September on a bill known as Tax Reform 2.0 (“TR2”). The bill would make permanent the politically popular provisions of the original tax bill (“Tax Reform 1.0”) passed by the Republican House and Senate and signed into law by the President last December. Not a single Democrat in either the House or Senate voted for the bill, which has subsequently unleashed 4% GDP growth rates, a stock market boom, full employment (as usually defined by economists), and increased real income levels for workers. But because the Senate rules require 60 “yea” votes to pass a bill — and Senate Republicans barely had a majority — the bill had to be passed through an arcane process called Reconciliation, which permits a mere majority to pass a bill, not a 60-vote super-majority. The drawback of using this procedure was that a number of important and popular provisions in the bill will be expiring in eight years. House Republicans want to make those provisions in TR2 permanent because they are regarded as political winners and will put House Democrats on the spot just before the midterm elections if they vote against the bill.

Among the popular provisions that the Democrats would be voting against, The Hill reports, are:

“…across-the-board reduction in tax rates for individuals, the doubling of the standard deduction, the effective 20-percent reduction in the tax rate on small-business profit, a doubling of the child tax credit and a defanging of the despised alternative minimum tax.”

Americans for Tax Reform adds that

“Tax reform 2.0 will strengthen family savings through the reform of tax-advantaged savings accounts. The legislation will update retirement accounts so that businesses have more flexibility to set up and contribute to plans, and workers have more flexibility to invest and save for retirement.

“In addition to expanding existing savings accounts, tax reform 2.0 creates a new savings account – the Universal Savings Account (USA).

“A USA allows a taxpayer to contribute after-tax earnings of $2,500 each year that they are free to invest as they see fit. These funds can be withdrawn at any time, and for any reason. USAs exist in Canada and the UK and have succeeded in promoting family saving and investment.

“The tax bill also expands 529 savings accounts so that they can be used for apprenticeship programs or cover home schooling expenses. 529 accounts are a key way for middle class families to invest in their children’s futures and are currently used by 13 million families.”

The Hill also notes that:

“With House passage of Tax Reform 2.0, Republicans send a potent political message — some combination of ‘Here’s what we’ve done for you lately,’ and ‘see, you still need us.’

“A Democrat in a swing district who votes against ‘making middle-class tax cuts permanent’ will have some explaining to do. He or she won’t necessarily be able to count on polling data showing that only around 40 percent of the public support the December tax reductions. That’s the whole law. What’s at issue here are its popular bits.”

In fact, House Republicans hope that the publicity they garner for TR2 will help raise that undeserved 40% public support for Tax Reform 1.0 (TR1), given the prosperity it has brought about. The Democratic Party media pilloried TR1 as a Republican giveaway to corporations and the rich — not explaining to their readers that businesses only invest and create jobs when it will be profitable to do so. Under Obama’s tax and regulatory straitjacket on the economy, economic and income growth was unprecedentedly low for a recovery.

Admittedly, from an economic standpoint, a bigger bang for the buck could be had by extending immediate expensing of short-term investments (“bonus depreciation”) rather than allowing it to expire in eight years. The bonus depreciation provision of TR1 is very important for business planning and not creating an investment famine in the several years before that provision will otherwise expire. “[P]ermanent 100 percent bonus depreciation produces about 4.5 times more GDP growth per dollar of revenue than making individual [TR1] provisions permanent,” according to the Tax Foundation.

But politics must, of necessity, be in the drivers seat for now. If Republicans can hold the House and Senate in the midterms, they will have a chance of passing bonus depreciation and other investor and middle-class friendly tax provisions; otherwise, nada.

Click here to go to the previous Founders Broadsheet (“Trump threatens Japan and Canada with ruinous auto tariffs”)