A tax cut, but for whom? Republican plans favor business.
Senate and House leaders say their tax cuts will boost economic growth and household incomes. But Senate plan would undercut Obamacare and allow middle-class tax cuts to expire, while making cuts for corporations permanent.
The latest plot twist in Republican efforts to overhaul the US tax code amplifies what may be the most fundamental debate surrounding the legislation: Who is this really for?
Senate Republicans are moving to add a major new element to their bill: a repeal of Obamacare’s “individual mandate” – the requirement that people have health insurance or pay a tax penalty.
That is certain to please rank-and-file GOP voters who are frustrated by Congress’s failure to repeal the Affordable Care Act. But it’s raising the volume of criticism from Democrats, who are now attacking the bill not only for showering tax breaks on the wealthy but also for an expected decline in the number of Americans with health insurance.
And there’s more: The new version of the Senate tax bill, unveiled late Tuesday, says the planned tax cuts for ordinary households will sunset after 2025, while corporate tax cuts will be permanent. This helps the bill hit the budgetary target required to allow passage by a simple majority of the Senate.
But to say the politics of selling the tax legislation just got more complicated may be quite an understatement.
Republicans are trying to stay on message, with their pitch being that cutting tax rates and streamlining the tax code will boost economic growth and provide an income boost for households across the spectrum. Many finance experts, however, say the bill carries outsize benefits for business owners and the rich – and much less that looks constructive for average Americans or the overall economy.
“This is really tiny tinkering for individuals, [while] on the business side this is a major reduction of business taxes,” says Richard Kaplan, a tax policy expert at the University of Illinois, referring to the House and Senate plans. “That seems to be the real focus.”
It’s not that Republicans are without arguments in their quiver. They really have tried to craft a plan in which most Americans, not just the rich, see their tax burden decline. And their assumption may be that those tax cuts would prove popular enough that, ultimately, Congress would keep them in place beyond 2025.
Skewed toward the rich?
On the corporate side of the equation, many economists support the idea of trying to lower business tax rates, and modernizing the corporate tax code, to help America in the global competition for high-end jobs.
And, on Obamacare, the bill would leave most of the Affordable Care Act untouched. Republicans say the individual mandate is unpopular, and that the solution on health care isn’t to force people to buy a product they don’t want or can’t afford. “Just to maintain some perspective, nothing in our bill would keep eligible individuals from receiving premium tax credits to pay for coverage. Nothing would require those who are eligible for Medicaid to opt out of receiving free health care,” said Sen. Orrin Hatch (R) of Utah, chairman of the Senate Finance Committee, in remarks about the latest version of the bill.
To skeptics, though, the GOP effort looks skewed toward favoring the rich – and now toward undercutting Obamacare.
The measure that House Republicans are aiming to vote on Thursday, for example, would bestow most of its largesse (for individual taxpayers) on the top 20 percent of earners. They’d reap more than half the tax-cut gains in 2018 and three-fourths of the gains by 2027, according to analysis by the Tax Policy Center in Washington. The top 1 percent of earners alone would reap nearly half the gains in 2027, the study found.
It's true that those high-earning taxpayers are the same people who currently pay a disproportionate share of federal taxes. But at a time of chronic federal deficits, many economists are skeptical that cutting those taxes will generate much in the way of new economic growth. And in polls, Americans widely say they don’t want more tax cuts for the rich.
Americans also say they don’t want tax cuts for big business – yet that’s another central element of the House and Senate tax plans.
Provisions that would help corporations and the rich extend beyond rate cuts. Examples include ending the estate tax (or applying it to fewer estates in the Senate version) and preserving the preferential tax rate given to capital gains and hedge fund “carried interest.”
'Get it done'
For Republican lawmakers, the plan reflects what GOP voters and campaign funders are asking for.
"My donors are basically saying, 'Get it done or don’t ever call me again,' " Rep. Chris Collins (R) of New York said recently of the tax bill.
“Class warfare is the word for this,” says Daniel Shaviro, a New York University tax law expert. As he sees it, the House and Senate plans are oriented especially toward certain favored taxpayers, including notably those who have businesses that file taxes as “pass-through” entities under the individual side of the code.
The GOP calculations are also about process. By Senate rules, the tax measure can’t be passed by simple majority if it adds to deficits after 10 years. And Republicans control the Senate by only a slim margin: They can lose two votes from among their own caucus – but no more – and still rely on Vice President Mike Pence to break a tie.
Repealing the Obamacare mandate would officially save about $300 billion for the US Treasury over 10 years. (The Treasury would lose tax-penalty payments, but that would be more than offset by savings as fewer people tap Obamacare subsidies or enroll in Medicaid due to the mandate.)
The extra money from Obamacare allows the newest Senate plan to sweeten the pot of tax breaks and helps the math of making corporate tax cuts permanent beyond 2027.
And as for the individual-taxpayer rate cuts, the idea of passing temporary ones with the hope they’ll become permanent isn’t new. It happened under President George W. Bush. And the gambit largely succeeded when President Barack Obama kept reduced tax rates in place for all but the highest earners.
The Obamacare twist
But fiscal watchdogs say that doesn't make for sound budget planning.
And Senate minority leader Chuck Schumer of New York signaled the pressure Republicans now face to show how their plan would help average Americans. "I say to my colleagues, particularly the deficit hawks, you can't have it both ways. You cannot say we’re going to protect the middle class after 2025, and we’re going to reduce the deficit," he said on the Senate floor Wednesday. "This bill is a deficit budget buster."
Senator Schumer also cited Congressional Budget Office estimates to question the idea of repealing the Obamacare mandate: "So we’re kicking 13 million people off health insurance to give tax cuts to the wealthy. Also, according to CBO, it would lead to a 10 percent increase in premiums; each year they’d be 10 percent higher than they otherwise would be."
In fact, the idea of repealing the mandate was at the core of legislation – a so-called skinny repeal of Obamacare – that narrowly failed to pass the Senate earlier this year.
So, after Democrats just won a Virginia governor's race where health care played a major role, it remains to be seen if the Obamacare provision will remain in the GOP bill.
One sign of the tests that remain: Sen. Ron Johnson of Wisconsin (R) came out against the Senate bill Wednesday, arguing it favored corporations too much over pass-through entities. Tax breaks for the latter would expire under the Senate plan.
Republicans know the political consequences are big if they fail to pass a tax bill at all. But that doesn't mean 50 votes are sure to materialize.