Many of the ideas in the Republican tax proposal unveiled Thursday have found bipartisan support in the past and endorsements from economists who see a way to improve the U.S. economy. That includes plans to make the corporate rate more competitive, simplify personal taxes, curb several tax breaks of dubious value and provide more assistance to working families.
The controversy is over who will gain the most: the rich and corporations. The GOP bill would cut the corporate rate well below previous attempts, eliminate a tax on inheritance that affects only people with many millions of dollars, and take other actions that do not provide direct benefits to most Americans.
And the proposal represents a significant break with previous tax-rewrite discussions. Republicans have in the past focused on the importance of not adding to the nation’s debt through tax reform. Democrats have favored overhauling the tax code to raise revenue to pay for needed improvements in America’s infrastructure or to provide services for the middle class and poor.
But in this case, Congress’s Joint Committee on Taxation estimated Thursday that the tax plan would be paid for by $1.5 trillion in additional borrowing over the next decade. Much of that reflects tax reductions benefiting the wealthy and companies.
Budget experts say the GOP’s decision jeopardizes what could otherwise be one of the great legacies of Republican-controlled government: fixing the U.S. tax code and improving the economy.
“I do think this is a sensible framework. It emphasizes the need for corporate reforms and how our tax system works,” said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. “But this is still a deficit-exploding tax cut at a time when the deficit is at near-record levels.”
At heart, the GOP plan cuts taxes on large businesses and pays for those reductions by raising taxes on individuals, the exact opposite of what was done in the 1986 Tax Reform Act under President Ronald Reagan. Republicans have long held up the 1986 effort — which did not add to the deficit — as a model.
The cut in corporate taxes will deplete the Treasury by nearly $847 billion over the next decade, according to the Joint Committee on Taxation. The elimination of the estate tax — which is paid only by the small portion of Americans with estates worth more than $5.49 million — and related measures will cost $172 billion. The creation of a 25 percent rate for people who pay corporate taxes through the individual code — a popular way for the wealthy to reduce their tax obligation — will cost $448 billion.
The GOP offsets some of those costs by raising taxes on individual earners who use tax breaks such as the mortgage interest deduction and the state and local tax deduction. But critics say the GOP could have chosen to overhaul the tax code in a way that concentrated benefits on middle- and working-class Americans — and chose not to.
“You can very much achieve tax reform without giving higher-income earners a tax cut,” said Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities.
President Trump and top Republican leaders argue that the middle class and working poor will benefit from lower taxes of big businesses because corporations will use the money they save on taxes to hire more workers and pay existing employees higher wages.
“We will be creating jobs like you have rarely seen,” Trump said in the Oval Office, as he kissed a postcard of the House GOP tax plan, hailing it as a “great Christmas present.”
Invariably, overhauling the tax code creates winners and losers, and the writers of the legislation argued that they were making progress toward a top policy goal.
“None of [the critics] thought we would even get this far with tax reform, and they’re wrong,” Rep. Kevin Brady (R-Tex.), the chief author of the tax bill, said Thursday.
The plan contains several policies that have attracted bipartisan support before. The current corporate tax rate of 35 percent is far higher than those of most other wealthy countries, leading many companies to say they are at a disadvantage and must spend a disproportionate amount of time and resources on complying with tax rules. In his last year in office, President Barack Obama proposed lowering it to 28 percent.
The GOP has pursued a much lower rate, proposing on Thursday a 20 percent rate. Earlier this year, the GOP planned to offset the deep cut in the corporate tax rate by imposing a substantial new tax on imports, a move that was killed by retailers and other industries. The bill unveiled Thursday didn’t have many revenue streams from businesses.
Likewise, many experts agree the tax code contains numerous tax breaks that don’t provide much benefit to the economy. For example, while many existing homeowners may appreciate the mortgage interest deduction, research suggests that it disproportionately benefits higher-income earners and does little to spur home-buying. Democrats have proposed limiting its value before — just as the GOP tax bill on Thursday proposed allowing new home buyers to deduct interest on only $500,000 of mortgage debt rather than the current $1 million threshold.
Only 5 percent of mortgages in the United States are worth more than $500,000, according to the National Low Income Housing Coalition.
The mortgage interest change, among other limits to tax breaks benefiting individual earners, would raise more than $1.25 trillion over the next decade, according to the Joint Committee on Taxation.
Alan Auerbach, professor of economics and law at the University of California at Berkeley and one of the country’s top tax scholars, said some provisions in the plan make a lot of sense. For example, he praised how the GOP proposal would allow companies to deduct the cost of investing in new equipment, which is likely to spur immediate spending in the economy. But he lamented how much the plan adds to the deficit, among other provisions.
The bill “has a pulse,” he said, but he’s “not sure it can be resurrected” into something that is good policy for the United States, especially after so many interests groups and lobbyists pressure Congress for changes in the coming weeks.
Republicans are pushing an aggressive timeline to get the bill to the president’s desk. The idea is to limit lobbying by moving quickly, but many are skeptical it can happen.
“The problem is we’re creating policy in an era of free-lunch economics,” MacGuineas said. “No one seems to acknowledge budget constraints and real choices.”