Northwest Arkansas Democrat-Gazette
Senator goes back on his tax assertion
Middle-class rise now said possible
WASHINGTON — Mitch McConnell, the Senate majority leader, acknowledged Friday that the Republican tax plan might result in a tax increase for some working Americans under the Senate tax bill, saying he “misspoke” days earlier when he said that “nobody in the middle class is going to get a tax increase” under the Senate plan.
“I misspoke on that,” McConnell, R-Ky., said in an interview Friday. “You can’t guarantee that absolutely no one sees a tax increase, but what we are doing is targeting levels of income and looking at the average in those levels, and the average will be tax relief for the average taxpayer in each of those segments.”
The Senate bill unveiled Thursday would raise taxes on millions of middle-class families, according to a preliminary New York Times analysis. The plan would also disproportionately benefit high earners and corporations. Still, middle-class earners would fare better under the Senate proposal
than its counterpart in the House, the analysis found.
The Senate Finance Committee’s bill would, on average, cut taxes for people at every income level. But, as McConnell alluded to in his remarks, those benefits would vary widely within income brackets, depending on the specific circumstances of individuals and households, and many would pay more than under existing rules.
Republican lawmakers have been in a dash to devise and pass a tax overhaul that would mark their most significant achievement since taking control of Congress. President Donald Trump and Republican leaders have outlined two main objectives for the rewrite: cutting taxes for American businesses and for the middle class. The legislation reduces tax rates on individuals and businesses, while eliminating some tax breaks to make up for lost revenue. It is meant to accelerate economic growth and increase wages for workers.
The Times analysis, using the open-source software TaxBrain, found that roughly one-quarter of families in the middle class would see their taxes increase in 2018, by about $1,000 on average. By 2026, the share seeing an increase would rise slightly, to about one-third, and the average increase would rise to about $1,600. For the majority of middle-class families that receive a tax cut, the average savings would be about $1,300 in 2018 and $1,700 in 2026.
The Times analysis defines the middle class broadly as those earning between twothirds and twice the median household income, or about $50,000 to $160,000 per year for a family of three. To focus on families, the analysis excluded individual filers and households headed by people 65 or older and is adjusted for the size of each household.
Both the House and Senate bills slash the tax rate for corporations to 20 percent from the current 35 percent, but the Senate’s measure delays the rate cut for a year.
The delay is meant to reduce the bill’s cost by $100 billion or so — but it’s opposed by the White House and House Republicans. Wall Street is also opposed. U.S. stock markets sold off Thursday in response to news of the proposed deferral, with industrial and technology stocks leading the decline, before recouping some of the losses by the close of trading.
The House and Senate bills also diverge on the number of personal income tax brackets.
The Senate measure keeps the current number of tax brackets, seven, though it changes the rates to 10, 12, 22.5, 25, 32.5, 35 and 38.5 percent. That last top bracket for the wealthiest earners carries a higher rate of 39.6 percent under current law.
The House bill goes further toward simplifying the tax system. It shrinks the number of brackets from seven to four, with rates of 12, 25, 35 and 39.6 percent.
In another change, the Senate bill would eliminate a taxpayer’s ability to deduct state income taxes and local property taxes. The House, in its measure, compromised on that issue, providing instead a property tax deduction of up to $10,000 to appease GOP lawmakers from New York, New Jersey and California.
On Friday, the independent Tax Foundation released an analysis of the plan’s growth effects. It projected that the Senate bill would increase gross domestic product 3.7 percent over the next decade and raise wages 2.9 percent across the economy.
TEMPORARY OR PERMANENT?
A chief conundrum facing Republican tax writers is that, under Senate rules, the tax cuts would expire in 10 years, when a $1.5 trillion cap on the measure’s cost to the federal deficit ends.
Most economists say temporary tax cuts — those enacted for just 10 years — would swell the national debt while doing little for economic growth. And without faster growth, few individuals would stand to benefit from the pay raises and job gains being promised by Trump and Republican congressional leaders.
“We have identified this consistently as one of the fundamental principles of tax reform,” said Jared Walczak, a senior policy analyst at the conservative Tax Foundation. “Anytime you build in a sunset, you’re encouraging businesses to not make the longterm investments.”
He was referring to sunset clauses, which provide that a measure ceases to have any effect after a specified date.
Businesses that are considering making investments that might span decades, for example, would need to know that the Republicans’ proposed
20 percent corporate tax rate won’t jump back up to the current 35 percent in a few years.
It is a theory rooted in the work of Milton Friedman, the Nobel Prize-winning economist who argued that individuals and businesses make economic decisions based on what they expect their net income to be over the long run. And that expectation depends, in part, on tax rates.
Though Republican leaders accept this theory, they have yet to show that they could make their tax cuts last beyond 2027. Enacting permanent tax cuts that that would raise the deficit after a 10 year-period would need 60 votes in the Senate. So instead, Republicans intend to cut taxes with a simple majority that wouldn’t require Democratic votes.
Within the 10-year period, its budget would allow the Senate to add up to $1.5 trillion to the national debt. Beyond 10 years, they couldn’t add any debt. So the tax cuts would expire if not paid for.
Temporary tax cuts, Republican leaders have conceded, wouldn’t achieve the key economic benefits that Trump has said would flow from their bill: sustained annual economic growth above 3 percent and yearly income gains averaging $4,000 per household.
“These reforms — these tax cuts — they need to be permanent,” House Speaker Paul Ryan said in a speech over the summer. “Every expert agrees that temporary reforms will only have a negligible impact on wages and economic growth. Businesses need to have confidence that we will not pull the rug out from under them.”
But most economists say the tax cuts wouldn’t pay for themselves. So making them permanent would entail further costs. And a steady shortfall in tax revenue could force deep spending cuts to many popular programs involving college, housing or medical aid, among other areas. Or it could require tax increases, or the debt could grow and potentially send interest rates up, thereby making it costlier for people to borrow to buy a home or car.
“We should have stability in our tax code, and this introduces instability in multiple ways,” said Jason Furman, a professor at Harvard University and formerly the top economist for President Barack Obama.
The potential consequences of the Senate plan released Thursday were still being calculated. But if the tax cuts in the House plan were made permanent, the national debt would surge by at least $6.3 trillion through 2040, according to an analysis by the Penn Wharton Budget Model.
What lawmakers may or may not do to preserve the tax cuts is one of the unsettled questions going into the Senate Finance Committee’s work of the proposal next week.
“We are still working
through some details on that,” Sen. Pat Toomey, R-Pa., told reporters Thursday.
To confront the deficit issue, Republican tax writers were employing accounting gimmicks to pare tax cuts that appear larger. For example, the House tax plan phases out an enhanced child tax credit by 2023.