The House and the Senate passed separate versions of tax reform legislation. A Conference Committee follows and then, finally, votes in both houses. Here are some things to consider when evaluating the developing legislation:
My preliminary “assumptions and presumptions:”
n If you want less of something, tax it more. If you want more of something, tax it less.
n Tax reductions initially reduce revenues, but are ultimately expansionary.
n We must decide if we want our tax system to focus on social engineering or just raise revenue.
n It’s inevitable tax reform will have both winners and losers.
n Most middle class taxpayers would receive real tax relief from the proposal, largely through lower rates and doubling the standard deduction.
n This proposal gives the middle class larger proportionate tax relief than the top earners.
n The highest earners, while receiving proportionately less relief, will as a group receive more money.
n It’s a reasonable expectation economic expansion will be large enough to make up for initial loss of revenue — i.e. not adding to debt in the long term.
Democrats and Republicans present contradictory predictions regarding this legislation’s impact on the national debt. “Scoring” is the legislative term for measuring economic impact. Confusion arises because Democrats use a “static” scoring process while the Republicans use a “dynamic” method.
Dynamic scoring takes into account the comprehensive impact on different parts of the economy. Using dynamic scoring, Republicans are attempting to reflect the full expansionary impact of tax cuts and other changes.
Democrats get the wrong result by ignoring very real economic impacts, while Republican predictions are subject to error because of the difficulty identifying proper assumptions.
Lower corporate taxes would encourage significant repatriation (bringing back into the U.S.) of foreign earnings. Repatriation of foreign earnings, possibly trillions of dollars, could have transformative expansionary impact.
The top 25 percent of earners pay about 87 percent of federal taxes — a huge majority. The middle 50 percent (middle class) pay only about 13 percent — a relatively minor portion. Almost 50 percent of Americans pay no federal income taxes.
The middle class can be treated favorably by giving it proportionately more relief than the highest earning individuals, and there can still be meaningful expansion. However, insisting the middle class receive the bulk of dollars precludes the possibility of meaningful economic expansion. The middle class doesn’t currently pay enough taxes to get that done.
State taxes are deductible by individuals on their federal returns. Most Republicans claim federal taxpayers are unfairly subsidizing high-tax states.
Democrats, and some Republicans from high-tax states, argue their states aren’t being subsidized as long as they otherwise pay more taxes than are received back in federal programs.
Federal tax law shouldn’t affect state tax policy by providing incentives to raise taxes. State spending and taxing decisions should stand on their own merits. If there are fairness concerns, they should be dealt with in other ways.
The Affordable Care Act individual mandate was ill-conceived. Obamacare left tens of millions without insurance and millions chose to pay a penalty rather than buy insurance.
Health care should be available to everyone, but there are better ways to get more people insured with the coverage they desire. Even the CBO agrees over the next 10 years, eliminating the mandate will increase revenue by more than $300 billion.
Now, we should insist our legislators deliver effective health care legislation.
All these things deserve consideration when deciding “yea or nay” on tax reform proposals.