They never seem to learn - II
Yet getting back to the concerns over SALT payment deductions, Representative Issa summed up a key tenet of the objections to that as part of his overall concerns. This is that the same U.S. taxpayer income should not be taxed twice. So maybe the fact that a corporation pays taxes on its profits and then the investors are taxed on dividends is at least passingly alright.
Yet the idea that the same individual income that has paid state and local taxes should be taxed again at the federal level is conceptually an anathema to even fiscal conservatives who would like to have more money in the federal coffers. This was a key element in getting the original U.S. Revenue Act of 1913 passed into law, and the concept had been around since various failed federal income tax efforts going back to the Civil War.
The fact is that Republicans are trying to portray the local taxes in high tax states like California, New York, New Jersey (all Democratic strongholds) and others as an unfair additional burden on their taxpayers. They will get no argument from any quarter on that.
Yet to try and force their reduction or elimination by eliminating their deductibility from federally taxed income is a specious approach at best. Even the Republican claims that they are dropping other high-earner taxes (like the Alternative Minimum Tax) ring hollow where the net tax bill is likely to rise rather than fall. And the Republican legislators who are against this know it is also a political move (against heavily Democratic states) that may well be political suicide for those of them who represent those states.
They never seem to learn - III
Then there were the recent Republican House and Senate attempts to square the fiscal deficit circle by suggesting a ‘phase-in’ for the lower corporate tax rates. This is a clear example of not having bothered to study the history of these things. The suggestion of a five year phase-in was massively shot down in the House by the backers of many representatives as counterproductive to stimulating the economy and job creation.
As mentioned above, this was a major mistake on the 1981 Reagan tax reforms. The staging of the tax cuts without offsetting savings from closure of loopholes in 1981 along with delays in investment due to the second (more significant) phase of tax cuts not commencing until mid-1982 caused the second ‘dip’ of the 1978-1981 ‘double-dip’ recession.
And in spite of that history and the massive reaction against the House plan to pursue a five year phase-in for the corporate tax reduction, what did we (temporarily) hear from the Senate this week? The suggestion that they might consider a two-year phase-in. Just breathtaking in its lack of understanding of how businesses view these things. Why would any business massively accelerate their investment and hiring (even assuming the tax savings will indeed go for those purposes) in 2018 if they know the real benefits are not available until 2019?
Yet as was also the case to a goodly degree in the health insurance reform effort, the real problem here is the hurdles that have been put in front of Congress by candidate Donald Trump’s extemporaneous utterances on key topics. One of the most telling from a fiscal standpoint is his promise to not touch either Social Security retirement benefits or Medicare coverage for the elderly.
These have been acknowledged as two of the most major federal outlays, and also in dire need of reform. Rather than the “shove granny in the wheelchair off the cliff” scare mongering the Democrats did in previous elections, there are well-informed opinions on both sides regarding reducing benefits for younger workers that make sense. That would also allow for some further fiscal calculations that impact the next 10 year outlook.
However, with the need to rebuild U.S. military preparedness after the Obama administration ignored many maintenance and modernization needs (and that’s in spite of how much they spent), there is no appetite for cutting that major federal government expenditure. So all of these folks who are trying to drop the corporate taxation rate so sharply are running up against the self-imposed Republican restriction of no more than an additional $1.5 trillion of U.S. debt over the next ten years.
The bottom line
And specifically that ‘bottom line’ in the fiscal impact of the tax reform creates another hurdle: the Republican fiscal hawks are not at all happy about even that relatively modest (even if only when compared to the last two administrations) additional debt. Some of them have already indicated they will vote against any bill that incurs even that much additional debt over the next decade.
As we have noted since the administration and Republican Congress’ focus moved on (after failed health insurance reform) with much fanfare to the ‘simpler’ tax reform, the same Republican Party divisions that scuppered the health insurance reform effort still afflict the party on tax reform.
And the Democrats are already ramping up the criticism of a tax bill that does indeed provide far more benefit to the corporations and top earners, and projects a ‘trickle down’ benefit to the middle and lower classes. This is crucial for Republican legislators, especially in high SALT heavily Democratic states.
They will need to consider whether it is indeed healthy to vote for the tax reform legislation in its current form? Or is it political suicide? That is especially true for the House, where all members must be reelected every two years.