The essential gamble of Republican plans to overhaul the tax code is now becoming clear: Big businesses get a large, permanent tax cut, while American families receive only temporary tax relief that expires as soon as 2023 in the House bill and 2026 in the Senate bill.
In the House bill, the tax increase would mostly hit moderate and middle-income families because a credit designed to help them expires after five years. But in the Senate plan, released late Tuesday, virtually all Americans would face higher tax rates because the individual income rate cuts go away entirely in 2026. The tax cuts for corporations do not expire.
Public opinion polls already show that many Americans believe the tax bills are designed to help the rich, not the middle class. In a Quinnipiac poll released Wednesday, just 16 percent think the plan will reduce their personal taxes, and 61 percent think the wealthy will benefit the most, similar results to many other recent polls about taxes. On top of that, Democrats are trying to hammer the GOP for what they say are disproportionate benefits for businesses and the wealthy.
Every tax bill requires difficult trade-offs. The centerpiece of President Trump and congressional Republicans' tax plan is lowering the corporate rate from 35 percent to 20 percent, which they say will lead to faster growth and, as a result, more jobs. But that has to be paid for or it would add trillions of dollars to the U.S. debt, a burden on future generations that economists say would slow growth down the road.
“We cannot get a truly healthy American economy — 3 percent sustained growth — without tax reform,” said Mick Mulvaney, President Trump's budget director.
To make the finances work, the Senate plan also includes the repeal of the individual mandate under the Affordable Care Act, a change that saves the government money but would likely lead to 13 million Americans becoming uninsured, according to estimates from the nonpartisan Congressional Budget Office.
Republicans have said that they expect Congress in the future to extend these temporary tax cuts for individuals and families, but that is not a given. America's fiscal situation could look even worse than it does today, putting more pressure on Congress to increase revenue. Even under current law, the deficit is expected to grow to $1.5 trillion by 2027 from $693 billion today, according to the CBO.
Worth noting that it would be better if Congress did not enact temporary tax policies, and instead made hard choices about how to offset the long-run cost of permanent tax cuts.
— Scott Greenberg (@ScottElliotG) November 15, 2017
Republicans have been carefully crafting their tax plan to limit the impact on the deficit. They face two basic constraints. The first is that the House and Senate have only authorized $1.5 trillion in additional borrowing to finance tax cuts over the next 10 years.
But Senate rules don't authorize legislation that adds to the deficit after 10 years without 60 votes, and no Democrats are expected to vote for the tax overhaul. Making the individual tax cuts temporary gets Republicans a large way toward this goal.
By allowing the tax cuts to individuals and families to expire at the end of 2025, the GOP plan shaves roughly $800 billion off the cost of the tax cut package over 10 years, according to projects by the Joint Committee on Taxation.
Republicans may be counting on a future Congress renewing the tax cuts in 2025 or sooner. That's what Congress did, partially at least, in 2010 and 2012, when the George W. Bush tax cuts, passed under a similar mechanism, were set to expire. If they did renew them, it could add another $800 billion to the federal debt.
Democrats and those concerned about America's $20 trillion debt say it's disingenuous for Republicans to make policy this way.
“Republicans have put themselves between a rock and a hard place: dramatic tax increases on the middle class or a huge hole in the deficit,” said Senate Minority Leader Charles E. Schumer. “Either tens of millions of taxpayers will pay significantly more the longer this plan is in effect, or a future Congress will extend the tax breaks, making the deficit hole they create massively deeper.”
If the tax cuts do expire, many Americans might find themselves worse off than today. The rates would return to today's levels, and another provision — a less generous formula for calculating inflation — will remain as part of the law. That means people will enter higher-tax brackets faster.
According to initial analysis by Ernie Tedeschi, an economist at research firm Evercore ISI and a former Obama Treasury Department official, about 57 percent of Americans would be worse off 2027 under this revised Senate bill than they would have been under the original version. His calculations found that close to 80 percent would be worse off who earn $50,000 to $75,000.
As a result, about 57% of all filers are worse off in 2027 under the modification versus the original Senate TCJA, as written. In some income groups, like the $50K-$75K band, it's close to 80%. /7 pic.twitter.com/NfRuZIZp7N
— Ernie Tedeschi (@ernietedeschi) November 15, 2017
Experts across the political spectrum agree that the way America taxes companies needs a substantial change with lower rates for U.S. corporations to be more competitive against foreign firms, but whether the GOP plan needs to cut rates from 35 percent to as low as 20 percent is an intense debate. Republican Senator Susan Collins of Maine suggested a cut to 21 percent might make more sense and allow more middle-class tax relief.
The average effective tax rate that S & P 500 companies, America's largest publicly traded firms, pay is just over 25 percent, according to S & P Global.
It's a tricky political calculus for Republicans. They promised higher growth — aiming for at least 3 percent growth versus the roughly 2 percent the nation saw under President Obama. But they have to sell a skeptical public that tax cuts for corporations will help the middle class.
"I don't think it's an optics issue. I think again it's just critical that when we go from a worldwide system to a territorial system, it's critical that it's permanent," said Treasury Secretary Steve Mnuchin. "I think people understand that we'll fix the personal side."
In 1986, the last substantial overhaul of the U.S. tax code under President Ronald Reagan, Congress forced some businesses to pay more to fund a tax cut for individuals and families. In 2017, the reverse is happening: Individuals are being asked to potentially sacrifice so corporations can get a better deal.
Damian Paletta contributed from Washington D.C.