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Why Republicans shouldn’t be so optimistic their tax bill will be a big win

Rep. Cathy McMorris Rodgers (R-Wash.) hit out at criticisms of the GOP's tax proposal on Dec. 12. (Video: Reuters, Photo: Zach Gibson/Reuters)

Republicans are on the verge of passing a massive tax cut for businesses that is deeply unpopular with the American public. They are doing it with no Democratic votes and at a moment when the U.S. economy looks pretty healthy (typically, tax cuts are most effective when the economy is struggling and the government wants to revive it). A surprising number of chief executives admit their top plan for the extra cash is to pay shareholders more, not grow jobs and wages. Billionaire chief executive Michael Bloomberg went so far as to declare the bill a "trillion-dollar blunder."

So all of this raises the obvious question: Why are Republicans doing this?

'It's the politics, stupid'

Political analysts say it's all about the 2018 midterm elections. President Trump and Republicans swept into office in November 2016 and so far have few major legislative achievements, even though they control the White House and both chambers of Congress for the first time since 2007.

"The American people are just not going to accept the fact that we do not get our job done after we’ve talked about this for years," Rep. Diane Black (R-Tenn.) said Thursday on Fox News. Black is chair of the House Budget Committee and a member of the conference committee that spent the past week hammering out the final tax bill. "We need to get this over the line."

Getting a tax cut done shows the GOP is doing something, particularly on an issue — tax cuts — that has been at the core of Republican orthodoxy since the Reagan era. The surprise victory of Democrat Doug Jones in Alabama also means Republicans would likely have a harder time passing a bill like this next year.

But pursuing legislation that most of the country doesn't like is still very risky. Poll after poll shows only about a third of Americans think it's a good idea. The vast majority feel it's heavily skewed to the rich and big businesses.

Yet Republicans are optimistic. Why?  Perhaps because most Americans are getting a tax cut under this plan, and if growth gets even hotter and unemployment gets even lower by Election Day, voters could reward the GOP, at least in the short term.

GOP mentality: growth conquers all

For Republicans, the fundamental belief driving this tax bill is that it will unleash substantially stronger economic growth that will solve many of America's problems — from debt to inequality. The thinking goes like this: Give corporations a massive tax cut and most Americans a decent-sized cut. Then business leaders and families will turn around and spend that tax savings on buying stuff and hiring more workers. That, in turn, should generate even more economic growth, causing businesses to employ more people and incomes to rise a lot for the first time in decades.

Many GOP lawmakers have made this argument in recent days.

Rep. Darin LaHood (R-Ill.): "This is going to get the economy roaring again."

Trump: "We stand on the verge of a new economics miracle," he said Wednesday, predicting economic growth would jump above 4 percent (it's on track to be 2.5 percent this year).

House Speaker Paul D. Ryan (R-Wis.):  "We know for a fact that the studies show us you lower the corporate tax rate, workers benefit."

Sen. John Thune (R-S.D.): "We didn't have good growth in the last eight years under the Obama administration. We were averaging 1.5 to 2 percent growth ... I can't believe that would be acceptable to people in this country."

Senate Majority Whip John Cornyn (R-Tex.): "I do believe this tax bill will help stimulate economic recovery that will more than offset any deficit."

Republicans are correct that growth since the Great Recession of 2008-2009 has been sluggish. It's been about 2 percent, far lower than America's historic average of about 3.5 percent.

But there are good reasons to doubt GOP optimism that the tax bill will turbocharge the economy (at least beyond 2018 and maybe 2019).

First, the bill is unlikely to generate sustained 3 percent growth, let alone 4 percent. The overwhelming expectation of economists is that there will be a "modest" pick up in growth, but it won't last long given America's aging population. Wall Street bank Goldman Sachs predicts growing soaring to nearly 3 percent for a year or two and then falling back down.

We “note that the effect in 2020 and beyond looks minimal and could actually be slightly negative,” Goldman wrote.

Janet L. Yellen, chair of the Federal Reserve and one of the most respected economists in the world, said this week, "I think my colleagues and I are in line with the general expectation among most economists that the type of tax changes that are likely to be enacted would tend to provide some modest lift to GDP growth in the coming years." Beyond that, she said there is "considerable uncertainty."

The bottom line is that Republicans aren't just projecting 3 percent or better growth for a year or two; they are projecting it will happen every year for the next decade. If it falls short of that, workers are less likely to get higher wages, and the bill won't come close to paying for itself.

Second, it's likely to make inequality worse. Almost everyone agrees that the wealthy will do well from this bill. The tax rate for millionaires drops, there are still loopholes they can use, and they get the ability to pass up to $11 million tax-free to their heirs. The rich also tend to own the most stocks, and shareholders are likely to see a lot of benefits as the market rises and companies fatten their dividends and share buybacks. So the rich will almost certainly get richer from this bill.

Republicans argue most middle-class families will also get sizable benefits. That's true (at least until the tax cuts for individuals expire in 2025), but the middle class and poor are unlikely to see nearly as large of a benefit as the top, which means the gap between the haves and have-nots is likely to grow.

On top of that, Republican leaders say they want to "reform" welfare and entitlement programs such as Social Security and Medicare next year. Scaling back those benefits hits lower-income families and, again, exacerbates the gap between the top and the bottom. There are also concerns that this bill will hurt funding for public schools by making it harder to raise local taxes that pay for public education in America. This, too, could hold back people's ability to better their futures.

Third, it drives up the debt, costing $1 trillion or more. The White House has tried to argue that economic growth will be so large after the tax cut that the tax bill will pay for itself, something the Reagan and Bush tax cuts failed to do. Numerous independent analyses of the plan conclude it would add $500 billion to $2 trillion to the debt.

Congress's official scorekeeper initially said the bill would cost just over $1.4 trillion. Then the scorekeeper went back and calculated what the cost would be after taking into account modest economic growth from the bill. The conclusion? It would add $1 trillion.

Republicans say that's a very conservative estimate and that the impact on the debt is likely to be far smaller. But the bill has been rushed through so fast — in a mere six weeks (including a holiday week for Thanksgiving) — that tax experts and lobbyists say there are a ton of loopholes in the bill that businesses and the wealthy will be able to exploit to pay lower taxes, meaning the U.S. Treasury could end up with less revenue than anticipated.

Thirteen tax experts published a 35-page paper detailing dozens of "glitches" in the bill. On the individual side, the biggest loopholes are ways the wealthy can cast their income as business income to take advantage of the new lower corporate rates. On the corporate side, the bill creates new opportunities for businesses to essentially "hide" income overseas. The goal was to eliminate that, but the experts detail a number of ways that could still happen.

The takeaway:

The United States has, arguably, three fundamental economic problems: sluggish growth, massive inequality and high debt. The GOP tax bill is meant to solve America's growth problem, and Republicans believe faster growth will help improve the other two issues. But many economists (and even many business leaders) say Republicans are exaggerating the growth that will come and they're aren't being realistic that inequality and debt are likely to get uglier.

"The GOP story line is: If we cut taxes, there will be more middle-class jobs and people will get increase in their wages. Everyone knows that story is utter nonsense," said Robert Crandall, the former president and chief executive of American Airlines. "I think a tax cut is absurd."

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