Tax Reform Debate Taxing Republicans' Negotiating Skills

Fiscal responsibility takes a backseat to cutting taxes.

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KEVIN DIETSCH/UPI/Newscom

The good news is that there's a debate in Washington about how to make the tax code less destructive. The bad news is that lawmakers will be able to achieve much less than they otherwise could because of bad policy priorities.

It's obvious that Congress and the White House are unwilling to cut or even restrain spending to pay for tax reform. Indeed, the budget resolution that passed the Senate calls for a tax reform bill that would increase the deficit by $1.5 trillion over 10 years with no savings worth mentioning. As a result, there's little leeway to mix tax cuts with tax reform. Moreover, failing to restrain spending today while cutting taxes means that taxes will have to go up in the future to pay for larger deficits.

Sens. Bob Corker, R-Tenn., and Rand Paul, R-Ky., sounded the alarm and were loudly criticized. In contrast, the House budget called for tax cuts to be paid for with spending cuts, asking for some $200 billion in savings over 10 years. Under pressure to pass tax reform, however, the House is ready to throw away all pretenses of fiscal responsibility and adopt the Senate bill.

Making matters worse, Republicans insist that they want to give a real tax cut to the middle class. Though politically expedient, it wouldn't be wise. There's very little economic growth to be expected from reducing the marginal tax rates on middle-income earners. Additionally, there isn't actually much in taxes that could be cut from those in the middle class because they barely shoulder any of the income tax burden in the first place. For them to pay even less than they already do, many would have to pay no income taxes at all through a larger standard deduction and child tax credit. This would make tax reform more expensive and make the fight against big government more difficult. Without any tax skin in the game, Americans don't call for smaller government. And with no spending cuts and fewer taxpayers, who would pay the government's bills? There simply aren't enough rich people for that.

These policy decisions have consequences. The main one is that lawmakers are left scrambling to find more revenue to pay for a few tax reform ideas. And though there are a lot of tax exemptions they could cut or limit to pay for tax reform, some in the White House have set their sights on counterproductive targets.

First, Republicans again floated the idea of reducing the 401(k) tax deduction from $18,500 to $2,400. This is a terrible idea. 401(k) plans are a central part of retirement security for millions of Americans. As of now, 75 percent put more than $2,400 into their 401(k) accounts during any given year, meaning this change would incentivize many to save less. Thank goodness, President Donald Trump tweeted, as he did the first time this idea surfaced, that no change should be made to this deduction. Unfortunately, House Ways and Means Committee Chairman Kevin Brady is still considering the idea.

Second, the tax reform framework originally called for reducing the number of tax brackets we have, from seven to three. However, the administration backpedaled and announced no change to the top marginal rate of millionaires. So that's four rates, including 39.4 percent for millionaires. I get that they want to kill two birds with one stone—to appear as if they aren't cutting taxes for the rich while raising up to $400 billion over 10 years.

It's true that little economic growth could be expected from lowering the top rate from 39 to 35 percent, but what they're doing is politically sloppy and potentially dangerous. Higher-income earners are the most responsive to changes in the tax rates. So though the current rate isn't terrible, it could be once the Democrats are in power or revenue-hungry Republicans prevail. Research has also shown that higher tax rates greatly influence the decisions made by future higher-income earners. In other words, the consequences of this policy decision might be minor today but ultimately counterproductive.

There are many more bad ideas floating around the Capitol and the White House, such as a proposal to give up on cutting the state and local tax deduction or to agree to a minimum tax hike (which no one even asked for in the context of tax reform) in exchange for business tax cuts (which aren't at risk).

Republicans are known for being bad negotiators on top of being fiscally irresponsible. This tax debate may reinforce these beliefs.

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  1. I almost wish someone would just say, “We’re going to raise taxes to cover costs. If we can’t cut them we have to pay, so be it.” It would be brave, and if they aren’t even going to pretend to cut spending, and if America believes cutting spending to be impossible, than I accept that we should be taxed to pay for it.

    1. Then elect Democrats. They tax and spend. Republicans cut taxes, then borrow to pay for the cuts and spend. Of course, they never cut spending

      1. Democrats spend and tax.

        Both parties are guilty of not cutting government spending substantially and raising taxes plus borrowing even more.

        Democrats just are fine with spending until the USA goes broke. RINOs are scared to cut spending for some reason, only raise taxes in sneaky ways that are less obvious, and okay more debt for some reason.

        1. Tax and spend, spend and tax, same thing.

          But, Republicans are special. They cut taxes, borrow more, and then spend.

          1. Don’t you worry, Paint Thinner.
            Between the democrats wanting to raise and taxes and the republicans wanting to borrow more money, the USA will soon end up broke the old USSR.
            You gotta have faith in the system.

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      2. Democrats do the same basic thing, tax one group and spend on benefits to another. Rich versus poor rather than between generations. Again a moral hazard. worse in some ways since it punishes success.

        1. Try reading next time. I said Democrats tax and spend, didn’t I? Republicans don’t tax, they cut taxes, borrow more, and spend anyway.

          One of the two is more unconscionable for fiscal conservatives and those worried about the grandchildren

          1. I read it. Maybe you need to reread mine now with the understanding that I read yours.

            Republicans actually do tax, check your paystub. It just is less to the current generation leaving it to be paid off later.

            And you provided no support for your moral assertion. Why is it at all better to leave debt to the future versus making one tax bracket carry another? Both fuck things up. The class warfare approach has its own problems. At least with debt they can inflate it down some and theoretically even default and just not pay.

    2. A Constitutional amendment that requires a balanced budget for Congressmen to get paid would fix a lot of that.

      1. Or just mandate that Congressional pensions are paid out of the surplus, if any.

    3. This.

      Balance the budget and raise taxes accordingly. This is the only way people will finally wake up and demand an end to this shit.

      1. As long as we all pay a flat rate, fine. Or I’d be OK with a top rate in the middle of the income range and falling off on either side. The problem is that the middle class needs to be sent the bill for their goodies. They’ve been able to pass it off on others for decades.

    4. But we won’t tax you more, of course, dear voter. No, we’ll tax only people who are richer than you.

  2. In theory I’m in favor of getting the government out of the business of incentivizing retirement savings.

    However the way they’re (supposedly) doing it is pretty retarded. Bet the financial advisor community would love it though. Shitloads of confused idiots trying to find someone to tell them what a Roth IRA is.

    1. In theory, I’m in favor of getting the government out of the business of aiding hurricane-affected states, earthquake-affected states, fire-affected states.

      In practice too, as long as we start with a red state first.

      1. I dunno. Some things are sufficiently rare and catastrophic that it doesn’t make individual sense to insure against it. But it does make economic sense to have some sort of reconstruction support. This would then require some sort of federal building standards in order to be eligible and then libertarians have a sad.

        1. If something is not worth insuring, and you don’t have the wherewithal to absorb the cost when things go wrong, then don’t engage in the risky behavior to begin with.

    2. Incentivizing by not taxing the savings, and taxing it more on the back end?

      Why not have no taxes at all on savings, no taxes at all on interest income or capital gains, no taxes when you withdraw the money, no annual limits on savings, and no mandatory withdrawals?

      Sound too good to be true? That’s the savings incentives we had before the income tax was enacted.

    3. Then you should be more worried about entitlements which everyone views as “savings.” If anything 401ks should be mandatory and FICA should be voluntary (or we could just eliminate income taxes and go to a more efficient and equitable consumption tax).

  3. failing to restrain spending today while cutting taxes means that taxes will have to go up in the future to pay for larger deficits.

    Not if the government defaults on its debts. Which it should, since it’s planning to pay them back with stolen money. Any lenders knowing that are complicit in the crime.

    1. This is why I don’t care about deficits anymore. Spending will never be curtailed. Default is inevitable. Gen Xers in their prime earning years shouldn’t have to underwrite pushing that default off a few years for the benefit of millenials.

      The systematic bias towards never cutting taxes because “the 1%” needs to be addressed. The best thing the GOP could do would be to eliminate the payroll tax and then change all the tax brackets to recapture most of that income within the income tax structure. Put everyone in the same boat. Get rid of the moral hazard present in the fact that any tax cut will benefit only the 50% of the country that pays meaningful amounts of income tax.

      In the meantime, making the corporate rate competitive, doing a repatriation discount, and doing pass through entity reform for real businesses will all be massively helpful. The Obamacare investment income tax should be eliminated. Individual rates can come down a bit, too — kind of have to in order to sell it.

      1. Unless you advocate for increasing the tax rate specifically on the middle income quintiles, the payroll tax is the only semi-fair/responsible tax we have at the federal level.

      2. I don’t care about the deficit anymore either. But the government will never default. The Fed can print money and the government will inflate its way out of debt. That is how we all will end up “paying” back the debt, since there is no free lunch.

        I’m for lower taxes and lower spending. If I can’t get both, I’ll take either one.

        1. “Deficits do not matter”

          Hey, that is back in vogue

          1. Deficits matter, but I’m not willing to have bigger government faster (i.e. taxes) in order to avoid them.

      3. Put everyone in the same boat.

        You CAN’T put everyone in the same boat because everyone is in different boats to begin with.

        People at the bottom can only pay consumption/sales taxes
        People in the middle or in their accumulation years can only pay income taxes
        People at the top (who have already accumulated) can avoid EVERYTHING except an annual wealth tax.

        Until we stop looking at everything through the income tax hammer, there can be no such thing as a fair tax system. Switzerland does it right at their federal level:
        Consumption tax (3% on food/necessities, 8% else)
        Income tax – flat 12% on everything over 30k or so
        Annual wealth tax – 50 basis points on everything over 500k or so

        That gathers 11% or so of GDP at federal level – doesn’t create disincentives or poverty traps – and leaves plenty for cantons/municipalities to do at the local levels. And unlike us, they also have a hard public debt cap – currently 33% of GDP – down from 50% in 1998. The last time our federal debt was that low was the late 70’s – the time before that was the 1920’s and then before WW1.

  4. Thank goodness, President Donald Trump tweeted

    Has this ever been said before? By anyone?

  5. It’s obvious that Congress and the White House are unwilling to cut or even restrain spending to pay for tax reform.

    Quote from 1932?

  6. As a child growing up in the awful 1970s, I dreamed of an age where taxes could be cut, spending could be slashed, inflation would be essentially zero, and the debt having some semblance of getting paid back. As I near my dotage I am starting to realize that this dream, like my other dream of a decent Hobbit movie getting made, will never come true.

    Republicans simply do not want to cut spending. They do not. Their posturing as fiscally responsible adults has been a cruel lie. They a tax cut shell game to get your vote, but have no intentions of rolling back any spending whatsoever.

  7. “increase the deficit by $1.5 trillion over 10 years with no savings worth mentioning.”

    Is that supposed to be “debt” instead of “deficit”? There’s still a couple ways left it could be interpreted. What are the deficits projected to be? 150B?

    1. The debt will go to $26 T in 10 years. The deficits over those 10 will amount to $1.5 T (additional)

  8. RE: Tax Reform Debate Taxing Republicans’ Negotiating Skills
    Fiscal responsibility takes a backseat to cutting taxes.

    Cutting taxes is always a good idea, but for right now, cutting spending must take precedence if we are to avoid an economic collapse.

  9. Grover Norquist said yesterday that tax cuts can’t possibly increase the deficit or the national debt, only spending can. He also said any that the deficit can be a shiny thing that people use to distract from tax cuts. https://www.youtube.com/watch?v=7yjVR_FxVd8

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