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Coming Down the Home Stretch on Tax Reform

The House and Senate have both passed a bill. Now they have to iron out their differences.

Congress Architect of the Capitol/WikipediaThe House and Senate passed their own versions of a tax reform bill surprisingly fast. But now the hard work starts, as they need to turn those two bills into one. The trick is to produce a bill that can pass both chambers again, meaning a bill that appeases some powerful interest groups while still making the budget math work.

In some respects, this conference process may be easier than we think. Once lawmakers have come this far with such a big bill—when stakes are this high—it's hard to imagine them not doing everything they can to cross the finish line. Helping in the process is the fact that their bills aren't so vastly different in terms of philosophy and provisions that it makes reconciling differences impossible.

For instance, both bills would permanently lower the corporate income tax rate to 20 percent. They would get rid of the state and local tax deduction but retain a $10,000 exception for property taxes and make changes to the mortgage interest deduction. They both would improve investment taxes and allow 529 college savings accounts to apply to some primary and secondary education expenses.

Yet they aren't identical. Some differences are small, such as the date of implementation of the corporate income tax reduction; the House chose 2018, and the Senate bill says 2019. Also, the Senate bill would sunset many of its provisions, including the child tax credit expansion and the reductions in individual rates, and the House bill wouldn't. But most people agree that this is a budget gimmick to make the math work in the Senate and that most of the sunset provisions would be extended when the time comes.

Other differences are big. For instance, both chambers adopted very different treatment of pass-through income (for businesses such as partnerships, sole proprietorships, S corporations and limited liability companies), with the Senate bill making it so generous that it could lead to further problems down the road. Another major difference to overcome has to do with the monstrous alternative minimum tax. Created in 1969 to prevent wealthy taxpayers from using deductions and credits to avoid paying federal income taxes, the AMT has expanded over time to hit middle-income people it was never intended to tax. The House bill would repeal both the corporate and the individual AMT, but the Senate version wouldn't.

It's worth considering some worst- and best-case scenarios resulting from this conference process. Worst-case scenario, the final bill would water down the investment provisions and entirely preserve many tax preferences currently targeted in both bills. It would also preserve the House version's individual rates, including a 12 percent bubble rate for top income earners, which effectively would impose a marginal tax rate of 45.6 percent, as opposed to the current 39.6 percent.

It would expand the child tax credit value beyond the levels passed in the House ($1,600) and the Senate ($2,000). That change would remove a large number of taxpayers from the tax rolls, which would be problematic because Republicans also refuse to cut spending. This also would shift more burden to the top 10 percent (taxpayers making above $138,000), who already pay 70 percent of the total federal income tax. If members of Congress also were to expand the refundable part of the credit, it would dramatically increase government spending, too.

The cherry on a very unsavory tax cake would be if lawmakers adopted the House's tax base erosion provisions, which include an idiotic excise tax that resembles the dreaded border adjustment tax, which was killed in recent months.

To finish on a positive note, allow me to dream a little. My best-case scenario would maintain the permanent 20 percent corporate tax rate. It would also delay the adoption of anti-tax avoidance provisions until lawmakers get to assess the full impact that cutting the corporate tax rate has on avoidance behaviors by companies. Congress would adopt the Senate version of the individual tax rates or even cut the top marginal rate further.

It would get rid of the alternative minimum tax and the state and local tax deduction—including the $10,000 exemption—and it would go ahead with eliminating all the tax preferences to special interests targeted in the House bill. Finally, lawmakers would start working on shrinking the deficit by paying for tax reform with serious spending cuts. Throw in a repeal of the death tax and be done with it.

Now that's a tax reform bill I could cheer, but I don't plan on holding my breath!

Photo Credit: Architect of the Capitol/Wikipedia

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  • Fist of Etiquette||

    But now the hard work starts, as they need to turn those two bills into one.

    Budget reconciliation is how all the big, comprehensive legislation is passed.

  • Tom Bombadil||

    Is 'hard work' a euphemism for 'circle jerk'?

  • Don't look at me.||

    Where do they find the time , what with all the sexual shenanigans?

  • Rich||

    Finally, lawmakers would start working on shrinking the deficit by paying for tax reform with serious spending cuts.

    Hey, how about a tax credit for legislators who implement serious spending cuts?

  • KDN||

    Such a thing would literally cause children to die. Why do you hate children?

  • Rich||

    Hey, how about a tax credit for *dead* children?

  • Mitsima||

    They can already vote, might as well make them a tax shelter.

  • Tom Bombadil||

    It would be a win-win for the pro-choicers.

  • eyeroller||

    I'd like it better if they would repeal the income tax and payroll tax and disband the IRS.

  • Mitsima||

    That's just crazy sexist racists talk which only proves you hate gender-queer disabled immigrant children.

  • Libertarian||

    So, Chelsea Handler tweeted this yesterday:

    Just evacuated my house. It's like Donald Trump is setting the world on fire. Literally and figuratively. Stay safe everyone. Dark times.

  • Rhywun||

    Let me guess: she lives in a natural tinderbox in a near-desert region. Mabye she could do a rain-dance to counteract the force of Trump making her live in Southern California.

  • Mitsima||

    The TDS is strong in my family. My father has it. I have it ... and ... *looks at Chelsea* my sister has it.

  • Tom Bombadil||

    California's decades of shitty water management is Trump's fault. She's such a hero.

  • colorblindkid||

    This is why the "we don't know what's in it!" cries are nonsense. There's still a lengthy process where people will go through and figure shit out before the final bill.

  • Mitsima||

    Which makes the whole process seem a little insane.

    I'd like to buy this car. The engine misfires? Not sure if the brakes work? 'D' & 'R' on the gear selector are reversed? That's alright, it mostly looks like a car; I'll figure out the rest on my way home ...

  • Let freedom ring||

    Maybe I am not a REASONOID.
    Still, its a free country (somewhat) and I want to express my opinion.
    I give libertarian and conservatives an F tax reform reporting and commentary. Congress passes major tax reform only once a generation, the libertarian establishment has failed to identify what real tax reform would be. They are silent about the nature of the income tax and instead indulge in masturbatory left sectarianism and short sighted right opportunism.
    The best reform of the income tax is not a flat tax, a fair tax, or no tax-which is what this magazine limited the libertarian options to. The best reform would be to understand what the income tax is, and to return that taxation to its constitutional and statutory limits. Simply put, the US INDIVIDUAL INCOME TAX is a classical liberal tax on public offices. It is a tax on the exploitation of federal privilege for profit. A tax on government salaries, pensions, agencies, investments, etc. That is the constitutional, and statutory boundaries of the tax. At least two thirds of American workers are not required to pay the tax. It is theft by deception since WWII, and it feeds the welfare/warfare state.
    Shame on all the libertarian/conservative think tanks, political parties, PACS, etc for not researching and explaining the tax to libertarians and proposing the simple solution of enforcing the tax laws as they are actually written.

  • Tom Bombadil||

    "A tax on government salaries, pensions, agencies, investments, etc."

    Government salaries are paid using tax revenues, which are derived by taxing government salaries, which are paid using tax revenues, which are derived by taxing government salaries... ad nauseum.

    Hey everybody, come look at the perpetual motion machine.

  • CE||

    If only you were right.

  • CE||

    Created in 1969 to prevent wealthy taxpayers from using deductions and credits to avoid paying federal income taxes, the AMT has expanded over time to hit middle-income people it was never intended to tax.

    Unless that's exactly how it was intended to work.

  • Believe and Obey||

    This article presumes that there is an actual tax cut on the table. This is nonsense. The deadweight tax loss to the economy is the spending level as the resources must come from somewhere. All of this dampens capital formation and reduces production. I outline this at www.believeandobey.net/single-.....Tax-Reform

  • tzx4||

    A quick cursory internet search turns up Apple Inc having somewhere in the range of 100 to 250 billion dollars in cash reserve. So, any body here care to enlighten me as to why Apple needs a tax cut?

  • Believe and Obey||

    The moral case: it's their money. The practical case: they know how to use it way more effectively than the government.

  • Fairbanks||

    I don't think anyone said they do. But perhaps Apple's shareholders could do with a reduction in the double taxation they incur on Apple's Income. As an aside, do you understand the difference between income and wealth?

  • Mitsima||

    $100-250B in cash pales in comparison to the cumulative wealth Apple's employee's have in liquid assets. Anyone here care to enlighten me as to why working people need a tax cut?

  • Allen Johnson||

    Have troubles with understanding all the political complexities? Read research papers to sort all this information out: https://studentshare.net

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