Blog No. 165 The Republican Tax Bill: The Sausage Examined

The passage of the Republican tax bill was celebrated at the White House with a gaggle of Republican legislators showering lavish praise and gratitude on their Dear Leader. Peggy Noonan aptly described the scene:

Wednesday afternoon’s big White House rally celebrating its passage was embarrassing. All these grown men and women slathering personal, obsequious, over-the-top praise—“exquisite presidential leadership,” “a man of action,” “the president of the United States, whom I love and appreciate so much”—as Donald Trump emceed and called new praisers to the stage. They do this to keep the president happy, feed his needy ego and insist on his competency. It looked less like praise than self-abasement.

Actually, and I’m sorry to say this, the mood reminded me of the tale of Stalin telling some lame joke in a dinner speech. His ministers all laughed as if it were the wittiest thing they ever heard. Then they kept laughing, louder, and wouldn’t stop, because they knew the first one to stop would be noticed by Stalin and would soon be gone. So boy did they laugh.

Anyone who missed the spectacle but is curious, can find it here.  As a caution, however, you may wish to have some Pepto-Bismol not far away.

It remains to be seen whether the tax bill will still be a cause for celebration among Republicans by the time the 2018 elections arrive. By then the bill’s stunning unpopularity with the public may have been somewhat mitigated among taxpayers who have found modest improvements in their withholding statements. Most, however, are likely to recognize that those improvements are temporary and that the benefits of the tax “reform” largely fall on the more affluent. And most will still be waiting for the promised improvement in jobs and wages. Finally, voters who are inclined to worry about the country’s fiscal health will have become increasingly aware of the tax bill’s impact on the deficit. While recent polling indicates that concern over the deficit has lessened somewhat from a previous high, some 54% of Americans continue to believe that it is a very serious problem.

There are many voices on either side of the debate over how the tax bill will affect the economy, and one example is provided by differing perspectives found in the Wall Street Journal. The editorial page of the Journal has been a full-throated cheerleader for the tax bill from the start and a celebratory editorial on December 19 proclaimed that it “offers hope of broader prosperity after a decade of slow growth and rising inequality.” The lengthy editorial did not mention at any point the word “deficit.” Other pages of the Journal, however, expressed a more measured view. In a December 25 column, Gerald F. Seib. Chief of the Journal’s Washington Bureau, observed that Republicans and Democrats alike invoke or ignore the deficit as it suits their broader political purposes. In the case of the tax bill, Seib cited estimates by the Committee for a Responsible Federal Budget:

[The Committee] estimates that these deficit increases will drive the accumulated national debt to 98% of the nation’s annual gross domestic product in the next 10 years. Add on expected health and other tax changes, and the debt the government has piled up may well climb to 99% of GDP. Put another way, if that forecast is correct, the nation’s accumulated debt will be equal to its entire annual economic output in a decade.

Seib then continued:

Republicans, who professed shock at rising deficits during the tenure of President Barack Obama, now show little concern. Most simply say the tax cuts over time will produce enough economic growth to pay for themselves, though few economic models or historical precedents, including the effects of big tax cuts in 1981 and 2001, indicate that will be the case.

On the same day, a Journal column by Nick Timiraos reported the expectation of Wall Street economists that the combination of tax cuts and federal spending will produce some increased economic growth in 2018 and 2019, but not over the longer term:

[F]ew on Wall Street expect this stimulus-fueled short-term acceleration to translate into higher long-term growth, the key justification Republicans advanced for cutting personal and business tax rates. Goldman, for example, still sees long-run potential growth at 1.75%, in line with that of Federal Reserve officials. Congress’ nonpartisan scorekeeper, the Joint Committee on Taxation, similarly sees almost no increase in growth after 10 years.

If the Wall Street economists should prove correct, the short term benefits of the tax bill could help Republicans survive the 2018 elections, but provide little support for Trump in 2020, if he has not been overcome by other difficulties by then.

Apart from the macro effect of the tax bill, several provisions are likely subjects of continuing scrutiny and political debate. One is the preservation of the “carried interest” loophole that in essence allows hedge fund managers to pay a capital gains rate on what most view as ordinary income. Although Trump  promised repeatedly and unequivocally during his presidential campaign that the carried interest provision would be eliminated, it was not; and the White House offered no objection. As Helen Olen put it tartly in the Washington Post, Trump signed “a tax reform package that will sunset the reductions the typical middle income filer will get, even as it leaves in place the very provision that he himself held up as Exhibit A of how elites wallow in the swamp to their own great benefit.”

Another provision likely to be a continuing source of controversy allows certain individuals to “pass through” business income to be taxed at the individual rate—but after a 20% deduction. This complex provision will be subject to interpretation and abuse and will probably be a gift that that keeps on giving for lawyers, accountants and the media. Of particular interest was a last-minute amendment that made the provision applicable to real estate developers and provided major benefits to political figures including President Trump and Senator Corker. (If one accepts at face value, Corker’s claim that he knew nothing of the provision when he finally decided to support the bill, it preserves his integrity but raises questions as to his diligence and the haste with which the final version of the bill was cobbled together).

A provision limiting the deduction of state and local taxes to $10,000, is particularly harsh on many taxpayers in high-tax states, which not coincidentally, are “Blue” states that reliably vote Democratic. Taxpayers have been sent scurrying to pre-pay their 2018 taxes to gain the deduction for 2017, a maneuver that may help some but not others. It is too early to assess the fiscal impact of the deduction limit on the states most affected (e.g.,California, New York, New Jersey) or the way voters in those states may respond in 2018. (Twelve Republicans from those states did vote against the bill in the House, but those who supported it may be at risk.) Apart from a possible desire to punish voters in Democratic states, the provision is difficult to reconcile with a Republican philosophy that, in the name of federalism, has long sought to shift a variety of responsibilities from the federal government to the states. Limiting the deduction for state and local taxes clearly impairs the ability of those governments to shoulder such responsibilities.

There is still much in the tax bill to be discovered and debated. For example, a New York Times article was titled “In a Complex Tax Bill, Let the Hunt for Loopholes Begin.” It outlined some of the new law’s uncertainties, but many more are sure to appear over time. One thing, however, is certain now: that despite Trump’s earnest protestations to the contrary, he and his family will do very, very well from the tax bill. Anyone who is interested in the goodies found under their tree will enjoy the piece by Alan Binder, former Vice Chairman of the Federal Reserve, in the Wall Street Journal, “Think of Tax Reform as the Trump Family’s Christmas List.”

Happy New Year to All! The year 2018 promises to provide be an interesting ride.