The Trump administration have been searching for some sort of legislative victory - the multiple attempts to "repeal and replace" the ACA are a political version of the Cleveland Browns, three legged dog of the NFL act.
Today, news has arrived that the Republican majority in the House have passed a tax bill; it's now to the Senate, to reconciliation, and then to Trump's desk.
I am guessing that he will sign it faster than he can pour a bottle of ketchup on a steak "so well done that it rocks on the plate."
Is it "good" or "bad" is another question, and the political fur is already flying. Friends in the blogosphere and social media are all over each other, one side claiming loudly that it is a direct attempt to kill, chop, and put into a rich man's stew what's left of the middle class (Ohio Senator Sherrod Brown got into a rather indecorous shouting match -the words "spew" and "bull crap" were used), while others claim it's going to add further fuel to our economy, providing revenues to cover the cuts and "making America great again!!!"
What is the truth? I don't know, and no truthful person does with perfect clarity. But here's a summary of what I see, after looking over some synopses.
- For most of us (myself included), it’s going to be more or less a wash. Most will see some sort of marginal reduction (a few hundred dollars) due to rate reductions, but much will be eaten up by the loss of deductions. For individual taxpayers, despite all the shouting on the House floor, it really doesn’t make a huge difference.
- Second, it will make things a lot simpler for some of us. The elimination of the Alternative Minimum Tax is, IMHO, structurally a long-overdue move. It often is portrayed as a way to ensure that “the wealthiest families” cannot escape taxation, which is a laudable idea. And in 1969 when it was passed, the AMT was designed to capture about 155 families in the entire country.
Last year, the AMT got 4 million taxpayers. More than 1/4 of the people paying had adjusted gross incomes of less than $200,000. That’s to be sure, upper middle class, but it’s really not what was envisioned in 1969, and complying with the AMT is a headache.
(Disclosure: Each year for the past 20, since I purchased my first house, I have had to pay some amount of AMT, and in those days, earned decidedly less than $200,000 per year. It’s a long, not atypical Silicon Valley story involving stock options, but the AMT personally cost me a couple of million dollars - at the time I left my startup, I had a few hundred thousands stock options (the company later was sold) that I had to forfeit because I could not pay the AMT had I had exercised them.
I personally hate the AMT, and will be glad to see it go.
- Third, it’s theoretically a good idea to move our corporate tax structure to a territorial system - where taxes are due on profits where you make them and not globally. The US is one of (might be the only) OECD country who do this. It brings us in line with our European competitors. I suspect it may make American businesses more competitive in the long run, as it reduces compliance and costs.
- Fourth, with respect to (3), it is not going to result in job growth. As others have said, companies hire workers to produce goods and services that are in demand, and that produce more value than the cost to produce them.
For example, imagine General Motors, who manufacture and sell cars in many countries around the world. Now, rather than the system the US has, it moves to the territorial system, reducing GM’s tax burden. Will they then hire more workers? To make what?
GM is already well aware of how many cars that are demanded world-wide. They have smart guys with maths degrees who sit in rooms and make all sort of forecast models. That GM will have marginally more money in FY 2019 than FY 2018 will not mean that an additional Chevy Malibu is going to be needed. If they needed that line worker, they would have hired him. Taking the money from tax savings and giving it to him to make a car that can’t be sold is something that to me is so obviously a flaw in the argument of how corporate tax cuts create jobs that I hardly believe anyone tries to use it.
- The bill is going to put to the test the Democrats’ argument that ‘taxation is a patriotic cost of citizenship,” because the single biggest burden it presents is that it will not allow people to deduct their state income taxes against federal ones. This is going to hit high-tax, Blue states far, far harder than it will the Red, low-tax states.
I live in California, which has among the highest income taxes in the country. New York, Illinois, and New Jersey also make the cut. ALL of them are firmly Democratic. On the other hand are states like Texas and Wyoming. This provision will not affect them in any way. High earners in Blue states - San Francisco, New York, Chicago - are going to see their taxes go up over the long haul.
Do not be fooled that this is a tax that will hit middle and lower income Americans. It only affects people who do not take the standard deduction, which has actually been raised.
Rich people living in high-cost coastal cities will see this part of their tax bill go up. To me, that’s a kind of poetic justice. Will it be off-set by the rate reductions? For the really Richie Riches, it will. For the guy who makes $300,000 or so, I doubt it. (Again, full disclosure: I fall in this group personally, so I expect that, over time, this “reform” will raise my personal tax bill marginally).
- It is a solution looking for a problem. By many accounts, the economy is growing steadily, if unspectacularly. Trump himself has crowed about how strong the economy is. So why do we need tax cuts to goose the economy? What is more likely is that it will provoke inflation, which will hurt the poor and middle, for what are frankly dubious benefits.
We don’t “need” it. The whole thing strikes me as an attempt to make the corporate donor classes happy and at the same time allow the Republicans to claim some sort of legislative victory going into 2018. They’ve failed on the ACA, which was their big-ticket item (in corporate speak, their “stretch goal.”) So, the Republicans being the Republicans, when they need to so something, “Hey! How about a tax cut?!?!
The Republicans need to understand that tax cuts are an option - one among many. They are not the solution to all the ills of the world.
- (Final, I promise) With no parallel cuts to spending, this looks like it is going to juice the deficits. Again. Most analyses I have seen put the cost at more than a trillion dollars over 10 years. So much for being “fiscally responsible.” That, along with point 6, is very likely to result in higher interest rates, inflation, and poorer real dollar wages for most.
Summary: I grade the GOP tax bill with a D.