Tax Framework: The Devil, the Details, and the Opportunity for Chuck and Nancy

Tax Framework: The Devil, the Details, and the Opportunity for Chuck and Nancy

Yesterday, the White House and Congressional Republican leadership outlined their blueprint for tax "reform." The framework itself, while lacking in substance and detail, is not itself completely horrifying, but there can be little confidence that Republicans will abide by the meager promises even it makes.

The devil, as they say, is in the details, and this "plan" has hardly any developed details at all. Estimates are that the Republican propensity not to pay for tax cuts can add up to $5 trillion to the national debt. Still, I will attempt to go through what little we do know and explains how it stacks up.

The Doubling of the Standard Deduction

The plan would nearly double the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly. This, on its surface, is a good idea, even if it comes at the expense of eliminating certain itemized deductions. It allows, for example, a leveling of the playing field between homeowners and renters to a good degree. Data shows that a good majority of American households take the standard deduction, and stand-alone, this provision would help the millions of poor and middle class families who do not itemize. In addition, higher income households are much more likely to itemize their deductions, with big majorities of households making over $75,000 itemizing. Increasing the standard deduction brings parity for lower income households.

As a stand-alone provision, this is a no-brainer, and I do not expect this particular specific to face much opposition.

But then, the devil.

The Elimination of Itemized Deductions, Except Mortgage Interest and Charitable Donations

This framework, like the current tax code, insists on the government subsidizing certain financial choices. So long as the government is going to do so, it is immoral to subsidize homeownership but not student debt, to subsidize religious institutions but not the investment citizens make in their own states.

That's right. The Republican plan would eliminate deductions for both student loan interest as well as state taxes such as state income taxes, sales taxes, and property taxes. Evidently, "states rights" lovers want to make it more difficult for citizens to invest in our own states. Property taxes specifically, it should be noted, go largely towards funding local public schools (a terrible way of funding education, but that's another essay), and thus the ability to deduct property taxes is an indirect way for the federal government to fund public education.

In and of itself, eliminating itemized deductions can get us closer to a more effective progressive tax code, if people's taxes weren't determined based on how they spent money. In an ideal world, this progressive would prefer the elimination of all itemized deductions, bringing down rates for lower and middle-income Americans and increasing them on the rich, and raising the income-tax exempt portion of one's income (the standard deduction). But that isn't what this framework is offering.

The Rates and A Commitment to Preserving Current Level of Tax Progressivity the GOP Probably Does Not Plan on Keeping

The tax plan would consolidate the current seven federal income tax brackets into three, 12%, 25% and 35%, with a remarkable caveat:

An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers. 

The commitment to preserving present-day income tax progressivity, even on paper, is a testament to one Barack Obama's success at reframing the entire national conversation around taxes. A decade ago, Republicans had no compunction about campaigning for large tax breaks for the rich openly and loudly, and they broadly agreed on the idea of a regressive flat tax. It is no small feat for a Republican plan to include a possibility of a higher tax bracket just to keep progressivity.

Republican flat tax advocates, of course, may still threaten to kill legislation arising from this framework, necessitating help from Democrats to pass any tax bills. That will be the cue for Chuck and Nancy to move in, and demand, for example that the Republican wet dream of getting rid of the inheritance tax be dropped.

In fact, Republicans may already be realizing that they will probably need a few Democratic votes to get something resembling a tax reform bill passed, and some rather meager opening concessions are offered in the framework.

Business and Corporate Taxes - How the GOP is Planning to Screw Everyone and How Democrats Can Stop Them

The two central provisions of the business tax changes under the proposal are as follows:

  1. Lower the corporate tax rate to 20%. The current top rate is 35%.
  2. Tax small business as well as pass-through rate (income made by a business but realized by the owner) at a top rate of 25%. Pass-through income is currently taxed at the individual income rate.

Interestingly though, the framework does pay lip service to developing legal language to disallow the rich to rebrand personal income as small business income and thus avoid the top personal rate.

The framework would also allow repatriation of overseas profits at a low but unspecified rate, change the corporate tax system to territorial from global, and allow immediate expensing of 5-year depreciation of assets.

These topline items are pretty scary, especially if the current corporate loopholes and business deductions are left in place. As it is, with a top rate of 35%, slightly less than half of all large corporations in America pay no income tax according to the Government Accountability Office. Of the large profitable corporations in America, 1 in 5 pay no income tax.

The average income tax liability for large US corporations is at a low 14%, which could explain why Trump and the Republicans had originally sought a corporate tax rate of 15%.

That the framework now proposes a 20% corporate rate may well be a nod to the need for Democratic votes. If Democrats can play this right and achieve the closure of corporate loopholes in exchange for the bare minimum of votes, a 20% applied rate will actually be an improvement over the 14% average rate paid by large profitable American companies now. President Obama proposed a top 25% corporate rate for manufacturers along with a small, one-time repatriation rate back in 2013.

The Overall Verdict

This "framework" is as barebones as they come. No Democrat or progressive should be jumping on the bandwagon until a bill is written and taken through the normal process. Left to their own devices, there is no doubt that Republicans will paper over every promise made on paper, from progressivity to not shifting the tax burden away from the rich. There's no doubt they will try to pass a boondoggle for multinationals without curing loopholes. There's no doubt they will try to punish California and other blue states that invest in their people.

But, I am also fascinated to see whether - and how - 'Chuck and Nancy' are able to take advantage of Republican divisions between the flat tax purists and the desperate establishment that know if Trump's second major legislative push ends up as much failure as the first, bloodbath won't even begin to describe their chances in 2018. Can they - and perhaps some blue state Republicans - preserve prorgessive states' right to invest in their own people and infrastructure? Can they turn back Republican attempts to help the rich at the expense of everyone else? Can they preserve help for students? Will they be able to force Republicans to live up to their rhetoric of deficit neutrality?

A lot will depend on the answers to these questions.



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