Republicans get regressive on tax reform

Discussing tax legislation is about as interesting as watching paint dry. However, it is tax legislation that has made it possible for corporate America to park huge profits overseas, to make rich people richer and spawn and support a vast array of non-tax paying organizations to ply their wares at our expense. So it is no small matter that the congressional Republicans under House Speaker Paul Ryan (Wis.) have announced a tax reform package that is going to set things right and make America great again.

{mosads}There are many components to the plan, but some are important enough that they jump off the page. Ryan’s plan would have the corporate tax rate cut from 35 percent to 20 percent for large corporations and 25 percent for small businesses; the top individual tax rate would go from 39.5 percent to 33 percent. The inheritance tax would disappear, as would the alternative minimum tax. Itemized deductions would disappear, in particular the deduction of state and local taxes (but not home mortgage interest and charitable donations). The standard deduction would rise to $12,000 for singles, $18,000 for singles with a child and $24,000 for joint returns (roughly double current levels).

The capital gains rate would decline from its current rate of 20 percent to a range between 6 percent and 16.5 percent with similar treatment for dividend and interest income (currently scaled at the personal income rates from 15 percent to 33.9 percent). Most tax returns would be submitted on a form the size of a postcard. Businesses could write off capital investments immediately (rather than currently amortizing the cost over the equipment’s useful life). Research and development credits would continue, but otherwise, most interest and credits would be eliminated. Business would have a one-shot opportunity to repatriate the over $2 trillion in overseas profits at 8.75 percent (rather than the 35 percent current rate) before the overseas profits would be taxes based on where the products were sold rather than global profits.

If you haven’t nodded off yet, be reassured that businesses have viewed the proposals positively. To quote one assessment, “If Congress follows the architecture the blueprint lays out, it will create a strongly pro-growth tax system that will create jobs, raise wages, and increase opportunity for American families at all income levels.” That is from The Daily Signal, a publication produced by the conservative Heritage Foundation. Another conservative source, the Tax Foundation, assures us that just allowing business to expense capital investment will increase gross domestic product (GDP) by 0.5 percent per year (which is impressive when you reflect on average annual GDP growth of 2.2 percent over the past five years; that’s a 23 percent increase). It will result in decreased tax revenues, however, to the tune of $881 billion over time.

On the liberal side, there has been very little reaction other than to brand it generally as regressive. According to The Wall Street Journal, “Rep. Sander Levin (D., Mich.) noted that the plan doesn’t appear to touch the tax treatment of private-equity managers’ carried interest income, which would be treated as capital gains taxed at 16.5% instead of business profits taxed at 25% or wages taxed at 33%.” In U.S. News & World Report, Josh Hoxie properly described it: “Low and behold, this year’s plan, adorned with the snazzy title ‘A Better Way,’ is … simply terrible.”

The research firm Citizens for Tax Justice’s assessment is summarized as follows: It adds $4 trillion to the national debt over a decade and overwhelmingly benefits the top 1 percent of taxpayers while resulting in a net loss for the bottom 95 percent of taxpayers; corporate tax collections are slashed at least half. “Altogether, CTJ’s analysis finds that the personal income tax changes would lose government revenues of $1.2 trillion, the corporate tax changes $2.5 trillion and the estate tax changes $0.3 trillion over 10 years. In other words, the corporate tax cuts make up the bulk of the plan’s tax breaks.” Seventy-percent of the tax reductions on individuals would go to the top 5 percent of income earners.

As abstract and distant as these concepts may appear, the Ryan plan requires public attention. It especially demands the attention of conventional Republicans who seem to support the Grand Old Party no matter how many times its representatives shortchange all but a few of its supporters.

According to FiveThirtyEight, there is an 80 percent chance that the Republican Party’s presidential ambitions for 2016 will be thwarted, but it is not clear that Republicans will lose control of the House of Representatives. This means, quite simply, that the Ryan plan will be center stage and will represent the counterpoint with which a President Hillary Clinton will have to deal. The Ryan plan may well find a receptive audience in the White House when the poetry of campaigning turns to the prose of governing.

Thus, in states like New Hampshire, it is important for Republicans to note what their congressional candidates intend to do when the arm twisting begins. With the exception of those in the top 5 percent of earners, Republican votes may have unintended consequences. For Democrats, congressional candidates had better be pledged to distance themselves from their president if the word “pragmatic” creeps into the rationalization of tax legislation. Their candidate has clear obligations to wealthy elites.

Russell is managing director of Cove Hill Advisory Services.

The views expressed by Contributors are their own and not the views of The Hill.