Senate Republicans Aim to Torpedo House GOP Tax Reform Bill

If reports about the Republican Senate resonse to the House tax reform bill are true, we could be witnessing the GOP’s suicide.

The House GOP tax bill is, as I’ve argued, a fundamentally flawed bill in some ways.  But in many others, it’s a pretty good one.  In what could only be described as an epic feat of failure, though, Senate Republicans are reportedly seeking to double down on its flaws, and undo much that is good about it.

Let’s begin with a simple fact.  Not conjecture, but a fact.  A bill which cuts taxes for all Americans cannot be immediately revenue neutral for the government.

Efforts to craft a tax bill which is revenue neutral requires that government pick winners and losers among its taxpayers, because immediate revenue neutrality can only be accomplished by zero-sum exchanges in order to achieve it. 

For example, to cut taxes for the middle class while remaining revenue neutral would require that the same amount of uncollected revenue be shored up by other means.  Governments tend to then arbitrarily target specific groups to make up for that lost revenue.  Often, because it’s politically expedient to do so, higher-income earners and/or wealthier Americans – not always the same people – are targeted. 

If this is what you believe to be a “tax cut,” you must admit that socialists like Bernie Sanders are incredible advocates of tax-cuts.   

Somewhat problematically, the House tax bill includes some such exchanges.

The bill does dramatically simplify the tax code.  It reduces the number of marginal brackets from seven to four, and reduces the tax liability across the board via marginal rate thresholds. These are very good things for American income earners, and specifically for advocates of actual tax cuts, because it allows Americans’ to keep their earned money (which is their rightful property before it is the government’s) and because we believe individuals to be better stewards of their own money than our government, which has proven to be infinitely wasteful. 

But even the House bill does other shifty things to shore up that revenue from higher income earners.  It includes deep limitations to the state and local income tax deduction (up to $10K only) and mortgage interest deduction (only on debt up to $500K), which are meant to specifically and negatively impact higher earners in particular areas of the country.  Most notably, though, the bill has a sneaky mechanism to “phaseout” or ultimately eliminate the lowest 12% income bracket for married earners over $1.2M annually, for example, taxing some of their earnings at 45.6% in order to do so. 

Those are some of what I believe to be the bad things which target higher income earners to help “pay” for the tax cuts.  But what about the good things?

Simplifying marginal tax rates from seven to four brackets?  The Senate is reportedly considering keeping the seven brackets, while suggesting that they hope to modestly reduce the rates and/or lower the thresholds for each bracket. 

State and local tax deductions limited to $10K?  The Senate may double down on this targeting of the higher earners in specific states by eliminating the deduction altogether,  according to the Washington Post.

Corporate tax reductions?  Sure, but they may have to wait a bit to do that.  “While Senate Republicans say they still hope to make corporate tax cuts immediate and permanent,” the Post reports, “they are planning to pair any potential delay with other initiatives to limit its impact on the economy.” 

If Republicans choose to amend the House bill to not include corporate tax cuts in 2018, Republicans may get creative and allow companies “to immediately deduct capital investments in 2018 from their taxable income,” which would “avoid having companies wait until 2019 to spend on the economy.”

If allowing corporations to retain more capital will spur spending on the economy, why wait to 2019 cut corporate taxes?  It makes no sense.  Unless… this is an olive branch to Democrats to give the appearance of “paying” for the tax cuts.  This is dangerous, if only because the “permanence” of a 2019 corporate tax cut may be threatened by the 2018 midterm elections.

Here’s what’s most aggravating to me, though.  Senate Majority Leader Mitch McConnell had a pretty good answer to the question of revenue neutrality in the bill.  When asked by a reporter to respond to criticism about the plan not being revenue neutral, he said:

There’s all kinds of reports about all kinds of proposals.  On the Senate side, we haven’t laid out our proposal yet.  But you know from the budget, that the $1.5 trillion-dollar gap, would be closed if we only had four-tenths-of-1% growth in the next ten years.  Which is a really modest projection of what growth would be.  So we fully anticipate that this tax proposal, in the end, would be revenue neutral for the government, if not a revenue gainer.

The tax cuts will yield more money in Americans’ hands, which will yield substantially more economic growth, which will yield greater tax receipts in the long run.  Why is it so difficult to run with that message and move forward with only modest amendments to the House tax reform bill?  We conservatives are not about growing government’s power, but we certainly know that tax cuts can lead to economic growth, and along with that, government revenue can increase as an ancillary outcome.

Sure, the House tax reform bill is not perfect for small-government, big liberty loving Americans like me (to loosely borrow from Mark Steyn).  And frankly, as a conservative voter, I’m bothered that we can’t get nearer to perfect than the House bill, given Republican control of Congress and the White House. 

But maybe the problem keeping us from a perfect bill is in Republicans’ fundamental messaging.  As described by Ed Feulner, founder of The Heritage Foundation: 

Just tinkering with the tax code, though, may not be a political or economic winner.  The system needs to be rebuilt – made simple and pro-growth.  Market research shows that that what Americans want most from the tax system is “fairness,” so shaping the popular definition of that term will be key to winning the policy debate.

A fair tax system isn’t one that takes from the rich to give to the poor.  It’s one that requires everyone play by the same rules. 

Though they have the opportunity to rebuild the tax code, Republicans haven’t done enough to shape this definition of fairness as effectively as Democrats have shaped their definition of fairness to mean that the government should take from the rich to give to the poor as the highest of moral causes. 

Nonetheless, if the Senate’s answer to the House bill is to subvert its positive core measures, while keeping or exacerbating much of what is bad in order to appease Democrats and promote the Bernie Sanders mantra that corporations and high-income earners should finance tax cuts for everyone else, then Republican promises to cut taxes may prove just as empty as their promises to repeal Obamacare.

Just as the GOP should have simply repealed Obamacare when they had the chance, they should just simply cut taxes today.  But it appears that they’re getting lost in the swamp again.

William Sullivan blogs at Political Palaver and can be followed on Twitter.