Tax ‘Reform’: Pyrrhus meet McConnell

by Andrew Stuttaford

If you shoot yourself in the foot, it is, I suppose, a victory over your foot, but I’m not convinced it’s the wisest of victories to win.

Even the circumstances of the GOP’s narrow win in the Senate over tax ‘reform’, scrambled,  chaotic, and embarrassingly last minute were a reminder that this ragbag of proposals has been rushed,  poorly considered and is a very long way from the caution and (where possible) incrementalism that, as a general rule, ought to be hallmarks of conservative reform.  

Writing in Forbes, Tony Nitti (my emphasis added):

Regardless of your political affiliation or opinion of the proposed tax plan, you should be mortified by what took place over the past two weeks in the Senate. First, Senate Finance Committee Leader Orin Hatch neglected to publish legislative text of his proposal until November 21st. At 515 pages, this was no light read, but yet the Finance Committee was somehow familiar enough with its contents to vote to move the bill forward a mere seven days later.

On the Senate floor, things went from shady to sham rather quickly. First, a list of possible amendments was handed out around Capitol Hill, but only to lobbyists, rather than journalists. Then, after a flurry of 11th-hour bargains were made to nail down the final few wavering Republican Senators, the final version of the bill — now reduced to a lithe 479 pages — was made available in the dead of night, and was voted on before you awoke. Even more embarrassing was the state the text of a bill that will shape our economy for the next decade was in, as it was complete with — and I’m not making this up — key amendments and alterations hand-written into the margins of the page, with large swaths of text simply crossed out….

If you’re wondering how 51 Republican Senators can confidently vote for a piece of text so lengthy it would make Tolkien blush, well, they simply can’t. Call me a cynic, but there is no chance any of the Senators fully grasp the impact of the sweeping tax changes they passed last night. I make my living in the Code, and 12 hours later, I’m still grappling with the intent and impact of certain provisions in the bill, as are other tax wonks.

I quoted the Wall Street Journal’s Greg Ip in a post the other day:

In their rush to pass a sweeping tax overhaul, Republicans and the Trump administration may be headed for a reckoning with the law of unintended consequences. The U.S. tax system is a complex, jury-rigged contraption. At the best of times, tampering with any part invariably triggers collateral consequences. Those risks are magnified now by Republicans’ determination to pass the plan with minimal hearings on party lines by Christmas.

What could possibly go wrong?

And yes, fair point, Obamacare was pushed through something like this.

To repeat myself, what could go possibly go wrong?

Meanwhile, in a decision that will leave another weapon ready for use by future tax-grabbers, the Senate has agreed that the (long overdue) proposals to abolish the Alternative Minimum Tax will themselves be abolished.  To the delight of fans of tax complexity everywhere, Republican senators have decided that this grotesque levy should remain, but the exemption rate for individuals has been increased by a forty percent, an exemption that will, of course, be eroded over the years. As a reminder, when the AMT in its original form was introduced in 1969 (a time when individuals had far more tax ‘breaks’ to play with), it was in response to the revelation that 155 high income families had been able to reduce their federal tax liability to zero.

155.

To her credit, Senator Collins has managed to salvage something out of the ruins of the State and Local Tax (SALT) deduction, in the form of an agreement to preserve a deduction for up to $10,000 in property taxes, a change that is better than nothing, but won’t go very far to remedy the damage that will be caused by the illogical, anti-federalist and wrong-headed elimination of all the rest of the SALT deduction. And it’s a change that will not (something that may disappoint the more vindictive or—they thought—cleverly calculating Capitol Hill Republicans) just put pressure on the finances of blue states. That said, the blow will probably fall hardest on some of the productive people in two states (California and New York) responsible for an alarmingly large percentage of the nation’s net new business formation. That’s not very clever, nor (I once would have thought) Republican.

Bear in mind also that the net effect of these and other changes envisaged by the GOP could easily be a hit to real estate prices, something that risks a negative wealth effect that could easily do quite a bit to erode the far from impressive increase (‘rocket fuel’ it isn’t) in GDP growth that this tax ‘reform’ is meant to generate.  As a report in Forbes notes, The National Association of Realtors is predicting that tax reform on GOP lines will cause housing prices to drop in every state. To be sure, the NAR has an obvious bias, but take the time to read the report. It’s not reassuring. And, by the way, falling housing prices are not normally a vote-winner.  

Take a step back and it’s not hard to come to the conclusion that the Republican leadership has thrown away the opportunity for real, beneficial and, yes, sustainable tax reform.

That reference to sustainability is not just a reference to the boost the tax plan will give to the deficit, something that will raise awkward questions before long. There are also grubby political realities to consider.  Whatever else you might say about these tax changes, their cumulative effect will be complex, so complex indeed that it will not  be easy to calculate how many will win or lose, and by when, and for how much, and for how long. That, to use horrible jargon, muddies the narrative. This plan is already unpopular. It will not be an easy sell as the midterms approach. Worse still, the task of the GOP in selling it will be made even more difficult by tales from the losers—many more of whom, incidentally, might turn out to be (ex?) Republican voters than the GOP leadership might have thought—which will be easy to understand and, with the eager assistance of the media, will be widely shared.

The midterms are already looking tricky, and as for 2020, well….

And if the Democrats do win their way back into power, the GOP is now busy removing some of the previously untouchable tax deductions that would otherwise have been a bulwark against a Left out for revenge.

Heckuva job, Republicans.

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