Resisting Trump’s Millionaire Tax Giveaway

The September 27 Republican Tax Framework makes it clear that Republicans are interested primarily in providing tax breaks to the wealthy and corporations. The fact that most Americans (maybe even most Trump voters) rightly think that the wealthy and corporations don’t need tax breaks doesn’t seem to carry a lot of weight. So it is important to resist this tax giveaway. Resistance requires a good strategy. On strategy, there are parallels between health care and tax reform, because it seems that Republicans want to do tax reform the same way that they did ACA repeal.

Resistance goals

As with health care, the goal of resistance should be to stop Republicans from proceeding in a partisan way and encourage them to instead work with Democrats, and craft a solution that actually makes sense for the American people. This would mean not proceeding via reconciliation legislation. Or, if they don’t want to do that, just to stop them. There is also a fallback: if Republicans manage to push something through, it needs to be branded for what it is and they need to be held accountable in 2018.

Not normal — no “regular order”

The Framework does not represent a normal way to propose tax legislation. The normal way is to announce a specific proposal, which allows everyone to analyze its effects and suggest changes. Instead, the Framework hides the ball by announcing certain aspects but not others. Tax law is all about details. You can’t describe a tax proposal in vague general terms and expect people to be happy about it. The fact that Republicans don’t seem to understand this shows that they don’t know how to write tax legislation. Of course, a tax proposal changes during the legislative process. But that is not a reason for failing to include all the necessary elements in the initial proposal so that it can be analyzed and debated. In the words of John McCain, this proposal is not “regular order”. Let me give an example from the 1984 Treasury Department report that led to the Tax reform Act of 1986. Page 65 of the report spelled out the proposed tax rate schedules and the tax rate schedules applicable under current law. We see nothing like this in the framework. Until we do, there is not really a tax plan in the normal sense.

Branding: tax giveaway to the wealthy

The branding is pretty easy. The Republican Framework is a big tax giveaway for the wealthy and corporations, crumbs for the rest of us. That message is accurate, and easy for folks to understand. It’s important to repeat that message and drive it home, so that more and more voters understand what Republicans are up to.

Strategy for lobbying MCs

Individual Republican members of Congress (MoCs) are central to a resistance strategy. Constituents need to communicate their concerns to them. They need to hear that folks in their district are paying attention and care about tax reform as an issue. There are several key issues on which many Republican MCs will be sympathetic.

State and local tax (SALT) deduction

The first is the deduction for state and local taxes (SALT). Several Republican MCs from high-tax states (New York, New Jersey, and California) have already announced that they were opposed to getting rid of the SALT deduction. It should not be difficult to get many more Republican MCs onto that list. The effort need not be limited to high-tax states. For example, there are 32 states with state income tax rates of 5 percent or higher. And even though Texas and Florida have no income tax, their sales tax is deductible. So even though there will be affected taxpayers in many states, the overall effect of repealing SALT would be to raise taxes on those living in high-tax states currently taking advantage of this deduction and reducing taxes on residents of low-tax states that tend to vote Republican. So it is a pretty political issue.

Let your MC know: Don’t take away my deduction for state and local taxes. Tax reform is supposed to be about getting rid of loopholes. The state tax deduction is not a loophole. It is a deduction taken by most people who itemize deductions, and simply coordinates state and federal taxation, so that the federal government taxes only what is left after paying state tax. There is nothing broken here that needs fixing. Tax reform is supposed to be about simplification, but the state tax deduction is not complicated. For most people, the amount of state tax withheld is shown on their W-2, just as are amounts of federal tax withheld. This is not one of those complex tax code provisions that no one understands — it’s pretty simple. The state tax deduction acknowledges that amounts paid to state governments to finance government programs reduce the taxpayer’s ability to pay. The property tax deduction for homeowners is part of SALT too. Homeowners who pay property tax are counting on deducting that tax to be able to afford their monthly payments.

True, the SALT deduction does primarily benefit taxpayers at the top: households in the top percentile of the income distribution claim about 37% of all SALT deduction benefits, and those in the top decile about 71% of SALT deduction benefits. So it looks like getting rid of the deduction would make the tax system more progressive, but at the same time Republicans are planning to reduce rates at the top, so the effect will be a wash, more or less.

Other deductions

While the Republican Framework says that it will not get rid of the deduction for home mortgage interest and charitable contributions, for practical purposes, the Framework would eliminate all deductions, except for a small number of taxpayers at the top. That’s because the Framework proposes to double the standard deduction. The result is that a very small number of taxpayers at the top will itemize, and all the rest of us will not. Younger taxpayers who bought a home recently and are counting on deducting their mortgage interest and property tax likely will not be able to do so, because they will not be itemizing in the first place (unless they fall at the very top of the income distribution). The result is a bit ironic because the only taxpayers who will get a tax break from homeownership are the ones who don’t need it. Charities will be hurt to the extent that they rely on contributions from the public (again, except for contributions from a relatively small group of wealthy people at the top). Taxpayers who incur large medical expenses will not be helped; that deduction will either be eliminated explicitly (the Framework says most deductions will be eliminated) or for practical purposes because of the increased standard deduction.

The elimination of itemized deductions (except for a small number of taxpayers at the top) is not necessarily a bad thing from a tax policy point of view. Economists have been criticizing subsidies going to home ownership through the tax laws, for example. But from a political point of view, it will make the tax law the Republicans are working on very difficult to pass, and will arouse a lot of opposition from various groups: charities, hospitals, the real estate industry, state governments.

Additional standard deduction for the elderly

The Republican framework proposes to double the standard deduction but in the process to eliminate the additional standard deduction received by those over 65. This means that the elderly will pay a greater share of income tax than they do today.

Deficits

The Republican Framework busts the deficit, and the budget resolution being worked on in the Senate allows a tax cut of something like $1.5 trillion. Many MCs will also be receptive to an argument that tax reform should not increase the deficit. In deciding whether tax legislation is revenue neutral, there is some scope for judgment, but Congress should defer to its professional staff of economists to forecast revenues and should not base decisions on forecasts involving dubious economic assumptions. Again, a fairly straightforward message for your MC: support tax reform legislation only if it will not add to the deficit.

No tax cuts for the wealthy

Another “ask” from your MC is to oppose any tax reform legislation that involves a net tax reduction for the wealthy. For example, this clearly requires removing estate tax repeal from the tax reform agenda. The estate tax plays an important role in preserving the progressivity of our tax system, and applies only to one-fifth one percent of decedents. Although proponents of repeal cite the effect of the tax in preventing farms or businesses from being passed on to children, this is a myth and no farms that have to be sold to pay the tax can be found. (At current exemption levels, a tax is due only once the estate of a married couple exceeds about $11 million.) See the Center for Budget and Policy Priorities write up on the estate tax. http://www.cbpp.org/research/federal-tax/eliminating-estate-tax-on-inherited-wealth-would-increase-deficits-and

Most Republican MCs are likely to reject this argument, but it is not bad for them to hear it anyway. Democratic MCs are likely to be much more sympathetic to this ask. It is important to reach them as well: they may not be able to influence the Republican bill, but they may have to be voting against it, and constituent pressure should help stiffen their spine if needed.

Special 25 percent rate for pass-throughs

The Republican framework limits the tax rate on income from pass-through entities such as partnerships and S Corporations to 25 percent. According to the Tax Policy Center, two-thirds of this business income is reported by households making $292,000 or more, and half goes to those making $693,000 or more, the highest income one percent. In the absence of this limitation, the income would be taxed at the top rate of 35 percent, so this is simply a 10-percentage-point tax reduction for the wealthy on this type of income. This makes little policy sense. Currently, income from pass-through businesses is taxed in the same way as any other income. Why should it be taxed at a lower rate for the wealthy? Not only does this not make much sense, but the proposal will require anti-abuse rules to prevent top-bracket taxpayers from structuring their affairs to take advantage of this favorable rate, thus making the tax code more complicated.

The only reason this measure is being considered is because of the proposed drastic reduction in the corporate tax rate to 20%. If the corporate tax rate were reduced, but the individual rate on business income were much higher, there would be an incentive for individuals to form corporations and earn their income that way. The reduction of the corporate rate to 20% imbalances the system. The remedy, though, is not to create a special 25% rate, but rather not to reduce the corporate rate as much. The corporate rate, if it is to be reduced at all, need not be reduced below something like say 28%. In this case, there would be no need for a special rate for pass-throughs.

Lobby early and often

Even though tax legislation may not be voted on for months, lobby your MC now. If they are a Republican, you would like them to be on the record against any diminution of the SALT deduction, and against any deficit-increasing tax cuts. The sooner they hear from you the better. You can follow up as needed depending on the legislative process.

Changes in this article

It is my intention to make changes to this article as tax legislation develops, and as I notice further things about the Republican framework. (I will be adding a section on the international corporate provisions, for example.)

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