Trade-Offs Made Clear in the Senate Bill

Last night, Chairman Hatch introduced a new version of the Senate tax overhaul bill. Since the bill is being pushed through using reconciliation procedures to avoid the filibuster, the bill is not allowed to add to the deficit after the end of the budget window in 2027. The original version had violated that constraint, and Chairman Hatch last night amended the bill bring it into compliance, expiring many of the provisions after 2025. After those expirations, what remains is a permanent corporate tax rate cut paid for with a number of business tax raisers and then two large offsets that, in combination, affect almost every low- and middle-income family.

Specifically, as of 2027, the chained CPI (an alternative inflation measure that slows down cost of living adjustments in the tax code) would remain in place, raising about $30 billion according to the Joint Committee on Taxation (JCT), and the repeal of the individual mandate from the Affordable Care Act would raise an additional $50 billion. Together, these two provisions offset about half the cost of the corporate rate cut as of that year, with the rest coming from business offsets.

Winners and Losers

The reconciliation rules have now forced the tax writers to choose their priorities. Looking across the income distribution, the effects of those choices are clear.

The below figure shows the distribution specifically of paying for the corporate rate cut with the chained CPI in 2027. It reflects the $30 billion of taxes being raised through the chained CPI in that year and offsetting a little under one-fifth (or almost three percentage points) of the corporate rate cut. The distribution is based on earlier Tax Policy Center (TPC) tables separately distributing the chained CPI and corporate rate reductions.

Basically, the only winners on average from that trade-off are the top 1 percent, with the top 0.1 percent coming off particularly well. Low- and middle-income Americans face tax increases.

However modeled, the effects of eliminating the individual mandate are surely more regressive than even that. CBO finds that this would result in 13 million more people without insurance by 2027, and most of the federal government’s savings come from reduced federal spending on tax credits to help people buy insurance in the exchanges and Medicaid. The particular effects of eliminating the mandate have been discussed extensively elsewhere — including healthy people dropping out of the markets, higher premiums resulting, and still others dropping out of the market because of those higher premiums. There will be winners and losers, but, overall, this will be a significant blow to the welfare of low- and middle-income Americans.

(Note to journalists and others: If you’re looking at the distribution of the new legislation in any year — whether 2027 or another — and aren’t in some way taking into account the welfare loss to middle- and low-income Americans from getting rid of the mandate, then you’re missing something fundamental. If looking at “tax only” tables — now that this involves major spending programs and health policy — you’re seeing only part of the story.)

Real Trade-Offs, Real Choices

Republicans are likely to say that the expirations in the legislation aren’t “real” at all since they intend to continue all of the tax cuts. They will blame the expirations on the reconciliation rules. However, there’s a basic problem with totally dismissing these expirations in that way. In the long-run, the trade-offs are very real; deficit-financed tax cuts can’t continue forever, not because of congressional rules but because of basic fiscal math. Deficits and the debt-to-GDP ratio will not continue rising forever, and what’s unsustainable will not be sustained.

The Republican leadership has time and time again suggested how they intend to meet those fiscal constraints. In their budget, they included large cuts to Medicare and Medicaid and basic government services. And, in this bill, they have made very real choices prioritizing the corporate rate reduction over almost everything else.

It’s important to keep in mind the fiscal picture we are likely to face in the future when Congress would be debating whether to continue the tax cuts and how to reduce the underlying deficits. We are now at a relative low-point in the federal deficit, with it projected to be around 3 percent of GDP this year. By 2027, the deficit — without any new tax cuts — is expected to rise to over 5 percent according to CBO projections, as the long-expected retirement of the baby boomers continues to push up costs for Social Security and Medicare.

Then, if the major expiring tax cuts in the legislation were continued, the deficit in 2027 would be around 6 percent of GDP — and the total cost of the Senate’s tax bill would be around $1.8 trillion through 2027, or about $2.1 trillion including interest costs.

How will Congress deal with expiring tax cuts and federal programs with a deficit of over 5 percent in 2027 and rocketing up to 6 percent if tax cuts are continued? Well, in terms of what the Republican party would do, we might begin by simply looking at their budget plan and the very tax bill they have now put forward when they were forced to choose their priorities.

(And, for those who say that middle class tax cuts never expire, we need only look back a few years to see the expiration of Making Work Pay and the payroll tax cut that replaced it, as Congress focused on fiscal austerity.)

When it comes to fiscal trade-offs, the answers Republican leadership keep offering would leave low- and middle-income Americans worse off — shouldering the burden of deficit reduction and, further, paying for new tax cuts disproportionately benefiting the very top. We should take their answers seriously.

Addendum 1: Corporate Rate Cut Paid for with Chained CPI

To calculate the distribution of the chained CPI paying for a corporate rate cut, I have combined two different TPC distributional analyses. The first is Table T13–0122, looking at the effects of chained CPI relative to current law and in effect over a 15-year period. The second is T17–0180, looking at the distribution of a corporate rate cut. I have assumed that the share of benefits to each income class from each of these tax changes would remain applicable in 2027, and I have then distributed a $30 billion corporate rate cut paid for with $30 billion in revenue generated by the chained CPI, as JCT projects to be the case in 2027.

The table below shows the separate effects of the chained CPI and the corporate rate reduction it pays for as a percent of after-tax income — and then the net tax cut or increase resulting from this.

Addendum 2: Is the Chained CPI Really Paying for the Corporate Rate Cut?

The Senate plan as released last night generates $30 billion of net deficit reduction in 2027. This raises the question of whether the chained CPI is really paying for the corporate rate cut or whether it’s contributing to deficit reduction.

There are two reasons to believe that it is in fact paying for the rate cut:

First, Republican tax writers have retained the chained CPI presumably because they know that, in its absence, the corporate rate cut would not be fully paid for in the years after 2027 and would thus violate the constraints of reconciliation.

Second, one business offset generating significant revenue in 2027 is largely a timing shift. Specifically, starting in 2026, the bill requires the amortization of research expenses that can now be expensed. That generates about $35 billion in revenue in 2027, but it is largely one-time revenue (since write offs are delayed, not disallowed). This helps explain why, on a forward going basis, the chained CPI is needed to offset the corporate rate reduction.

Addendum 3: Deficits with Tax Cuts Made Permanent

The table below shows the deficits under the Senate tax plan. It shows both the deficits if major expiring provisions are continued and assuming they are allowed to expire as scheduled. In the extension scenario, this assumes the major individual income tax provisions (both tax cuts and raisers), estate tax cuts, the pass-through deduction, and expensing are continued.