By Ryan Ellis
The U.S. Senate this week is considering the FY 2018 budget resolution, a document which is wholly meaningless except in one gargantuan respect–it sets up a process for Congress to consider tax reform under the simple majority, expedited mechanism known as “reconciliation.”
If that sounds familiar, it should. Congress passed a FY 2017 budget resolution in January, a document which was wholly meaningless except in one gargantuan respect–it set up a process for Congress to consider Obamacare repeal under the simple majority, expedited mechanism known as “reconciliation.” The House passed Obamacare repeal, and but the Senate GOP never found a combination of 50 Senators plus Vice President Pence to pass their own bill. Notably, Senator Paul was part of the health care reform coalition on “skinny repeal” but not on “Graham-Cassidy.”
The failure to pass even one jot or tittle of Obamacare repeal is a festering wound on the unified Trump-GOP government, and repeating this failure in tax reform would be absolutely catastrophic. Voters would rightly conclude that the GOP Congress is incapable of managing government, and will always find a way not to deliver on promises made over several election cycles.
Senator Paul is a key figure in this round of votes. He’s uncomfortable with the budget resolution because of the amount it sets aside for the “Overseas Contingency Operation” (OCO), originally a War on Terror supplemental defense package which has essentially become a way to get around the spending caps on the Pentagon. He is correct on this policy. However, let’s go back to the above–the FY 2018 budget resolution is a document which is wholly meaningless except in one gargantuan respect–it sets up a process for Congress to consider tax reform under the simple majority, expedited mechanism known as “reconciliation.”
Turning to tax policy, Senator Paul and I have sparred in these pages of late on whether the tax cut framework is a good deal for the middle class. Senator Paul’s fears that it might not be are mostly based on an analysis done by the ultra-liberal Tax Policy Center (TPC), an ideologically biased group committed to casting Republican tax legislation in the worst possible light. Senator Paul is in error to accept the analysis as gospel, and then wring his hands over phantom middle class tax increases using said analysis.
There are at least three ways the TPC assumptions could be off:
Their assumption that the new 12 percent bracket will be as deep as the current 15 percent bracket could be wrong. No one, not even those writing the bill, know how deep the new, lowest 12 percent bracket will go. It will be dialed up and down as scorekeeping, politics, and other considerations dictate.
Their assumption that the child tax credit will only grow from $1000 to $1500 per child is on the low end of the range. Serious proposals, including some made by Senate colleagues of Senator Paul, also have advanced $2000 and $2500 child credit levels. Why not assume that?
Their assumption that the child tax credit phaseout range will be where they say it will is also a pure guess.
These three levers all radically change tax outcomes for the middle class. If Senator Paul wants to ensure that the middle class doesn’t face a tax increase (and he has said that absolutely no middle class family should pay higher taxes), he should support the budget resolution and work to make sure the resulting tax product measures up. A vote against the budget resolution is a vote against tax reform.
I took the TPC numbers, pessimistic as they are, and ran scenarios for three median income families–a family of four, a single Mom, and an unmarried individual. All of them receive modest but to them very significant tax relief, even using TPC’s own numbers.
Senator Paul also ought to look at what’s happening on the state and local tax (SALT) deduction on the House side. Blue state GOP members have demanded that at least some of the SALT deduction, especially the primary residence property tax write-off, remain available for non-rich families. This will alter the Framework in such a way that, even if one was very confident in TPC assumptions, requires going back to the drawing board. This won’t be the last alteration of the plan. The international rules, how pass through taxation will work, business interest deductions, and a host of other sausage making compromises are in tax reform’s future. Our vision of the final product is still very, very hazy.
Finally, Senator Paul ought to be careful of the standards he is using to evaluate tax reform. Back in 2015, he ran for president on a tax plan which featured a 14.5 percent value added tax (VAT) and a 14.5 percent income tax. Because wages and non-wage benefits are not deductible under a VAT, the result is cascaded double tax on labor income. Do the math, and there is a 27 percent flat tax on wages and benefits under Paul’s plan. While the plan also features generous standard deductions, personal exemptions, child credits, and itemized deductions for mortgage interest and charitable contributions, there is no way to know if the plan passes the test Paul has set out for tax reform–not a single middle class family getting a tax increase. It’s hard for me to imagine that a 27 percent flat tax for most people would not result in a few losers.
There are 150 million personal tax returns filed every year. There is no version of tax reform–the GOP Framework, Senator Paul’s presidential campaign VAT, the Tax Reform Act of 1986–which can control for each and every one of them. There will inevitably be some scenario where a middle class or mass affluent taxpayer faces slightly to somewhat higher taxes under tax reform. It’s not possible to construct a tax plan (at least one living under budget constraints) which has only winners. What is possible is passing tax reform which makes us all better off as economic growth gets back to normal. That’s the plan the U.S. Senate will consider, but only if it passes a budget.