Tax Reform Is Inching Slowly Closer

Tax reform is the last chance for Republicans to come up with a victory in the current session of Congress and even that is proving difficult.  Yesterday the Ways and Means Committee had to delay publishing the bill because of problems.  There are several issues that seem to have been resolved but some others remain thorns in the side of the leadership and they are struggling to make sure they have the votes to pass the bill once they bring it forward.

A couple of items that seem to be resolved are the corporate rate being cut to 20% and apparently, they will keep the top individual rate at 39.6% which removes a major talking point for Democrats.  This is a change from Trumps plan to have three brackets and this will mean a fourth one is in place.  What may happen is the threshold for that higher rate to kick in may be increased but that is something that is hard to campaign on and make points with voters.

Some other points that are leaking out are changes that some liberals will publicly denounce while privately smiling because it will benefit them.  I am speaking about the estate tax which from what I hear is going to be ending but will probably have to be phased out over several years. This has been a major point for Republicans for years and the arguments on both sides are well known and in place.  Another issue that is still unresolved is the deduction of state and local taxes. This is a thorny issue for both sides. In the House Republicans from states like New York and California would be loath to support this and I am hearing that some form of a compromise might be put in place that allows some portion of property taxes to be deducted. It is interesting to note that Chairman Brady is from Texas where they do not have a state income tax but the property taxes tend to be a bit higher.

One issue that still seems to be percolating is how to change 401(k) contributions.  Currently you can contribute $18,000 per year and if you are over 50 you can increase that to $24,000 as part of the catch-up provision.  I think Republicans are making a mistake if they reduce these amounts.  Their logic is flawed because it goes against human nature.  The supporters of making this change have said that by reducing the taxes on the middle class they will have more money and therefore can set more aside for retirement.  I don’t believe this will happen.  Money contributed to a 401(k)-style retirement plan is money you don’t see and so you don’t really have an opportunity to spend it.  Once it goes into your bank account that that temptation is great and I don’t believe the public will save at the same level.  In the end, this could backfire on Republicans.

The major sticking point is how to pay for the tax cut that is included in the bill.  This is estimated to be at about $5.5 Trillion and that means there has to be some additional revenue sources in the bill.  Anytime you suggest tax increases you bring out the big guns in the form of industry lobbyists and members of Congress that see their constituents being harpooned.  Part of this problem are the members of Congress that are in the budget deficit hawks wing.  They are very concerned about the burgeoning debt of the nation and may well demand that the tax bill be revenue neutral out of the box.  Like other administrations in the past much of what is being proposed is based on rosy economic predictions.  If they come true then the funds to pay for the tax cut might be there but if they fall short [we have seen that happen many times in the past] we will see the deficit continue to skyrocket.

All of this makes Chairman Brady and Speaker Ryan’s tasks very difficult. They are trying to thread the needle on this issue anyone that has actually tried to do this realizes it is not easy and normally takes you several attempts.

Over in the Senate they are formulating their own version of a tax bill and Chairman Hatch has announced they will mark it up the week of November 13.  They are free of some of the problems facing the House but have their own set of issues.  One problem they don’t face is having members from traditionally blue states that have high state and local tax rates.  There are no Republicans from states like New York, California and Illinois. They can be a bit more aggressive when it comes to the state and local tax deduction.  But they also have a thin majority and we have seen repeated attempts by Senate Republicans to repeal ObamaCare fall short because of recalcitrant members of their own party.

I want to be clear that I think we need to pass a major tax reform bill. It has been over 30 years since we passed such a bill and over the years the tax code becomes muddled and burdensome.  The majority of Americans find their taxes confusing and the result is they know very little about how the system actually works.  This plays into the hands of some liberals who immediately bang the drum shouting this is a tax cut for the wealthy.  What then never mention is who is actually paying the income taxes in this country.  I have repeatedly pointed out that about 85% of the income taxes are paid by 10% of the people but this does not stop liberals from using this line and hoping that the general public never looks beyond the talking point to see that they are probably not paying much in taxes themselves.  I had dinner with just such a person last night.  This woman is a wonderful woman but she has bought the liberal talking points hook line and sinker and now claims that she may actually no longer be a Democrat and instead be referred to as a Socialist.  Of course, most Americans who say this have no idea what living in a Socialist state would be like and the freedoms they would lose.  What she means is she wants all the things she views as positives but none of the negatives that come with this form of government. I don’t believe that the things she views as positives are actually positive.  In the end, they would stifle economic growth and innovation.

In the end, I hope that Congress can get its act together and find a bill that can muster the votes for passage and we can finally simplify the tax code.  It would be a boon to the economy and make the lives of individual taxpayers simpler. I use this term, taxpayers, purposely because this is where the liberals and Democrats seem to get lost.  They want to ignore the people that actually pay the taxes in this country and focus on delivering benefits to those that do not.  It is one of the major reasons they have had such a major disconnect with middle America. It is one of the reasons they are a minority party in the Congress and in most states.  Republicans would be wise to remember this or the same problem could befall them.

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