The GOP Tax Bill: Fuggedaboutit!

The GOP has become so politically desperate that they might as well enact a two-word statute and be done with it. It would simply read: Tax Bill!

Actually, that’s not far from where they are in the great scheme of things. The Senate Finance Committee’s bill is a dog’s breakfast of K-Street/Wall Street pleasing tax cuts, narrowly focused revenue raisers that will be subject to withering attack on the Senate floor, nonsensical vote-driven compromises and outrageous fiscal gimmicks—-the most blatant of which is the sun-setting of every single individual tax provision after 2025.

This latter trick is designed to shoe-horn the revenue loss into the $1.5 trillion 10-year allowance in the budget reconciliation instruction and also comply with the Senate’s “Byrd Rule” which allows a point of order to strike down a reconciliation bill that increases the deficit after year 10. Save for these gimmicks, the actual 10-year cost of the Senate bill would be $2.2 trillion including interest on the added deficits.

Nevertheless, this and other sunset gimmicks also underscore how threadbare the whole undertaking has become. To wit, the bill provides interim, deficit-financed tax relief of $1.38 trillion during 2018-2025 before these budget gimmicks kick-in, which is not a big number in the scheme of things: it amounts to just 4.2% of current law revenue collections during the eight-year period and only 0.8% of GDP.

Since the bill doesn’t even really cut marginal rates during this interim period (the top bracket drops from 39.6% to 38.5%), it’s hard to see how a mere 0.8% “stimulus” to GDP is going to incite a tsunami of growth and jobs.

As we have frequently pointed out, the Reagan tax cut of 1981—which had no measurable effect on the trend rate of economic growth— slashed marginal rates from 70% to 50% and as a total package paled the current Senate Plan into insignificance: It reduced the Federal revenue base by 26%, not 4.2%; and it amounted to 6.2% of GDP, not 0.8%, when fully effective in the later 1980s.

Moreover, the “fully effective” part is especially salient because the Senate bill’s impact does not widen with time, as do most permanent tax cuts which require phase-in periods, but, instead, shrinks into virtual insignificance.

Thus, the bill’s net tax cut amounts to $225 billion or 1.1% of GDP in 2019, but by 2022 the net cut shrinks to $199 billion and 0.9% of GDP—and then to just $145 billion or 0.6% of GDP in 2025 when the sunset gimmick kicks in.

Thereafter the bill becomes a small net revenue raiser ($31 billion) by 2027, but, more importantly, the single “cut” item left in the statute tells you who is really driving the show. That is, the Business Roundtable, the K-Street industry lobbies and Wall Street get to keep what they mobilized for—-the 20% corporate rate cut, which stays in place permanently at a cost of $171 billion in 2027 revenue loss.

However, the lopsided math laid out in the Tax Policy Center’s price-out of the Finance Committee reported bill underscores why this dog’s breakfast will never make it close to the Donald’s desk. That’s because by year #10 not one of the 150 million individual filers get a tax cut; the reduction for small business “pass-thru” payers is zeroed-out, and the balance of the bill consists of an incredible $202 billion of tax increases in 2027 compared to current law.

That’s right. The great Republican “tax cut” slithers off the stage in 2027 raising taxes by a net of $75 billion on individual filers, $123 billion on business filers (aside from the corporate rate cut) and $4 billion on international companies.

So what you have is a sharply downward sloping taper of tax cuts and revenue losses, which makes the bill a classic Keynesian deficit stimulus through the tax code, not a supply-side incentive driver; and one so tangled up in the nation’s fiscal strait-jacket that it ends up in political la la land.