We’re one day away from the formal introduction of a tax overhaul bill that will affect every taxpayer in America. On the eve of kickoff, though, almost nobody knows what’s in it. Even members of the House Ways and Means Committee, whose Republican chairman Kevin Brady is working on the bill, are in the dark. Last-minute additions and subtractions with enormous impact have been quietly announced, retracted, or kept up in the air.
The haphazardness calls into question whether congressional Republicans can accomplish the biggest rewrite of the tax code in 30 years—and get it done before Thanksgiving, as per the announced schedule. But it also guarantees that this bill, being patched together in a desperate lunge to offset revenue and please wary Republicans, will have massive and unexpected consequences for non-wealthy Americans.
All we know thus far about the bill comes from a two-page joint statement of principles from cabinet officials and congressional leaders in July, and a somewhat more detailed nine-page framework in late September. As the latter makes clear, Republicans want to cut taxes on the wealthy and corporations. As The New York Times reported at the time, “the president offered no measure of the plan’s cost and scant detail about how working people would benefit from a proposal that has explicit and substantial rewards for wealthy people and corporations.”
The plan significantly lowers individual income and corporate tax rates, while raising the standard deduction that all tax filers take (eliminating tax on the first $12,000 of individual income, $24,000 for a married couple). It creates a loophole on “pass-through” income for people who set up corporations, which could prove a major tax avoidance strategy. Another big loophole exempts foreign income earned by multinational corporations that have U.S. headquarters, creating huge incentives to designate as much “foreign” income as possible. And Republicans want to repeal the alternative minimum tax, which hits high-net worth individuals, and the estate tax, which affects wealthy scions.
These tax breaks for the rich are expensive—costing at least $3 trillion over the first ten years and $6.6 trillion afterward, according to the nonpartisan Tax Policy Center. Under the budget resolution passed last week, the tax plan is only allowed to create a maximum of $1.5 trillion in deficits over the first ten years and nothing thereafter, if Republicans use the budget reconciliation process. The debate over the final details of the bill is mostly about how Republicans will make up that difference.
The September framework called for eliminating “most itemized deductions,” but it retains nearly all the largest ones, like the mortgage interest and charitable deductions and the employer deduction for purchasing health insurance for their employees. The Child Tax Credit is even expanded. The GOP will attempt to close the gap by claiming that economic growth spurred by the cuts will yield larger tax revenues—a long-discredited argument But even this doesn’t get the number down to $1.5 trillion, hence the desperate search for pay-fors.
First, Republicans sought savings by implementing a “border adjustment tax,” which would have helped exporters and hurt importers. The latter, particularly retailers, killed the idea.
Then Republicans considered eliminating the state and local tax deduction, which costs about $1.1 trillion over the next ten years. But that particular deduction disproportionately benefits wealthy suburbanites in high-tax states like New York, New Jersey, and California (not to mention red states like Utah and Georgia). House Republicans represent many of those districts, and several opposed the House budget resolution for this reason. This weekend, Brady announced that he would restore the deduction for local property taxes, which may bring those House Republicans back into the fold but adds at least another $500 billion to the tax bill.
Brady’s announcement failed to satisfy the National Association of Home Builders, which formally opposed the bill this weekend. Why, if property taxes will remain deductible and the mortgage interest deduction is unchanged, are home builders opposed? Because doubling the standard deduction means it won’t make sense for many homeowners to itemize. The NAHB believes that will hurt home prices, because people won’t see as much benefit to buying, therefore lowering real estate demand. The NAHB wanted property and mortgage interest deductions changed to a tax credit that would aid any homeowner, but that solution would have blown up the deficit even more, so Republicans rejected it.
Republicans still need more money to pay for the tax cuts. So they’ve eyed curtailing the tax benefits of 401(k) retirement plans by limiting the amount workers can contribute in a given year to $2,400. President Donald Trump himself promised “no change” to 401(k) benefits, but Brady later refused to rule them out. Republicans are also toying with a millionaire’s bracket, to be slightly higher than the 35 percent top rate, specifically because they “are losing so much money from other concessions,” in the words of Axios’ Jonathan Swan.
Congressional officials are even talking about phasing in the corporate tax cuts over five years to save money, a classic scam that does nothing in the long run but makes a bill look cheaper inside the ten-year budget window. It also blunts the alleged economic benefits from lower corporate taxes for the 2018 midterms and Trump’s 2020 re-election race.
These hastily considered last-minute changes benefit one class in particular. Keeping property taxes and mortgage interest as a deduction while increasing the standard deduction means that the only people itemizing are the rich, who have enough deductions to capitalize. It makes those pieces of the tax code “a subsidy for the very wealthy,” said one NAHB representative to Politico.
Similarly, capping 401(k) contributions, while seemingly a way to stop the rich from sheltering income, would actually more likely hit the middle-class workers who use those plans. In reality, Congress should kill the ineffective 401(k) and increase Social Security. But as long as it exists, the worst possible solution is to cap contributions, while using the savings to cut taxes on businesses and the wealthy. The seriously rich have all sorts of ways to shelter their income; ordinary 401(k) investors mostly have just one.
The millionaire’s tax bracket looks like a reversal of this trend, but it’s actually pretty symbolic. It doesn’t raise nearly as much money as people think, and when combined with the cuts to the first $1 million of income, the estate tax, the alternative minimum tax, and corporate taxes, the rich come out ahead. Wealthy individuals “don’t care that much about the individual rate so long as they get all the other goodies,” an administration official told Axios. That includes the pass-through loophole; wealthy earners could just establish corporations and enjoy a lower tax rate. So a good accountant can ensure that their client never sees a millionaire’s bracket.
The tax bill was already heavily tilted to businesses and the wealthy; the eleventh-hour concessions and rewrites are tilting it further yet—and that’s before the bill is even released, at which point lobbyists swarm the Capitol, pushing to retain tax breaks for their industries. The middle class doesn’t really have a representative in that fight. Expect many more twists and turns before it’s over, most of them thinning the wallets of the little guy and sharing the proceeds with the rich.