GOP tax-cut legislation

The Unintended Legacy of the GOP Tax Cut

Congressional Republicans are on the precipice of passing a major tax cut that modestly boosts US economic growth while achieving a lasting legacy of helping US corporations integrate even more into the global economy by keeping earnings offshore and shifting profits to tax havens.

Congressional Republicans are on the precipice of passing a major tax cut that modestly boosts US economic growth while achieving a lasting legacy of helping US corporations integrate even more into the global economy by keeping earnings offshore and shifting profits to tax havens.

Lost in the hoopla over the GOP-backed tax bill that Congress passed and sent to President Trump are statistics showing a steadily expanding global economy.

While tax bill backers promise a domestic economic boom and Trump rails against unfair trade deals, the International Money Fund reports the global economy has grown this year by 4.2 percent. That doesn’t square with all the talk of protectionism. It also suggests that the United States may not be the only kid on the block.

One reading is that the world has become more economically integrated, regardless whether political leaders like it or not. That explains why many US corporations have lobbied against major changes proposed by Trump in the North American Free Trade Agreement or why the 11 other nations that signed the Trans-Pacific Partnership are still pushing ahead even though the United States pulled out.

PwC, a British economic consultancy firm, predicts 2018 will see another expansion of the global economy that is broad-based. One exception noted by PwC will be Britain, which is facing economic headwinds as it tries to negotiate its way out of the European Union following the Brexit vote.

The statistics don’t reflect the damage to regional economies and local communities caused by globalization. But they do reflect what appears like an irreversible force toward more globalization in trade for goods and services and in capital flows.

Conservative-leaning think tanks predict the GOP tax-cut bill will promote economic growth. The Heritage Foundation projects corporate tax cuts will add to US capital stock, but also lower the numbers of hours worked, presumably because of increased investment in automation. The Tax Foundation model, a reliably aggressive pro-growth calculator, predicts tax cuts will boost US Gross Domestic Product in 2018 from 2.01 percent to 2.45 percent, far less than Republican architects of the legislation predicted and not enough to offset the increase in the federal deficit.

U-Penn's Penn-Wharton model, run by a former Bush administration economist, forecasts the GOP tax bill will increase national debt by $1.9-$2.2-trillion by 2027 – after incorporating "dynamic" estimates of economic growth effects.

Amid skepticism the tax bill will stimulate domestic economic growth, many tax advisers think the legislation’s corporate alternative minimum tax provision will encourage more, not less offshore manufacturing. The deferral of tax on foreign income will provide an incentive to keep earnings from foreign operations offshore and to shift profits to offshore tax havens. Ironically, these provisions may bolster US-benefitted global economics.

In his national security speech this week, Trump warned of intensifying economic competition in the world. His solution: To look inward. The data suggests that’s old school. Obsessing about our border security and overlooking the very economic competition he called out in his speech is a strange brew and a broken policy.

When the tax-cut legislation finally passes this week, as expected, there will be a lot of high-fives and political backslaps. Congressional Republicans will have handed Trump his first significant presidential victory and kept a promise to GOP donors.

What may follow is a political uprising over the decidedly non-populist bent of the tax bill and, eventually, an even greater gasp when the tax legislation’s greatest advance is to speed automation and engage in even greater global economic integration. Ironically, that might turn out to be the legislation’s most lasting, if unintended legacy.

 

What Lurks in the 479-Page Senate Tax Cut?

New Yorker Magazine’s Andy Borowitz spoofed that a child’s scribbled drawing accidentally was included in the Senate GOP tax-cut legislation. With time to read the actual 479-page bill that the Senate passed, the buried provisions might be more disturbing than a scribbled drawing.]

New Yorker Magazine’s Andy Borowitz spoofed that a child’s scribbled drawing accidentally was included in the Senate GOP tax-cut legislation. With time to read the actual 479-page bill that the Senate passed, the buried provisions might be more disturbing than a scribbled drawing.]

New Yorker Magazine’s Andy Borowitz spoofed that a scribbled drawing by one of Senate Majority Leader Mitch McConnell’s grandchildren made its way into the GOP-backed tax cut bill approved late last week. With time to read the bill this week, people may uncover a lot worse than scribbling tucked away in the Senate measure’s 477 pages.

Nothing will be final until a House-Senate conference committee resolves differences in their tax cuts and the compromise goes back to both chambers for final passage. Media coverage will focus on the size of the corporate tax rate decrease, the number of individual taxpayer brackets, the impact on the federal deficit, benefits accruing to wealthy taxpayers and the fate of the Obamacare individual health care mandate.

There also will be stories searching the shadier corners of the tax bill and how they got there.

Wielding a copy of the Senate tax bill with what appeared to be margin notes as amendments, independent Maine Senator Angus King told Face the Nation that a bill to cut corporate and individual tax rates would take, at most, 50 pages. He wondered aloud on camera what the remaining 420 or so pages contain. “We’re going to find some really stinky stuff,” King predicted, pointing to provisions dealing with oil and gas extraction.

One of the clear winners in the GOP tax-cut legislation, according to Tony Nitti writing for Forbes, are tax attorneys and CPAs. “As an American taxpayer, I’m saddened by the way the process played out. As a tax adviser, I’m downright giddy. The eventual signing of the Senate bill into law, regardless how it is ultimately married with the House bill, will signal the start of hunting season for tax professionals who…will find ample opportunity to game the system and minimize their clients’ tax liability.”

“Business owners or managers that plan well and pay for good advice will be able to achieve much more favorable rates,” Adam Looney, a senior fellow at the Brookings Institution and a former Treasury Department official, told The New York Times. “I’m not sure if that is a loophole or the intent of the legislation.”

So much for a simple tax code. But who benefits from all the complexity? Nitti offers one example. The Senate version reduces the depreciation period for rental property from 27.5 years to 25 years and excludes landlords from a limitation on mortgage interest deductions. The House version piles on landlord benefits by capping pass-through taxation at 25 percent, as opposed to the current law 39.6 percent.

Another headscratcher was a decision by Senate Republicans to retain “bonus depreciation” for corporations at the expense of retaining the corporate minimum tax.

The eventual tax bill could have unintentional effects. The Hill.com ran a story saying, “Preemptively removing private activity bonds as a financing tool for infrastructure projects would undermine the stated goal of Congress to leverage a $1 trillion investment in our nation’s infrastructure.” Eliminating the tax deduction on private activity bonds was included in the House GOP tax cut bill to save $40 billion over the next decade.

Published stories in the last few days have pointed out other buried provisions in the House and Senate tax measures:

  • Elimination of a tax credit for pharmaceutical companies to develop drugs for so-called orphan medical conditions;
  • Elimination of a tax credit to small businesses who provide accommodations for workers or customers with disabilities;
  • Elimination of the New Markets Tax Credit intended to spur investment in communities with high unemployment or poverty rates;
  • Eliminates deduction for student loan interest;
  • Eliminates deduction for sexual harassment settlements with gag orders;
  • Allows unborn children to qualify for college savings accounts;
  • Reduces taxes on beer and wine;
  • Lowers taxes on storing and staffing private jets;
  • Retains ability by banks to avoid taxes by making payments to offshore subsidiaries;
  • Allows up to $10,000 per year from 529 college savings plans to pay for religious schools and some home schooling;
  • Excludes car dealers from any limitation on interest deductions; and
  • Provides an employee credit for paid family and medical leave, except for employees in states that require paid family and medical leave.

While the merits and demerits will be discussed ad nauseam in the days ahead, the evidence is pretty clear that the legislation billed by Republicans as a middle-class tax cut is at once a whole lot more – and less – than that.