What The Trump Tax Cut Could Mean Politically
The United States Senate just passed a giant tax reform bill this weekend on a nearly party-line vote. It's not law yet but at this point it seems like a done deal and it could plow through the House and be signed by the President this coming week. It's a striking "accomplishment" considering how incredibly unpopular the legislation is. It's polling as the least popular tax legislation of the last 40 years, which amusingly, includes past tax increases such as 1991. And most analyses have indicated millions of Americans will be paying higher taxes as a result of this reform right away next year while more than a third of Americans will be paying more several years down the road.
It's very hard to find any economist or serious person across the political spectrum who believes this tax bill is sound policy. There are the usual partisan cheerleaders of the Sean Hannity ilk who are hyping it, but even conservative analysts with scholarship in economics or a background in tax policy are giving it a giant thumbs-down. Even ardent supply-side Kool-Aid drinkers like Larry Kudlow are raising some red flags about this legislation. On the other hand, it's being pushed through almost unanimously by Republicans in Congress, even those who are considered moderates, and the conventional wisdom by pundits and Beltway insiders is that this is a political kamikaze mission by Republicans. So why the disconnect even on the right side of the aisle?
There are a number of reasons, but the bottom line is that Congressional Republicans have decided that, on balance, their party's interest is best served by getting this legislation through, and from a shameless tactical standpoint, I don't necessarily think they're wrong. First of all, this tax bill is one massive payola to the GOP's corporate and multimillionaire campaign donors, i.e. the most important people on the planet to them. If Republicans made it through this Congressional session without a multi-trillion-dollar financial reward for their campaign investments, the money would stop rolling in for the 2018 cycle and likely into 2020 and possibly beyond. This would disadvantage Republicans across the country in advertising and on-the-ground campaign operation and that alone would likely make the difference in hundreds of local, legislative, and Congressional races.
Second, the tax bill includes a doubling of the basic exemption and a huge increase in the child tax credit. This is important because that will likely result in frontloaded tax cuts for most downscale whites in Middle America, i.e. the Trump base. The Democrats will be grumbling about the "middle-class" who get stiffed on the tax cut, the disproportionate amount of benefits going to corporations and the rich, and how the tax cuts will disappear several years down the road, and while they'll be right, Trump and the GOP can simply ask the average working-class household from Ohio and Michigan if they paid less in taxes in 2018, 2019, and 2020, and most of them will be able to say yes.
Third, foisting even more of the nation's tax burden primarily on blue states with higher state tax rates by eliminating the state and local tax deduction is clever politics that allows the majority of the country to be given tax cuts at the expense of a handful of states that are off the table for Republicans in national and even state-level elections. The few members of Congress who probably did really screw themselves with this vote are House Republicans from blue states whose upper-middle-class constituents will see immediate and substantial tax increases next year because of the removal of the SALT deduction. This includes more than a dozen House Republicans from California who went off a cliff supporting this tax bill, but from a macro perspective on the GOP's part, triaging this already-shrinking faction of their caucus made sense in their cynical long-term numbers game of tax policy. With that said, if the Republicans lose the House next year, expect their losses to come disproportionately from losses in California, New York, New Jersey, and Illinois.
Fourth, by ensuring such a huge chunk of resources to corporate spreadsheets and multimillionaire stock dividents that would otherwise be going to the federal government in revenues, the Republicans straitjacket their opposition from ever being able to go on offense with a progressive agenda that they fear could be popular in the pending era of scarcity and Latin American-level inequality. Not only would this reallocation of resources to the very rich prevent a future Democratic President and/or Congress from enacting the progressive wish list of single-payer health care or universal basic income, it would likely force cuts in the existing safety net, particularly Social Security and Medicare. While forcing cuts to those programs would be politically unpopular to Republicans, they recognize the likelihood that they'll be passing that particular hot potato to Democrats assuming partisan control at some point changes hands in the next 10 years.
All of this certainly comes with risks for Republicans even for the short-term. The legislation remains very unpopular and the backdoor repeal of the individual mandate for Obamacare could blow up the insurance markets in 2018 and result in massive premium hikes for nearly everybody. And if the economy fails to experience any measurable growth felt on Main Street, or even tapers off after the current "tax reform bubble" in the stock market mellows out and Wall Street's current sugar high ends, it's big trouble for Republicans in 2020. But looking at all the angles of the risk analysis, it becomes easier to see why passing this legislation ended up being such an easy lift politically for Republicans despite the objections even from good-faith supply-siders who've been joined at the hip with Republican tax orthodoxy for a half century now. The legislation is indefensibly and irrefutably terrible public policy, but it just might be good politics for Republicans who have proven themselves beyond shame repeatedly now.
It's very hard to find any economist or serious person across the political spectrum who believes this tax bill is sound policy. There are the usual partisan cheerleaders of the Sean Hannity ilk who are hyping it, but even conservative analysts with scholarship in economics or a background in tax policy are giving it a giant thumbs-down. Even ardent supply-side Kool-Aid drinkers like Larry Kudlow are raising some red flags about this legislation. On the other hand, it's being pushed through almost unanimously by Republicans in Congress, even those who are considered moderates, and the conventional wisdom by pundits and Beltway insiders is that this is a political kamikaze mission by Republicans. So why the disconnect even on the right side of the aisle?
There are a number of reasons, but the bottom line is that Congressional Republicans have decided that, on balance, their party's interest is best served by getting this legislation through, and from a shameless tactical standpoint, I don't necessarily think they're wrong. First of all, this tax bill is one massive payola to the GOP's corporate and multimillionaire campaign donors, i.e. the most important people on the planet to them. If Republicans made it through this Congressional session without a multi-trillion-dollar financial reward for their campaign investments, the money would stop rolling in for the 2018 cycle and likely into 2020 and possibly beyond. This would disadvantage Republicans across the country in advertising and on-the-ground campaign operation and that alone would likely make the difference in hundreds of local, legislative, and Congressional races.
Second, the tax bill includes a doubling of the basic exemption and a huge increase in the child tax credit. This is important because that will likely result in frontloaded tax cuts for most downscale whites in Middle America, i.e. the Trump base. The Democrats will be grumbling about the "middle-class" who get stiffed on the tax cut, the disproportionate amount of benefits going to corporations and the rich, and how the tax cuts will disappear several years down the road, and while they'll be right, Trump and the GOP can simply ask the average working-class household from Ohio and Michigan if they paid less in taxes in 2018, 2019, and 2020, and most of them will be able to say yes.
Third, foisting even more of the nation's tax burden primarily on blue states with higher state tax rates by eliminating the state and local tax deduction is clever politics that allows the majority of the country to be given tax cuts at the expense of a handful of states that are off the table for Republicans in national and even state-level elections. The few members of Congress who probably did really screw themselves with this vote are House Republicans from blue states whose upper-middle-class constituents will see immediate and substantial tax increases next year because of the removal of the SALT deduction. This includes more than a dozen House Republicans from California who went off a cliff supporting this tax bill, but from a macro perspective on the GOP's part, triaging this already-shrinking faction of their caucus made sense in their cynical long-term numbers game of tax policy. With that said, if the Republicans lose the House next year, expect their losses to come disproportionately from losses in California, New York, New Jersey, and Illinois.
Fourth, by ensuring such a huge chunk of resources to corporate spreadsheets and multimillionaire stock dividents that would otherwise be going to the federal government in revenues, the Republicans straitjacket their opposition from ever being able to go on offense with a progressive agenda that they fear could be popular in the pending era of scarcity and Latin American-level inequality. Not only would this reallocation of resources to the very rich prevent a future Democratic President and/or Congress from enacting the progressive wish list of single-payer health care or universal basic income, it would likely force cuts in the existing safety net, particularly Social Security and Medicare. While forcing cuts to those programs would be politically unpopular to Republicans, they recognize the likelihood that they'll be passing that particular hot potato to Democrats assuming partisan control at some point changes hands in the next 10 years.
All of this certainly comes with risks for Republicans even for the short-term. The legislation remains very unpopular and the backdoor repeal of the individual mandate for Obamacare could blow up the insurance markets in 2018 and result in massive premium hikes for nearly everybody. And if the economy fails to experience any measurable growth felt on Main Street, or even tapers off after the current "tax reform bubble" in the stock market mellows out and Wall Street's current sugar high ends, it's big trouble for Republicans in 2020. But looking at all the angles of the risk analysis, it becomes easier to see why passing this legislation ended up being such an easy lift politically for Republicans despite the objections even from good-faith supply-siders who've been joined at the hip with Republican tax orthodoxy for a half century now. The legislation is indefensibly and irrefutably terrible public policy, but it just might be good politics for Republicans who have proven themselves beyond shame repeatedly now.
posted by Mark at 2:07 PM
2 Comments:
Excellent analysis. Can you explain the SALT and child tax credit a little more? I've always found tax terminology tricky to understand. And on a personal level, what do you think this means for your taxes and my taxes in 2018?
I would think that if the GOP really didn't want the bill, they could find one or two Senators to vote No and still get their corporate donations to roll in. But as you point out, there are other reasons for them to pass this bill.
All in all, it's pretty depressing. And the catering to the wealthy is not very consistent with "Christian values."
I've always filed taxes as a single filer without dependents so I can't really give too much clarity on the specifics. SALT just means you get to deduct state taxes against your federal taxes, which amounts to a good amount of money for a middle-income household in a state with higher income tax rates. I don't know how Wisconsin's taxes compare to the national average or what your income is, but chances are with two kids in the mix you'll get a tax cut of some sort if you itemize. Again, it depends a lot on Wisconsin's state tax rates. I've never heard WI mentioned among the states whose voters are most likely to take it on the chin because of the SALT deduction repeal so you're probably not gonna be among those immediately paying more.
The child tax credit just means you get to take X amount off the top of your taxable income if you have a child, and could double that amount if you have two kids, etc. When you hear Republicans grumble about how "47% of the country pays no taxes", the biggest contributing factor is that a lot of low-income single mothers are able to take the child tax credit and end up getting thousands of dollars worth of tax rebate checks at year's end rather than paying money in. As a single person without dependents, I can assure you it's the opposite. The basic exemption is (or at least was) something like $8,400. If you make more than that, you're paying federal taxes. I was mostly unemployed in 2005 and made only $11,000 in income. I nonetheless was on the hook for several hundred dollars in federal and state taxes.
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