The US Senate has passed its version of a Republican tax bill, making far-reaching changes to the American tax system all the more likely. What will be the impact of this sweeping reform?
C haos. Desperation. A mess. It was difficult for commentators to find any coherent strategy behind the Republican passage of their tax bill through the Senate. But early on Saturday morning, the bill passed with a 51-49 vote. Amongst the noes was every Democratic senator, and one Republican in the form of Senator Bob Corker.
Entitled the “Tax Cuts and Jobs Act 2017,” it is widely regarded as the biggest overhaul of the tax system since the 1980s. The reforms have far-reaching implications for the future of US society.
The Senate bill is centred around cutting corporation tax from 35% to 20%. Republican leaders argue that it will provide net benefits to the economy, and particularly the middle classes. “It’s a tax bill for middle class; it’s a tax bill for jobs… and it’s a tax bill for business, which is going to create jobs,” President Trump informed business leaders last month.
The Republican argument is based on conservative supply-side economics. “Better incentives - like lower tax rates, being able to write off investments, taxation only on earnings in the United States - will encourage innovation, investment, hiring and pay raises,” writes the former director of the Congressional Budget Office, Douglas Holtz-Eakin.
The theory is disputed, however, by many economists. Surveys of business leaders this year illustrated that their main priority after a tax cut would be share buybacks, allowing them to reward investors and increase their share value. Employees meanwhile would see minimal benefits.
“Under US corporate law, corporations are supposed to be managed for the benefit of their shareholders,” Michael Simkovic, professor of law and accounting at the University of Southern California, told the World Weekly. “The reductions are not structured in a way that requires or even really encourages companies to use the untaxed money to increase employment or economic activity within the United States.”
A report on the Senate bill by the nonpartisan Joint Committee on Taxation’s (JCT) found that the proposed changes would generate $458 billion in increased revenues across the 10-year budget window. Republican Senate Majority Leader Mitch McConnell has consistently claimed it would be “revenue neutral.” Instead, says the JCT, it will add around $1 trillion to US debt.
Equally, research has shown that the tax benefits skew towards the wealthy. The Tax Policy Center, a nonpartisan think tank, calculated that after initial small tax reductions across all groups, by 2027 low- and middle-income taxpayers would see “little change” in their after-tax income. In contrast, the top 1% Americans would be paying on average $26,880 less tax, and the top 0.1% an extraordinary $182,030.
A particularly divisive portion of the Senate bill concerns Obamacare. The bill partially funds its proposed tax cuts by repealing the individual mandate. The Congressional Budget Office reported that this would save the government $338 billion. But this would be at the cost of 13 million fewer insured people by 2027. As a result, insurance premiums are expected to increase on average by 10% annually, increasing the burden on poor and infirm Americans who rely on Obamacare.
The individual mandate is a tax penalty instituted as part of Obamacare for those who do not purchase insurance. It is intended to incentivise people, regardless of health, to join the programme and establish large ‘pools’ of funding to sustainably support those who need to claim.
“People will choose to not be covered, which is a shame,” Republican Representative Illena Ros-Lehtinen told the Washington Examiner, “but on the other hand, forcing them has never been a great Republican position.”
Democrats, by contrast, are furious. “I’ve said it before, and I’ll say it again: If you vote for people to lose their health care to pay for tax cuts to the top 1%, then you need to lose your job,” tweeted Senator Kamala Harris on Monday.
US national debt already stands at $20 trillion, with the ratio of federal debt to GDP at its highest levels since WWII. Democrats increasingly believe that Republicans will use the economic costs of their tax plan to justify cutting more welfare programmes - known in the US as entitlements - built to help low-income Americans. In an interview this week, Republican House Speaker Paul Ryan committed to target “entitlement reform, which is how you tackle the debt and the deficit.”
Reports indicated that corporate lobbyists wielded sweeping influence over the final version of the tax bill. What is more, Democrats claimed they were actively shut out of the drafting of the bill. Democratic senators reported how their Republican colleagues even blocked their motion to adjourn proceedings to allow them to read the 479-page bill - covered in handwritten last minute amendments.
“The Republican leadership never had any intention of making this a bipartisan bill,” Democratic Senator Joe Manchin told CNN. Republicans have rejected all such charges.
Political commentators have drawn parallels to past major pieces of tax legislation. President Ronald Reagan’s Tax Reform Act in 1986 was the subject of months of policy negotiation, with the final product backed by 30 Senate Democrats. By contrast, with the Tax Cuts and Jobs Act 2017 “the point is not sober deliberation, but rather quick victory,” argued William A. Galston, senior fellow in governance studies at the Brookings Institution.
According to the New York Times, “a trading floor” mentality has gripped Washington “where any deal is worth entertaining so long as it brings votes.” This atmosphere has turned the tax plan into a haphazard “christmas tree” stuffed with favours to various interests, rather than a coherent piece of legislation.
For example, Republican Senator Lisa Murkowski of Alaska’s vote was secured by including a provision to allow oil drilling in Alaska’s 1.5 million acre National Wildlife Refuge. She has long campaigned for it as a necessary boon for Alaska’s economy. Environmentalists called the move “utterly shameful”.
Some argue that there is a deeper partisan animosity at play. The bill ends deductions of state and local taxes (SALT) from citizens’ federal tax bills. Analysis has shown that the largest increases in the federal tax burden will come in high SALT, and coincidentally solidly Democratic, states.
Democratic governors from New York, New Jersey and California, called it a “targeted attack” on their states.
“It’s death to Democrats,” Stephen Moore, conservative economist and ex-adviser of the Trump campaign, told Fox Business.
The next few weeks will be a delicate balancing act. Before its final passage, the House of Representatives and Senate have to combine their slightly differing versions of the tax plan in a process called “reconciliation”. Main negotiation points include repealing the individual mandate (absent from the House bill) and the end of the SALT deduction; the latter is vocally opposed by twelve Republican members of the House from high SALT states.
The looming threat that Democrat Doug Jones could win the Alabama special election on December 12 has injected urgency to Republican haggling. Suddenly there would be 49 Democratic Senators. If two Republicans defected the bill would fail.
But compromises are being made, and Republican optimism is prevailing. “I can’t imagine having come this far we’re not going to finish the job,” Senator McConnell assured radio host Hugh Hewitt.
Meanwhile, Democrats are turning opposition to the bill into a rallying cry for the 2018 midterms. A Quinnipiac University national poll found that 53% of Americans disapproved of the Senate tax plan. “If Democrats properly seize this issue, they can potentially win over most every swath of electorate critical to next year’s midterm elections,” wrote Hillary Clinton and Bernie Sanders’ campaign managers in a joint memo.
Dogged by growing investigations by Special Counsel Robert Mueller into alleged links with Russia, President Trump is particularly keen for a major legislative victory for his administration. He didn’t ask much of his Republican senators at a White House lunch this week, only to “come out with something where everything is perfecto.”