Focus On One Particular Loophole In GOP's New Tax-Cut Plan

[ Posted Monday, September 18th, 2017 – 17:26 UTC ]

The Republicans are getting ready to unveil their tax-cutting plan. Reportedly, Treasury Secretary Steve Mnuchin has been meeting with congressional GOP leaders to come up with a plan both the White House and congressional Republicans can get behind. So far, they've been fairly secretive about this effort, because no matter what they decide they're bound to annoy at least one faction of their own party. To say nothing of Democrats, or the public at large.

The original effort was supposed to be a "once-in-a-generation reform of the entire tax code." It was supposed to be "revenue-neutral," which makes the entire exercise nothing more than redistribution of the tax burden. After all, if you make a whole lot of changes to the tax system but wind up collecting the exact same amount of money, then all you have done is to shift some of those taxes from one group to another. Republicans generally abhor "redistribution of wealth," but not in this particular case, because in practice it would almost certainly mean shifting a large part of the tax burden from businesses to individuals, and from the wealthy to the middle-class.

The original GOP idea has already jumped the rails, though. Now they're not even going to pretend to shoot for the "revenue-neutral" target. They've decided it is too hard to do that and yet still create big new tax breaks for the wealthiest among us. Even with their fake math (or, as they call it, "dynamic scoring"), the numbers just don't add up. So tax "reform" has already morphed into merely being a round of tax cuts. Which will add to the deficit. This is the first hurdle Republicans are going to have to grapple with, because while most congressional Republicans are accomplished players of the game titled: "The Deficit/Debt Problem Must Be Addressed Before All Else... But Only When Democrats Are In Control," there are actually some Republicans who remain deficit-hawks no matter who is running things. If the new tax plan explodes the deficit, there will be pushback from the fiscal conservatives who don't shed their ideology with every change in political power.

Already you can figure out what their highest priorities are from how Republicans are talking about tax reform. First mentioned is always cutting the corporate tax rate, so that has to be seen as their highest priority. This would mean a lot less money coming in, so what usually follows are ideas as to how to at least partially make up the difference. But you'll notice that almost all of these ideas revolve around cutting "loopholes" that ordinary people (and not businesses) use when filling out their taxes. They're going to attempt a massive rewrite of Schedule A, in other words. Perhaps state and local income taxes will no longer be deductible. Or some of the deductions on Schedule A like the mortgage interest deduction will be capped at a certain amount. All of this tinkering will affect those income tax filers who do not use the standard deduction, but instead itemize their deductions. To further confuse the issue, some Republicans are talking about offsetting this in part by doubling the standard deduction. This would make it more advantageous for more people not to itemize, and instead use the higher standard deduction. This could indeed soften the blow of changing the rules for Schedule A, but it'll be so complicated that each tax filer will have to calculate whether the changes actually help them or hurt them in the end, and by how much.

What I haven't heard discussed at all is changing any other loopholes. The ones that businesses routinely use, for instance. All the talk on the business side is about lower tax rates and actually expanding loopholes, in order to lessen business tax burdens. Which ultimately means shifting the tax burden from businesses to individuals, as previously mentioned. Businesses pay less, so individuals will have to pay more to take up the slack. This is all part of an ongoing trend that has taken place over decades, so it's really nothing new.

After the Republicans reveal their new tax-cutting plan, most of the discussion will revolve around the changes to so-called "loopholes" that average people actually have the opportunity to use. But keep an eye on two specific things to see how this is nothing short of a massive distraction to what Republicans are really trying to do.

The first is an issue Donald Trump explicitly campaigned on. He would, he promised from the campaign trail, make hedge fund managers pay their fair share in taxes by getting rid of their ability to use the "carried interest tax loophole" in order to pay roughly half the tax rate they should be paying. But it's doubtful this promise will be reflected in the GOP tax plan, at least if Paul Ryan and his ilk have anything to say about it. Hedge fund managers are big political donors, after all.

The second is the most blatant example of slashing taxes on the rich currently under discussion. Both Trump and the congressional Republicans want to get rid of the Alternative Minimum Tax. The A.M.T. was created for precisely the same reason that Republicans are now theoretically supposed to be trying to accomplish -- to limit the number of loopholes wealthy people can take to reduce their taxes to a rate far below what average working Americans pay on their income. Here's how it works. A tax filer fills out all the forms, claims all the deductions allowable, and comes up with the amount of taxes they should have paid for the year. Then, if they are high-income filers, they have to do another worksheet to see if they have deducted too much of their income. If their taxes are too low, then they are charged an extra tax (the A.M.T.) which in effect limits their ability to write off most of their income.

Most workers with few deductions don't even have to use this worksheet -- it is only for high-income filers, and only for those who have a lot of deductions of one sort or another. Now, it could be argued that the A.M.T. is hitting far more middle-class Americans than it was originally intended to, which could be fixed by raising the bar for who has to fill the worksheet out. But that's not what Republicans are calling for -- instead, they want to abolish the A.M.T. This would mean massively lower taxes for the wealthiest Americans, because instead of closing loopholes, this would be flinging the loophole door wide open.

Think that is an overstatement, or hyperbole? Think again. As I've pointed out previously, we only have one of Donald Trump's recent tax returns available to look at. On it, Trump paid quite a lot on the line for the A.M.T. So much, in fact, that if the A.M.T. were abolished, Trump would have saved a whopping 81 percent of the taxes he owed for that year. If Trump abolishes the A.M.T., he will be cutting his own taxes by over 80 percent, to put it slightly differently.

So when the media examines the new GOP tax proposal, they need to be ready to ask very specific questions so that the public can see exactly what is going on. "Donald Trump promised he'd raise taxes on hedge fund managers, so why doesn't this tax plan do that?" should be the first question asked, in fact. A good followup would be: "If the Alternative Minimum Tax is abolished, President Trump would have saved more than eighty cents of every dollar he paid in taxes, which means while lower-income filers may get tossed a bone, doesn't the meat of this proposal mean that the wealthiest of the wealthy will get jaw-droppingly enormous tax breaks?"

Trump, as usual, has been all over the map on tax cuts. He wants the biggest drop in the corporate tax rate of anyone (from 35 percent down to 15 percent), but has only proposed closing one business loophole at all (carried interest) -- which might not even make it into the final proposal. So businesses get to keep all the writeoffs that they currently use to lower their taxes (virtually no business winds up paying the full 35 percent in reality), and their tax rate will also be slashed. Meanwhile, Schedule A filers are going to have to do some calculating to even see whether they'll save a little bit of money, or have to actually pay more, because individual deductions are on the chopping block.

Last week, during Trump's dinner with "Chuck and Nancy," they apparently got him to agree that cutting taxes on rich people wasn't the way to go. Trump's been making some noises about this, but it remains to be seen whether anyone in the GOP group writing the actual tax plan is even listening. After all, by orthodox Republican ideology, the entire point of cutting taxes is to reduce taxes on the wealthy. That's what all their talk of "job-creators" is all about, after all. Paul Ryan isn't going to change his entire worldview because of a Trump tweet or two, in other words.

But Trump can't have it both ways, especially since we do have that one year of his own tax returns to look at. While many will get distracted by all the other proposed changes, what I'll be focusing on will be whether the A.M.T. is eliminated. Because this one change would have saved Donald Trump 81 percent on his taxes. That is indisputably a gigantic tax cut for the wealthiest of the wealthy. And unlike the other tax the Republicans reportedly want to eliminate (the estate tax), this one change would positively impact wealthy tax filers every single year, and not just when they die. So Trump can claim until he's blue in the face that the GOP tax plan "doesn't cut taxes on the wealthy," but pointing out that he'll personally be saving four out of every five dollars he used to pay in taxes will show this to be the giant lie that it is.

-- Chris Weigant


Cross-posted at The Huffington Post

Follow Chris on Twitter: @ChrisWeigant


11 Comments on “Focus On One Particular Loophole In GOP's New Tax-Cut Plan”

  1. [1] 
    nypoet22 wrote:

    i thought it was eminem.

  2. [2] 
    nypoet22 wrote:

    well, i didn't really, but it's still a good song...

  3. [3] 
    Elizabeth Miller wrote:

    Where is the practical evidence that any of the tax proposals put forth by the Republican cult of economic failure are pro-growth?

    I think the primary focus of the Democrats should be squarely on the premise put forth by congressional Republicans for whatever their tax plan entails. Which is to say that their long-standing and unproven claim that further shifting the tax burden away from the wealthy (read: job creators) is pro-growth is an argument that needs to be obliterated, once and for all.

  4. [4] 
    Balthasar wrote:

    This is a good time to remind your trucker buddy that the GOP won't spend one second on lowering his payroll taxes.

    What they will do is reduce all of his deductions. They'll raise 'sin taxes' on his beer and cigarettes, and gas and license taxes for his truck. If he owns a trailer or house, his property taxes will rise, as the feds cut funding for education, and states and local school boards scurry to cover the gaps in their budgets with local tax income. If he rents, he gets no mortgage deduction, and no deduction for the cost of utilities. Child care expenses are only deductible in a few states, and the enormous cost of child-raising accessories (from Pampers to playpens) is actually subject to sales tax. (A sign of the times: Toys 'R Us is filing for bankruptcy).

    Trouble is, when a payroll worker looks at his paycheck, he sees only a few deducted items listed: Medicare, Social Security, Unemployment insurance. He thinks: "if these things disappeared, I'd be a richer man." That, right there, is the genesis of 90% of the working poor's animosity toward Democrats. Never mind that a third of the money he ends up paying to the government will end up allocated to the Pentagon, it isn't listed, so he doesn't go home seething about the cost of Guantanamo or MOAB bombs. How did democrats manage to allow this slur against the social safety net to become so omnipresent? I can't find an answer, or any indication that anybody's even thought about it.

  5. [5] 
    Elizabeth Miller wrote:

    How did democrats manage to allow this slur against the social safety net to become so omnipresent?

    Poor communication skills.

    Remember, "You didn't build that."

  6. [6] 
    Elizabeth Miller wrote:

    I almost forgot! Though, I'm not sure how ...


  7. [7] 
    dsws wrote:

    After all, if you make a whole lot of changes to the tax system but wind up collecting the exact same amount of money, then all you have done is to shift some of those taxes from one group to another.

    Not true. You may have made taxation more efficient or less so. Taxation costs people time and money, filling out forms of course, but more importantly on gathering the information they need to document everything. Taxation also has indirect costs. If the after-tax price of one more unit of something isn't worth paying, even though the before-tax price is, one less unit gets bought (and therefore one less unit gets made). It's typically not that the taxpayer became too poor to afford the thing: if you just took their money outright, they probably would still have bought the whatever-it-is. Rather, you've made it look to the economy as though the thing costs more to produce. You've introduced false information, saying that the thing isn't worth making. This is called a dead-weight loss.

  8. [8] 
    Balthasar wrote:

    Where is the practical evidence that any of the tax proposals put forth by the Republican cult of economic failure are pro-growth?

    Yeah, it's amazing: the debate continues to rage, despite the Republican-caused Recession of 2008 and the resultant Austerity-vs-Stimulus debates that followed both here and in Europe, where the failure of austerity regimes has led to a "Keynesian resurgence" among decision makers.

    Not so much in the USA, where a 'mixed' approach to recovery was (by political necessity) applied, with predictably mixed results. Each side blamed the other for 'hindering' the recovery, even as the economy improved, the deficit shrank, and the employment situation improved (in most places).

    But while the basic paradigms of left and right remain unchanged (tax the wealthy or not, respectively), there is a remarkable amount of disagreement within each camp on other basic economic issues, such as free trade.

    On the Right, Trump and the populists have broken on the issue of Trade with the Reagan crowd and the Chicago School, for whom free Trade was a tenet. Trump's recent attempt to re-write NAFTA has drawn criticism from business leaders, and re-opened an old wound regarding ISDS (investor-state dispute settlement) provisions, which allow investors to sue foreign governments, and have been invoked 59 times under NAFTA. On August 23rd the chief executives of the three largest American business associations wrote a public letter to Robert Lighthizer, the United States Trade Representative, warning him against changing these provisions, but these very provisions are in the target sights of the 'America First' crowd, who view international arbitration panels as undermining American sovereignty.

    Trade policy is no less divisive on the left, where for instance, liberal economists Paul Krugman and Joseph Stiglitz disagree about the value of Free Trade and the Eurozone (Stiglitz and Beatle Ringo Starr were both in favor of BREXIT, too). Famously, Bernie was against free trade, while Clinton and Obama supported TPP, because it was viewed by them as a way to counter moves by China to corner markets in the Pacific rim (late in the 2016 campaign, Hillary moderated her position, saying that she wanted to 'see the details' of a finished TPP agreement before endorsing it).

    But as I said up front, don't expect the GOP to change it's public stance favoring tax breaks for the rich. It may be, as one pundit said recently, the only glue that still holds their party together.

    Democrats have just one play here, IMHO: to remind the working poor that Trump has brought into the party what a raw deal that is for them. To do this, Democrats need to make a plan addressing all of the inequities that I noted in my previous post [7].

  9. [9] 
    Kick wrote:

    The second is the most blatant example of slashing taxes on the rich currently under discussion. Both Trump and the congressional Republicans want to get rid of the Alternative Minimum Tax.

    The third is the Estate Tax, which the GOP likes to refer to as the "Death Tax" and whine how it affects the middle class and farmers... when nothing could be further from the truth.

  10. [10] 
    BashiBazouk wrote:

    Meanwhile you continue to avoid addressing important issues like Elizabeth Warren's Netroots speech and efforts like One Demand.

    I don't think anyone cares to address One Demand until you get off your ass and add the purported list of low donation candidates. We just went through a major campaign season and the only update to your site is a re-brand. I think you are completely naive about how money works and the ability to control it and are tilting windmills in thinking that money is the driving force of all other problems in politics, but I would find value in knowing who are low donation candidates. Too bad it looks like your site will never be a source for that information...

    As to Elizabeth Warren's Netroots speech, lots of energizing the base and listing of problems but non-existent on actual solutions. Most of the issues listed are championed by centrist democrats and those that are not don't seem to have any numbers behind their solutions. Bernie's medicare for all, single payer plan sounds interesting but until I see the numbers it's just a sound bite to me. How is it going to be paid for? If I am on a decent partially paid for by employer medical plan, how is my medical care going to change? Is it going to change for the better? The worse? Once you adjust for what my employer pays in, what I pay in, will that equal out to the tax increase? I mean contrary to all the rhetoric, the US does have the absolute best medical care in the world, if you can pay for it. When an Oil Sheikh gets cancer he does not go to Norway for treatment, he goes to the Mayo clinic. How does this change with Bernie's plan? Free college for everyone is another issue, that like medical care, is a devil in the details. I need to see those details before I can support such an issue and I don't think Bernie or Warren have figured them out yet nor have a plan to actually pass them...

  11. [11] 
    BashiBazouk wrote:

    But the list of candidates that have made the small contribution commitment actually is on the website- there are none yet.

    That pretty much sums it all up, doesn't it? Being ideologically pure but out of office does not accomplish anything. Plus, though I dislike the ramifications of the citizens united decision, I'm not convinced that the SCOTUS interpretation of the constitution was wrong.

    I do not think it is naive to think that Big Money effects every other issue. It is naive to think that it doesn't. How many issues can you name that are not effected by Big Money?

    There is a big difference between "effected" and "decided" by big money. But it really comes down to rights. Under our system, do businesses, corporations, non-commercial groups of various flavors or even religious organizations have a right to express their political views and petition the government or the people? Constitutionally, I think they do. I also think that it must be limited or evened out so to not overpower the will of the people, but those groups completely shut out of government is likely just as bad as giving them too much political power.

    The other problem I see is I'm not convinced that low donations is a magic bullet to solve the problems you seek solved. Obama and Bernie did quite well with the under $200 donations but so did Donald Trump. I also look abroad at other countries that have strict campaign finance regulations, shorter campaigns and otherwise considerably less money involved in politics and I'm not seeing noticeably better candidates or political outcomes. Why is that?

    Field of Dreams was a fantasy. If you built it they will not come unless you have a compelling reason to come. So far I see no compelling reason. National or even state candidates are not going to flock to your idea because they want to get elected. If you have no list, you have no reason to visit. I would find value in ratios of small to large donations or articles about specific politicians and how money has determined or not determined their votes and policies. But as an absolutist idea that I don't necessarily agree with (at least it's absolutist nature), with little behind it: pass. And I suspect I'm not the only one...

    Also, tone down that marketing speak. Nothing says "please ignore me" like marketing speak...

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