- Tax Reform 2.0 Effort Launched in The House
- Expensing, Retirement and Education Incentives
- The Big If: Capital Gains Indexing
- How Indexing Would Work
- Timetable and Outlook
- The GOP tax cuts aren’t popular, so Republicans want to do more of them
- This isn’t exactly a slam-dunk for the GOP
- This probably isn’t going anywhere, at least not this year
Tax Reform 2.0 Effort Launched in The House
Making the individual tax cuts permanent is the cornerstone of a new effort by House Republicans to craft Tax Reform 2.0.
House Ways and Means Committee Chairman Kevin Brady (R-Texas) has indicated that the White House and House Republicans are planning a second phase of tax cuts that may be in two or three new pieces of legislation.
The first order of business will be to permanently extend tax cuts for individuals that are set to expire after 2025 under the Tax Cuts and Jobs Act. “The focus here is going to be on making sure those middle class tax cuts and those small business tax cuts are made permanent,” Chairman Brady told FOX News in early July.
The Committee pointed to a study by the nonpartisan Tax Foundation of the positive economic effects of making the cuts to individual rates permanent. That study found:
- An additional 1.5 million full-time jobs would be added over the long-term.
- Permanent cuts would generate an additional 2.2 percent increase in long-run GDP.
- Long-run wages would be boosted by 0.9 percent.
Expensing, Retirement and Education Incentives
Making the TCJA’s expensing incentives permanent is one of Brady’s goals, along with extending the higher AMT exemption, the increased child tax credits and the doubled standard deduction. New areas of change identified by Brady are retirement and education incentives.
“We think the timing is right to help families save more and earlier in life,” Brady says on the Committee website. What kind of incentives? The Ways and Means Committee has assured taxpayers that it will not abolish the pretax benefit for retirement savings.
“Rothification” was floated during the first round of tax cuts, but did not make it into the final bill; Brady, however, has yet to identify the new types of savings incentives.
On education, the Committee is looking to streamline the many existing education tax benefits and combine them into a package of middle class benefits covering both college and vocational education. Charitable contribution deductions are another area slated for change under the next phase of tax reform.
The Big If: Capital Gains Indexing
Capital gains indexing could be a part of a second tax reform bill, although Chairman Brady has been hesitant to definitively state that it is part of the plan. Instead, Brady said Republicans are open to the idea of indexing, as reported by Politico.
Conservative groups, such as Americans for Tax Reform, have called on President Trump and Treasury Secretary Steve Mnuchin to implement capital gains indexing by executive order, but the Treasury Secretary has been cool to the idea due to the legal uncertainty about changing the tax code through executive order.
The best indicator that Congress is serious about capital gains indexing is the release of a June 2018 report by the Congressional Research Service (CRS) entitled, Indexing Capital Gains for Inflation. CRS prepares reports in response to Congressional inquiries and identifies upcoming issues while explaining legislative options. This 25-page report does just that.
How Indexing Would Work
Indexing capital gains would eliminate the part of capital gains resulting from inflation. The mechanism is an increase in the basis of a capital asset by the inflation factor occurring since the asset was acquired.
CRS offers the following example: If the inflation rate is 2% and the real rate of return is 7%, an asset purchased for $100 would sell for $109.14 a year later if interest is compounded annually. Without indexing, the gain if the asset was sold would be $9.14. With indexing, the basis would be increased from $100 to $102, and the gain would be $7.14.
One issue that has to be decided is which Consumer Price Index to use. Chained CPI is now used for the tax code, which results in a lower inflation factor than the traditional CPI.
Also, Congress will have to address whether corporate capital gains will qualify, whether both short-term and long-term assets will be indexed and what happens when indexing causes a loss. Finally, Congress would need to decide whether indexing would be prospective only or would apply to taxpayers’ existing holdings.
No matter how it is done or what benefits flow from indexing capital gains, it would complicate existing capital gains law and would be tricky to implement.
Timetable and Outlook
Although no bill has been introduced or reported the Committee so far, the draft of a second tax package is being circulated to House Republicans. A legislative outline could be made public as early as August, with votes in the fall. The biggest roadblock is the Senate.
Without putting tax reform in a budget reconciliation bill, it would take 60 votes, which require support from a number of Democrats, to pass tax legislation.
Democrats could find themselves in a tough position in the fall if they are forced to vote for or against a permanent extension of the individual tax cuts immediately prior to the midterm elections. If nothing else, it should be a lively fall!
The GOP tax cuts aren’t popular, so Republicans want to do more of them
House Ways and Means Committee Chair Kevin Brady speaks at a White House celebration of the GOP’s passage of its tax cut bill in December 2017. Alex Wong/Getty Images
Republicans are having a hard time selling their tax bill to voters — but that hasn’t stopped them from introducing another one.
House Republicans on Monday unveiled “Tax Reform 2.0,” a new set of proposals to stack onto the tax legislation they passed in 2017. The proposals would make the individual tax cuts contained in last year’s legislation permanent — they were scheduled to expire after 2025.
Republican leaders had anticipated the tax cuts they passed in 2017 would be a big win with voters, but thus far, that hasn’t been the case. The new legislation package seems to be a sort of eleventh-hour effort by the GOP to sell voters on the tax reform effort.
The 2017 tax bill cut taxes for most Americans, including the middle class, but it heavily benefits the wealthy and corporations.
It slashed the corporate tax rate from 35 percent to 21 percent, and its treatment of “pass-through” entities — companies organized as sole proprietorships, partnerships, LLCs, or S corporations — will translate to an estimated $17 billion in tax savings for millionaires this year. American corporations are showering their shareholders with stock buybacks this year, thanks in part to their tax savings.
The new proposed package, announced by House Ways and Means Committee Chair Kevin Brady (R-TX) on Monday, seeks to make permanent individual tax cuts, small-business income deductions, and a larger child tax credit under the 2017 law that were set to expire after 2025.
The legislation also contains a number of provisions aimed at boosting retirement savings and savings accounts for families and would make it easier for startups to write off their costs. The package initially consists of three bills sponsored by Republican Reps.
Rodney Davis (IL), Mike Kelly (PA), and Vern Buchanan (FL).
“Now it’s time to change the culture in Washington where we can only do tax reform once in a generation,” Brady said in a statement. “This legislation is our commitment to the American worker to ensure our tax code remains the most competitive in the world.”
This isn’t exactly a slam-dunk for the GOP
Brady is hoping to get a House vote on the legislation this month, but whether there’s a significant appetite for it isn’t really clear.
Polls show many Americans aren’t noticing tax cuts in their paychecks, and the bill has actually become less popular with voters over time.
According to a RealClearPolitics average of polling, 37 percent of voters approve of the GOP’s tax cuts, while almost 42 percent disapprove.
One Republican strategist recently told me that the party has found taxes are “not as big of an issue as we thought it might have been in January or February of last year.”
As Vox’s Tara Golshan pointed out, instead of messaging on the taxes in the 2018 midterms, many Republican candidates seem to have pivoted to immigration and race-based attacks.
There is also resistance within the GOP to this Tax Reform 2.0 plan.
Nancy Cook and Bernie Becker at Politico reported on Sunday that multiple House Republicans from high-tax states are worried about what will happen with state and local tax deductions (the SALT deduction) with the new proposal.
A number of Republicans from states such as California, New Jersey, and New York voted against the 2017 bill because it capped SALT deductions, saying it would increase taxes on too many of their constituents.
This second set of provisions would make the deduction cap permanent.
This probably isn’t going anywhere, at least not this year
House Republican leaders pushing the new tax legislation think it would be a bad look for Democrats to vote against what they’re positioning as tax relief for the middle class ahead of the midterms, but it appears some Republicans believe a vote would be a bad look for them, too. The Senate isn’t expected to take the bill up this year.
President Donald Trump appears on board with the idea. Over the summer, he touted the idea of a “phase two” of tax reform, saying he wanted to reduce the corporate tax rate more, to 20 percent from 21 percent, and do something to help the middle class. According to Politico, the White House is principally concerned with making the 2017 tax cuts permanent.
Of course, there’s another wrinkle to all of this tax-cutting: the deficit. The GOP has insisted that its tax cuts will lead to so much economic growth that it won’t affect the federal deficit or government debt, but thus far, that hasn’t been the case.
Jared Bernstein, a senior fellow at the left-leaning Center on Budget and Policy Priorities and former chief economist for Vice President Joe Biden, warned in a Washington Post op-ed on Wednesday that the GOP’s second round of tax reform would disproportionately benefit the wealthy and add even more to the deficit than the estimated $1.5 trillion the 2017 bill is expected to tack on over the next 10 years.
According to the estimates from the CBPP, the proposal would cut taxes by about $32,000 for the richest 1 percent of households and reduce them by $340 for the bottom 60 percent. And the Joint Committee on Taxation estimates that the extension bill would cost $650 billion from 2019 to 2028.
“These reckless tax cutters are still regaling anyone foolish enough to listen to them with trickle-down fairy tales,” Bernstein wrote, “but such tax policy will obviously only amplify the extent to which current economic growth is boosting profits, not paychecks.”
“,”author”:”Emily Stewart”,”date_published”:”2018-09-11T14:30:02.000Z”,”lead_image_url”:”https://cdn.vox-cdn.com/thumbor/CKobzvdKOYVZblQON8m0DZ4ZEBQ=/0x83:3000×1654/fit-in/1200×630/cdn.vox-cdn.com/uploads/chorus_asset/file/12891645/896284574.jpg.jpg”,”dek”:null,”next_page_url”:null,”url”:”https://www.vox.com/policy-and-politics/2018/9/11/17845780/kevin-brady-republican-permanent-tax-cuts”,”domain”:”www.vox.com”,”excerpt”:”Republicans rolled out a new tax reform package just ahead of the midterms.”,”word_count”:941,”direction”:”ltr”,”total_pages”:1,”rendered_pages”:1}