Can Americans Get a Tax Cut? 5 Big Questions Republicans Need to Answer

August 29, 2017

by Jonathan Decker


With the largest Republican majority since 1928, one would think that enacting tax cuts (a signature pillar of the Republican Party) would have been low hanging fruit for our elected officials.

Unfortunately, with only 48 legislative days left in 2017, the clock is ticking. Time is running out for the Republican Congress to make good on a promise that American families are truly counting on them to deliver.

So what’s the hold up? Here is a cliff notes version of the 5 biggest obstacles holding back tax cuts:

1) Tax Cuts or Tax Reform?

Right from the starting gate, Republicans in Congress have different opinions about whether we should actually cut taxes or merely reform the tax code. The word “reform” is used to sugarcoat “revenue neutrality.” A revenue-neutral tax plan will not, in the immediate term, reduce federal revenues.

Mitch McConnell has signaled he is only open to a revenue neutral tax plan — but why? One would think Republicans would want the government to have less money because we want the government to do fewer things, and that’s putting aside the potential for increasing federal revenues spurred by economic growth via tax cuts.

Supply-side champion Stephen Moore has slammed calls for revenue-neutral tax reform stating:

Revenue neutral means for every dollar you cut for one person someone else has to pay that dollar…I don’t think you can give people a very good, meaningful tax cut [if you maintain revenue neutrality]. Even if the Republicans can only achieve a 10- or 15-year tax cut, it should not be revenue neutral — it should be a tax cut for the economy…If you get more growth, then that growth should make up in the medium term for that loss in revenue.

2) Full, Immediate Business Expensing?

On the business side, Republican infighting has commenced over whether or not full business expensing should be included as part of the tax plan.

For the arguments in favor of full, immediate business expensing, the Tax Foundation notes:

Under current law, corporations are required to depreciate the cost of capital investments over several years or decades. The result is that companies cannot fully deduct those investment costs in present-value terms.

Americans for Tax Reform explains that under current law:

If a business buys a box of paperclips, that’s a tax deduction in the year of purchase. If, however, that same business buys a computer, it will have to be slowly-deducted (depreciated) over five years.

Small businesses can already deduct most depreciable assets in the first year today (so-called “179 Expensing”).  However, larger businesses and real property owners cannot… The principle [behind full, immediate business expensing] is a simple one—a business has to spend the money for the asset in the first year. They should also get the tax deduction in the first year….Depreciation is needlessly complex and economically destructive.

However, numerous prominent free market thinkers have come out with important arguments against full, immediate business expensing. Here is RealClearMarkets editor John Tamny’s take on how full, immediate business expensing would distort our economy to benefit industries of the past:

[Full, Immediate Business Expensing] subsidizes yesterday’s companies like General Motors at the expense of more advanced ones of tomorrow like Uber.  Uber’s creation of an app that brings sellers and buyers together is the source of its $70 billion valuation; one rooted in very little plant & equipment.  The latter describes Apple, Amazon and Google too.  The assets of these advanced companies are the people who show up for work each day, yet Republicans are crafting a plan meant to subsidize the doings of companies from the past, and that require enormous amounts of heavy machinery to conduct business.  So while corporations as taxpaying entities are a fiction as is (shareholders pay all taxes), the plant & equipment subsidy embraces yesterday at the expense of today and tomorrow.  At risk of being repetitive, Apple’s high valuation is a function of it leaving the manufacture of its phones and computers to other parts of the world where plant & equipment still inform innovative economic activity.

3) Should Tax Cuts Be Retroactive?

“Retroactivity” is the question of whether tax cuts should be back-dated to include some or all of our income in 2017, or if the tax cuts should take effect in 2018.

From a political perspective, this one is easy. If Republicans wish to reap the greatest political benefits from overhauling our outdated tax code, the tax cuts must be retroactive so that people receive an eye-opening, larger-than-normal tax refund check come April. That will give Republicans the strongest leverage going into the 2018 midterm elections.

4) Should Tax Cuts Be Permanent or Temporary?

THERE IS NO SUCH THING AS A PERMANENT TAX CUT!

Taxes are always subject to change at the behest of Congress. Politicians hide behind this talking point in order to claim their pursuit of revenue-neutral tax reform is done for the benefit of enacting “permanent” reforms. It’s a red herring.

5) Which Deductions and Loopholes to Close?

The tax code is riddled with all sorts of carve outs and loopholes that benefit a variety industries, individuals, and even states. Figuring out which loopholes to close together with lowering tax rates will be a difficult task, and one can anticipate that those receiving beneficial treatment under the current code will fight against changes that are perceived as harmful to them.

Hopefully this cheat sheet will be useful as we navigate the very tricky tax waters in the coming weeks. Fundamentally transforming our tax code will not come easily, but as we all know, Americans are depending on Congress to succeed.

Photo credit: Ken Teegardin via Flickr, CC BY-SA 2.0


Jonathan Decker is the Chief Economic Correspondent for TheNationalPulse.com.

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