GOP fears deficit holes in Trump tax plan

Treasury Secretary, Steve Mnuchin

Less than two weeks after the release of the proposed tax reform proposal by the Trump administration, there are concerns about its contribution to the deficit, and not by the minority party, but by majority Republicans such as Rep. David Schweikert, of Arizona, the soon to be retired Sen. Bob Corker of Tennessee, and Rep. Mark Sanford of South Carolina; all of whom seem to see less light, than darkness, on the horizon with what has been proposed.

“The numbers are really uglier than almost anybody around this place seems to have digested,” said Schweikert . . . a member of the tax-writing Ways and Means Committee.

The Hill, the ultimate inside the beltway publication, reported on Thursday that “The tax plan could cost the government $1.5 trillion in revenue over the next decade, but advocates argue that would be made up for through economic growth unleashed by the corporate and individual tax cuts included in the plan.”

Treasury Secretary Steven Mnuchin has said that the tax plan would bring in $2 trillion because of economic growth, which would be enough to actually lower the deficit.

“The running joke in our office is we work in a math-free zone,” said Schweikert, in opposition to that statement.

Moving even closer to the target was Corker, who, has warned he’ll oppose the tax plan if it adds to the deficit. With his soon to be emeritus status, his cautious reprove is not to be taken lightly.

Sanford says he has concerns about economic assumptions underlying the tax plan, and he was quoted as saying:  “Not only are we in the third-longest economic expansion, but you’re presuming we’re going to go the next 10 years without an economic downturn,” he said. “How many people would bet their house or kid’s educational account or whatever else on that? Is that a valid economic projection on which to project a budget?”

Historically, wide sweeping tax reform, especially for the much sought reduction in the corporate tax rate has not been done since the Kennedy administration, although Reagan's 1986 bill did help move the dial, and provided some relief to certain taxpayers.

Under Trump, with the assertions by Mnuchin aside, there are also valid concerns that this is yet another wealth transfer bill, designed to bolster high-earning taxpayers, at the expense of those on the bottom rungs.

Supporting that view is House Minority Leader Nancy Pelosi who commented that the plan “gives away the store to the wealthy while sticking the middle class with the bill.”

The soft underbelly of the plan, for some critics, is the reduction of the corporate tax rate from 35 percent to 20 percent, but that “change isn't as dramatic as it might seem because due to loopholes and other maneuvers, big U.S. corporations currently pay an effective tax rate of only 18.6%, according to the Congressional Budget Office.”

That, however, is only the headline grabber, for liberal progressives, and those to the far left. The other major issue is the removal of the state and local income tax deductions that just happen to not only hit those who itemize, but those on their returns, but also hits cities as well as states that have large Democratic majorities, as well as those that voted for Hillary Clinton in the 2016 election.

The Empire state, and its queen city New York, is an example of how to raise the ire of those long used to something, to only have it taken away.  The benefit allows the average New Yorker to deduct roughly $20,500 annually from his or her federal taxable income, according to the nonpartisan Tax Policy Center.”

“The Independent Budget Office has estimated that doing away with the deduction would increase New York City residents' taxable income by $28 billion, causing their collective federal tax bill to rise by $8 billion a year. The state and local deduction especially benefits people with incomes of $100,000 or more who live in places like New York, New Jersey and California, where state, local and property-tax bills are high,” says Crain's New York.”

According to the Tax Foundation only 28 percent of taxpayers take advantage of this specific foundation, most Americans don’t, yet the opposition has rallied.

"There has been a big campaign by municipalities to save the deduction because they don't want folks to realize how large their tax burdens really are," said Nicole Kaeding, an economist at the Tax Foundation. She also said it isn't yet clear if repealing the state and local deduction would result in higher tax burdens for New Yorkers who claim the benefit. It is possible the overall lower rates or the higher standard deduction proposed by the administration could make up for the loss of the deduction. But Kaeding said the Trump tax plan is still too vague to know for sure.”

Much like April’s release, but without the one page memo, the administration's proposals are still short on details, yet a possible taxable income increase is still a bone of contention for higher income filers; maybe not exactly in the 1 percent class, but enough to make it an issue.

Tax Policy Center senior fellow Frank Sammartino estimates the state and local deduction costs the government about $100 billion in annual revenue, so repealing it could help pay for the tax cuts Trump is proposing for businesses.

Many people may fasten on the reduction of seven tax brackets to three, and that simplification may be attractive, especially as it goes from 12, to 25, to 35 percent, and, if tied to inflation, might seem attractive.

Despite some earlier predictions, in January, that the president might delete the mortgage interest deduction, this has been retained.

There are also calls for preserving tax deductions for work and higher education, this might be a nod to the earned income credit, and also the American opportunity tax credit, but again, this is yet to be seen.

Adding further criticism is the move on international taxation that, according to the Tax Foundation “in which foreign-source profits of U.S. companies are not generally subject to U.S. tax upon repatriation. [It] Calls for, but does not specify, a global minimum tax intended to protect the U.S. tax base from cross-border income shifting.”

Easing on down the road is the elimination of capital gains taxes, and preservation of the benefits of 401(k) plans and other defined benefits plans. Trump’s attack on capital gains taxes, specifically its elimination “on estates worth more than $5.4 million . ..  could also represent a significant savings for the president who has claimed his fortune is more than $10 billion,” yet the  latter is hard to prove because he has never released his tax returns.

As has been often stated the elimination of the alternative minimum tax could also help Trump pay less taxes. This tax was created in the 1970s to ”ensure that wealthy Americans pay income taxes regardless of various loopholes or write-offs. He paid more than $31 million in AMT in 2005, according to a copy of a portion of that year's tax return that leaked in March.”

If one carefully traces the pattern of these deductions, then the benefit to the wealthy, and the transfer of tax burdens from low to high, is apparent. And, that is a chief  concern of the Trump proposal, despite the revenue neutral stance that was claimed by Speaker of the House Paul Ryan.

If the plan, any plan, was to be revenue neutral then it would reduce tax rates and pay for tax reductions by raising revenue in other ways, claims the left-leaning Center for American  Progress, and subsequently scale back tax preferences. But this was not seen in the plan released last month, which is not revenue neutral and has, as we have seen, has the potential to increase the deficit.  

What we have are mostly regressive actions that give benefits to the highest income households, as Pelosi countered.

Added to that are remarks by the CAP who said that, “Those tax cuts could be paired with cuts to programs for working families in the same legislation. Or the resulting budget deficits could be used as leverage to cut those same programs later. The bottom line is that if Congress passes a tax cut for the rich financed by either budget deficits or spending cuts—or uses both pathways for even larger tax cuts—the American people will be left holding the bag.”