- The Joint Committee on Taxation’s report on the Senate Republican tax bill was unsurprising.
- Tax cuts outlined in the bill come nowhere close to paying for themselves.
- Sen. Bob Corker’s proposed solution – a trigger that would roll back some of the tax cuts if economic projections were not met after several years – is fundamentally flawed.
- If the bill is adjusted to win Corker’s vote, it may actually discourage business investment over the next few years.
Nobody should have been surprised about the Joint Committee on Taxation’s analysis of the Senate Republican tax bill, which was released Thursday.
The JCT, the congressional body that produces analyses of the effects of tax policy, estimated that the bill would boost the economy only by enough to offset about one-third of the deficit increases caused by tax cuts. As a result, it would grow the federal debt by about $US1 trillion over a decade.
Sen. James Lankford of Oklahoma, for one, noted that the report says what he was expecting it to say:
From the office of Sen. James Lankford (R-OK): Senator Lankford does not understand why this JCT score seems to be freaking everyone out. The score is grossly underestimating economic growth, which everyone knew it would. There is nothing in the score that is a surprise.
— Chad Pergram (@ChadPergram) December 1, 2017
I disagree with Sen. Lankford that JCT’s figures are a “gross underestimate,” but I agree with him that the figures could have been easily predicted by looking at JCT’s past analyses of past tax plans.
I wrote in 2015 for The New York Times about the diversity of opinion among tax modelers; the JCT’s tax models are in the middle of the road, and if they average their models’ results (as they did in Thursday’s report) they’re not going to find that a tax cut comes anywhere close to paying for itself.
Yet Sen. Bob Corker, who has said he wouldn’t vote to add “one penny” to the federal debt, seems to have been under the impression, until Thursday afternoon, that the Senate bill might come within the ballpark of meeting that pledge. Sen. John Cornyn, the majority whip, says Corker has “latched onto” the JCT report, according to The Wall Street Journal.
Adding to the mess, the Senate parliamentarian informed Republicans that Corker’s idea for a “trigger” – a mechanism that would roll back some of the tax cuts if economic projections were not met after several years – violates Senate rules.
So now Corker is apparently demanding a reduction of the tax cuts by several hundred billion dollars over the next decade – perhaps by a weird mechanism like stepping the corporate income tax rate back upward in several years, after a large initial cut.
This is not a very smart way to reduce the cost of the bill, for a couple of reasons:
One is that, if you shrink the corporate tax cuts, you’ll reduce the revenue loss – but you’ll also reduce the positive economic effects, so you’ll still have a big deficit problem. This is kind of like trying to crawl out of a sand trap; you’ll keep falling back in.
Another is that making the corporate tax-rate cut temporary is an especially bad idea when combined with another provision of the Republican bill, which temporarily allows businesses to write off capital expenses in the year of purchase, instead of amortizing those expenses over many years.
In general, a temporary expensing provision like this should encourage a burst of business investment, as companies build buildings and buy equipment in the years when they can enjoy the favourable treatment. But temporary expensing will tend to reduce the taxable income companies report in the near future (as they take deductions for all those capital expenses) and increase it in later years (as those capital investments produce profits.)
Will companies be inclined to do this if they know tax rates are going to be low in the immediate future and then higher again in a few years, once those capital investments are generating profits? Taking advantage of the capital expensing incentive will just have the effect of moving their taxable income from low-tax years into high-tax years.
Those companies may decide they’re better off enjoying low tax rates on their profits from existing operations over the next few years, and delaying those capital investments into later years, when tax rates are higher and tax deductions are therefore more valuable.
All of which is to say, if the bill is adjusted in this manner to win Corker’s vote, it may actually have the effect of discouraging business investment over the next few years, reducing economic growth.
Senators need to take a little bit of time to think on this. If you’re going to shrink the size of the tax cut by about a third or a quarter – which seems to be what Corker is asking for since he can’t get his trigger – you need to pause to consider who should pay the extra taxes, on what, and when.
There’s no particular reason the Senate needs to vote this week. And, unless Corker folds, I think they’re going to have to take a few days and come up with a better design for the provision to win his vote.
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