TAXES | What Trump's Returns Show about Tax Laws

Gene Steuerle of the Urban Institute this week has posted a fine summary of lessons from Trump's tax returns as reported by The New York Times. 

Trump's returns show how U.S. tax laws can break the link between wealth and income, increasing wealth concentration. 

His  returns illustrate many ways individuals and businesses with large  accumulated assets can shelter income that would otherwise generate tax liabilities. Steuerle says tax policies since the early 1990s have hiked the ratio of household wealth to income, generating $25 trillion of nominal wealth above normal growth. The Fed's recent buying of debt has further protected wealth holders.

Examples: 

• Underreported capital gains. Income from appreciated property is not included in taxable income until the underlying asset is sold. Steuerle found in the 1980s less than one-third of net income from capital reported.
• Tax exemptions for real estate owners. Large real estate investors typically use a pass-through business and are thereby able to claim exemptions from corporate and individual taxation. If property is held until death, no income tax is owed on accrued but unrealized gains. Gains can be deferred or excluded from tax at death, but property owners can immediately deduct almost all expenses on their tax returns. Investors in real estate can swap real estate properties with another owner and defer recognition of capital gains income.
• Incentives for risky lending. Lending officers at an institution like Deutsche Bank make big money on loans even if their loans go sour. They earn bonuses by boosting the bank's cash flow. By the time the loan sours, it is usually too late to claw back bonuses.
• Incentives for risky borrowing.  Borrowers can write off nominal interest costs that are a multiple of the real cost of borrowing. Near-zero-interest federal fund rates, while taxpayers deduct their nominal interest costs, mean that in real terms some investors are being paid to borrow money.
• Tax incentives to declare bankruptcy.  An owner of two companies where #1 earns $5 million and #2 loses $6 million has an incentive to declare bankruptcy on #2 and avoid taxes on #1. Others bear the bankruptcy cost.

GOP TAXES | Three House Bills

The following update on new tax bills before the Congress is by Dana Chasin, posted here by permission.

House Ways and Means Committee Chair Brady is on a mission to make tax cuts a winning issue for Republicans in the fall.  His legislative vehicle is “Tax Reform 2.0.”

The problem is that the Tax Cuts and Jobs Act (TCJA) bill [signed last December as the Tax Act of 2017 (after conferencing the original title was made generic)–JTM] has been less popular than expected.

Most Republicans up for re-election have given up even mentioning it on the campaign trail.  The original tax cuts contained embarrassing mistakes and the many and sizable kinks still need to be ironed out with a technical corrections act in the works.

Republicans in the House are now marching on with a new trilogy of tax bills that they hope will resonate with their voters in November, while the Senate leadership sees no urgency.  What comprises this trilogy and what are its prospects?

Recent Legislative Developments

Chair Brady indicates that House Republicans are planning to divide the package into three separate bills: permanency, savings, and innovation.  Dividing the bills increases the chances that they are passed, if not all together, then separately, but creates a false illusion that they won’t aggressively try to pass all three. Ways and Means is set to mark up the bills in mid-September with the intention of passing them by the end of that month. In the Senate, the package is unlikely to be taken up before the lame duck session.

President Trump’s tax cuts, which permanently reduced the standard corporate rate from 35 to 21 percent, have already had a considerable negative revenue effect, with the New York Times reporting this week that “the amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted.”

While corporate tax payments between January and June fell by 33 percent compared with the same period last year, corporate tax receipts as a share of the economy have fallen to 1.3 percent, nearing a 75-year low.

The Road to Hell is Paved with Permanence

Tax Reform 2.0 is a decisively political move by Republicans to make permanent the changes they enacted in 2017 that are set to expire at the end of 2025 and to introduce other tax changes.  Although there is still no bill language, the rhetoric around the release implies that Republican leadership wants to perpetuate all of the individual income tax changes in the TCJA. These changes include:

• tax cuts for individuals and pass-through businesses
• SALT deduction cap [$10,000 for married couples filing jointly]
• Alternative Minimum Tax (AMT) cut
• standard deduction and child tax credits

Republicans are working on the idea that it will be hard for Democrats to vote against making the individual tax cuts permanent. They believe it is harder for Democrats to vote against individual tax cuts than the corporate ones that were included in TCJA. They also include a variety of new proposals designed to appeal to Democrats.  

A Wolf in Sheep’s Clothing

The new proposals in Tax Reform 2.0 are meant to provide benefits to the middle class at a comparable significance to those in TCJA that clearly favored the wealthiest Americans. These proposals aimed at the middle class are divided into two categories – savings and innovation.

     Savings. Tax savings are generated by three expansions of tax-favored savings accounts:

• Creating a Universal Savings Account (USA), which is basically a significantly improved Roth Individual Retirement Account (Roth-IRA), that individuals could contribute some of their after-tax income to annually – there is speculation on income contribution limits but nothing has been confirmed yet.  Withdrawals from the USA could be made at any time or for any reason without tax or penalty. Like a Roth-IRA, the USA’s earnings would not be subject to tax. The goal is to incentivize Americans to save more.
• Expanding the popular, tax-free 529 college savings accounts so it could also be used to pay for apprenticeship fees and home schooling expenses, as well as student debt.
• Allowing workers to tap into their retirement savings accounts without penalty to cover expenses from the birth of a child or an adoption.

    Innovation. So far there is only one clearly identified idea under this category–permitting start-up businesses to write off more of their initial costs to remove barriers to growth.

Although these measures seem to help the middle class, they are unlikely to be sufficient to offset higher interest rates on mortgages and student and car loans as the result of the ballooning deficit resulting from TCJA’s tax cuts for corporations and the wealthy.

A Tax Cut Catastrophe

Some of the provisions in the Tax Reform 2.0 package would put a further strain on tax revenues at a time when social benefit systems are in dire need of assistance. The Congressional Budget Office (CBO) estimates that extending the individual tax cuts would increase deficits by an additional $650 billion—this at a time when social security had to dip into its trust fund for the first time in 36 years and the federal budget deficit is set to surpass $1 trillion two years earlier than estimated, by 2020.

The TJCA was clear in its “reverse Robin Hood” regressivity. Tax Reform 2.0 is not as blatant, but enacting more provisions that deprive the federal government of vital tax revenue that it needs to fund critical social services is socially irresponsible.

Tax Reform 2.0 also includes provisions that allow for more cuts to the deduction for owners of noncorporate businesses known as “pass-throughs” and larger exemptions to the estate tax and the alternative minimum tax for individuals. Given the predilection of the well-to-do for tax avoidance, this reform makes policies permanent that encourage such activities and suggest that gaming the system is not only good, but recommended. In fact, the lower the pass-through rate, the more attractive abusing the tax code becomes.

Political Lens

With the 2018 midterm election looming, House Republicans are eager to make their individual tax cuts permanent before the Democrats take back control (knock on wood) and they are no longer able to. Were that to happen, at the end of 2025, corporate tax breaks would remain in place and individual tax cuts would expire, making for very bad optics for the Republican party, if it exists then. So even though Chair Brady is planning to introduce the package as three separate bills, passing the permanency of individual tax cuts will be crucial for him and the future of his party.

Sen. McConnell seems to have hit upon a legislative strategy that serves both Senate and House Republicans regarding Tax Reform 2.0.  The House will pass the bills as a package and be able to pick up political capital; Republican senators (who are in un-gerrymandered and therefore more purple jurisdictions) won’t have to take a difficult vote on these bills before the midterms.  Sen. McConnell won’t take the GOP trilogy up until the lame duck session, enabling the House to have its cake (have its vote), while the Senate doesn’t have to eat it too (swallow a tough vote).

PINK ARMY FORMING | How Women Won Primaries

Pink Army Rising

The following commentary is by Dana Chasin and is posted by permission:

Since President Trump’s election, hundreds of first-time female candidates have competed for political office.

A record 472 female candidates filed to run for House seats this cycle, shattering the 2012 record of 298 and more than doubling the number of women who ran in 2016.

More than three-quarters of the women who competed for House seats have run in Democratic primaries.

Women candidates are also winning at higher rates than ever before. Of primary contests between one woman, one man, and no incumbent, 65 percent have been won by the female candidate. A blue is wave anticipated in November; it may well turn out to be a pink army that leads it.

Contributions from Women Rise Sharply

Women are giving more to political campaigns. This election cycle, campaign contributions from female donors total 31 percent of House candidate fundraising, more than in any other election year and up from 27 percent in 2014. Women are not only participating by running, they are also participating by donating.

Source: Cook Political Report

Female Political Activism Up 

Political engagement and activism by women is at an all-time high. The Women’s March on Washington saw record numbers in D.C.—and across the nation—show up to make their voices heard on a issues such as women’s rights, gender equality, and paid family leave. Continuing with the #MeToo movement, we have seen the power of women’s voices in the political narrative and their engagement in the issues that matter most to them.

According to the latest Gallup poll tracking, just 35 percent of women approve of President Trump’s performance, compared with  49 percent of men. In 2016, Trump lost the female vote by an unprecedented 13 points, receiving just 41 percent to 54 percent for Hillary Clinton. Unmarried women, Latino, and millennial voters all came out to vote in the 2016 election in greater numbers than in 2012.  Given the rise in female political activism and the rise of female candidates focusing on issues that women care about, 2018 will surely be remembered as the Year of the Woman.

Progressive Women Win

Polls show that the Americans are looking for change from their political leaders-- and women are delivering. Candidates from districts as different as Alexandria Ocasio-Cortez's and Kara Eastman’s won their primaries against moderate incumbents, Joe Crowley and Brad Ashford, by running on more progressive policies and visions, and greater attention to neglected demographics.  While Ocasio-Cortez should cruise in her deep blue district, Eastman will face stiff competition in a purple Nebraska district that has been separated by one percentage point the last few election cycles.

Regardless of how difficult their general election fights will be, their primary victories represent the direction that this blue wave is headed – towards women and towards progressive outsiders.

Economic and Related Issues

A number of policy positions have played well for female Democrats during this primary season.

• Health Care

Voters rank health care as the number one issue going into the November midterms, and they are looking for sweeping reform proposals from candidates, not incremental changes.  Democratic candidates, such as Alexandria Ocasio-Cortez, are running (and winning) on bold, progressive policies such as Medicare for All. Healthcare issues resonate strongly with female voters because they make 80 percent of health decisions in the family, according to the U.S. Department of Labor.  Voters also tend to trust women more when it comes to healthcare, and given the importance that voters assign to the topic this will certainly advantage female candidates.

• Taxes and the Economy

The recent GOP tax cuts have gone from a positive to either a neutral or negative campaign message in the eyes of voters. This negative impression by the electorate could be further exacerbated if the GOP look to attack entitlements in order to make amends for their fiscally irresponsible Tax Cuts and Jobs Act bill. Likewise, with the economy, voters are looking for bold messaging: to rewrite the rules of the game so the economy works for everyone, not just a select few. As wages stagnate while the cost of living increases, the tax cuts feel more and more like a dividend for wealthy special interests who rig the rules.

• Campaign Finance Reform

Despite the repeated transgressions of the Trump administration, Democrats are double-digits behind Trump when it comes to “cleaning up the swamp.”  Democratic candidates are winning their primaries by linking economic and political reform. This issue is critical in the perception among voters that candidates stand for something and are not part of a political establishment that is looking to continue the status quo.  Many candidates have found that eschewing donations from big business, lobbyists, and/or super PACs resonates strongly with voters.

The Pink Army

A total of 29 female non-incumbent Democratic candidates have won primaries in districts that are considered to be competitive (not solid Dem or GOP) by Cook Political Report. The candidates in these districts are scattered around the country but are united by their prioritization of economic issues on the campaign trail and their desire for change.

More importantly, they will be a preponderant factor in enabling Democrats to take back the House in November.  The Cook Political Report has predicted that Democrats are going to win between 20-35 seats in November. To achieve this, Democrats must go with the flow of a pink army that has already seen half of all House Democratic nominations thus far go to women, more than double the previous record. 

TAXES | Using the Budget to Reform

Mike Enzi (R-Wyoming), Chairman
Senate Budget Committee

The following is from Dana Chasin's Update 211, reposted by permission (see last sentence):

Washington, D.C., October 5, 2017 – Today saw two major steps toward Congressional approval of a FY 18 budget resolution. The House passed its 2018 budget resolution providing reconciliation instructions, paving the way for tax reform, on a 219-206 vote, 18 GOP members voting against. And Senate Budget reported out its budget resolution along partisan lines.  

The Senate language allows for a $1.5 trillion deficit increase. The House measure calls for deficit reduction. Reconciliation instructions included in both the House and the Senate resolutions would allow Republican leadership to craft a tax package that adjusts revenues and spending that could be passed with a simple majority in the Senate.  To pass the cuts, Senate Republicans would have to vote in near unison.

The budget resolution's chances of passage and what's at stake are considered below. 

_____________________________________________

In day one of the two-day Senate Budget Committee markup, Senators drilled down tax policy. Republicans attempted to legitimize the Big Six’s policy framework, claiming it was based off bipartisan principles, but Democrats excoriated the proposal for rewarding the wealthy, dramatically increasing the deficit, and increasing taxes for the middle class.  

Stakes: Reconciliation

Senator Bob Corker (R-TN),
Maverick on Senate Budget Committee

Per the House resolution, top lines instructions for 11 House committees require a $213 billion decrease in spending. House Judiciary ($45 billion), Oversight and Government Reform ($32 billion), and Ways and Means ($52 billion) Committees are charged with producing the largest cuts in spending from 2018 to 2027.

Reconciliation instructions now require specific  changes from the Senate. Given debate during the markup session regarding the $470 billion of cuts expected to Medicare, much anxiety revolves around the reconciliation recommendations that will arise from Senate Finance. Sens. Sanders, Harris, and Stabenow led the Committee with the most amendments opposing these cuts. 

FY 18 Spending Top Lines

Today’s Senate budget resolution sets a topline FY18 discretionary spending at $549 billion for defense and at $516 billion for nondefense discretionary. By contrast, the House resolution calls for $621.5 billion for defense and $511 billion for non-defense discretionary spending in FY18  President Trump’s FY18 budget proposed $616 billion in defense, $538 billion non-defense.

The Senate figures represent a decline from the FY17 budget toplines of $616 for defense and $551 for non-defense discretionary spending. The administration and the House are more consistent with last year’s numbers, although the House resolution calls for a slight increase in defense spending matched by a slight decrease in nondefense discretionary spending.

The Senate resolution also calls for $632 billion in nondefense spending cuts between 2018 and 2027. Budget Committee Democrats repeatedly raised concerned that these spending cuts would translate into deep slashes vital social programs. Particularly contentious were proposed cuts to Medicare and Medicaid, Pell grants and Head Start programs, and WIC programming.

Points of Agreement

Today’s markup was anything but bipartisan. Democrats repeatedly introduced amendments to protect social programs, push Republicans towards budget neutrality in tax legislation, and ensure that the CBO analysis of tax proposals. Time and time again, these amendments were either tabled or failed outright – almost always along 12/11 partisan lines... yet another indication that Republicans plan on using a majoritarian route in pursuit of their tax reform agenda.

Sticking Points Going Forward

Yesterday, Sen. Corker indicated an unwillingness to play ball with his fellow Republicans, stating that he would not vote for a tax bill that was not permanent and that added to the deficit. While it is not clear how much he will end up pushing back, his dissent is worth noting – Republicans can only lose two votes on the Senate floor if they want to move their tax plan with reconciliation.

Beyond this, the Senate is unlikely to accept the $203 billion in mandatory cuts to social programs as the House sets out. These differences will have to be addressed in conference for agreement to be reached on a joint budget resolution.

Next Steps and Deadlines

Since the budget resolutions passed on the House floor and through the Senate Budget Committee today, attention turns now to how it will fare on the Senate floor. 

The Senate will address the budget after its return from Columbus Day/Indigenous People's Day recess on October 16. Thereafter, the two houses will conference to hash out differences.  Both the House and Senate Budget Committees are to have their recommendations for tax reform submitted by November 13. The reconciliation process and budget for FY 18 must be completed by December 8 in order to avoid a government shutdown.

TAX REFORM | Business Taxes

Sen. Orrin G. Hatch (R-Utah),
Chairman, Senate Finance Committee

The following is Update 205 from Dana Chasin, reposted by permission:

Sept. 19, 2017 – This morning, Senate Finance held its second hearing this week exploring tax policy. This time, the focus was on corporate taxes. 

The Committee heard testimony on topics such as pass-through rates, C-corp rates, territoriality, and options to raise revenue.

Chairman Hatch again asserted that a tax bill will be written by the Committee in a bipartisan way, insisting that the Secret Six will not force partisan changes since it doesn't legislate. 

Ranking Member Wyden took aim at the all-GOP Secret Six, whose tax-reform deliberations are the subject of intense lobbying and speculation, attacking purported GOP plans on pass-through taxation, and expressing outrage about the latest attempt to jam through health care repeal. 

What are the dividing issues here? Are these divides so great that Republicans will have to rely on reconciliation to move on a $1.5 trillion tax cut? Or does Hatch think bipartisan accord is possible? Best, Dana

1. Areas of Discord

Frequently, bipartisan differences on corporate tax proposals were aired, particularly regarding:

•  Pass-Throughs: Republicans defended pass-throughs as a way to support small businesses and spur economic growth by increasing investment.  Sens. McCaskill and Wyden were quick to refute these claims, arguing that the benefits of a pass-through rate cut would accrue mostly to the top one percent of earners, as pass-through income accrues to wealthy owners of larger businesses. 

•  Deficit Financing: Democrats emphasized the likelihood that tax cuts would be deficit financed. Precious few ideas have surfaced from Republicans about how to compensate for this revenue loss. Sen. Carper expressed concerns about deficit-financed tax cuts, particularly those disproportionately benefiting the affluent.

•  Dynamic Scoring:  Conservatives continue to cite this fiscal impact metric to mollify those concerned about adding trillions to the debt, saying that tax cuts will spur growth and in turn increase revenue. Not many serious economists think the government would get more than a dime out of the best designed tax cut dollar. Carper and others today called this trickle-down theory, recalling how similar corporate tax cuts of the past have increased deficits without generating growth to make up for them.

Sens. Brown and Stabenow excoriated trickle-down economic policies.   Stabenow suggested ending the tax subsidies that the five largest oil companies have enjoyed for over a century. She said eliminating the business interest deduction would harm workers, particularly in small businesses. Sen. Cantwell focused on the most vulnerable, highlighting the precarious situation of the Low Income Housing Tax Credit Program, a program with major implications for investment spending patterns of developers.

2. Areas of Potential Accord

The possibility of bipartisan accord is low, but a few isolated points emerged around which members may find bipartisan agreement, if and only if rate reductions are modest:

•  International Competition – Sens. Carper and Warner conceded that it may make sense to lower the corporate rate a few percentage points to increase competitiveness with other nations 

•  Pass-Throughs – Sen. Cardin noted that S-corps in his state plead for moderate reductions on pass through rates. 

•  The Interest Deduction – Two witnesses who did not agree on much else, Scott Hodge and  Donald Marron, concurred on the prudence of eliminating the business-interest deduction as a revenue source to bring in $1.2 trillion in revenue over the budget window. 

3. Reconciliation Process

If the GOP tax plan is so fiscally reckless and inequitable that no Democrats sign on, it will have a better shot if Republicans pass a budget resolution with reconciliation instructions providing for tax changes. No tax changes can add to the deficit outside of a 10-year budget window under reconciliation. A budget resolution that complies means the GOP would need only a 50 + 1 majority to pass the legislation; a filibuster requiring 60 votes to overcome, would not available to Democrats. 

There are a few obstacles to shepherding legislation by way of reconciliation.  Per the Byrd Rule, Senators can raise a points of order against an extraneous provision in a budget bill. A provision could be considered extraneous if it:

•  changes provisions for social security,

•  doesn't change the overall spending or revenue,

•  only incidentally changes spending or revenue,

•  is outside the jurisdiction of committee(s) reporting it.

4. Time Is of the Essence

Republicans must work with alacrity to create a product that overcomes the above obstacles to reconciliation. The window for using budget reconciliation will soon close. The Senate parliamentarian, who oversees the chamber’s arcane procedural rules, decided last week that the current budget reconciliation privileges would expire at the end of September, the last day of this fiscal year. 

The GOP badly wants to get a tax bill done this year, so as not to boot it to 2018, an election year. But it will be nearly impossible for Republicans to get this done by the end of the fiscal year.  

Just tonight, Sen. Corker, a senior Republican on Senate Budget, told reporters that the budget resolution that could unlock the process for reconciliation could be marked up in the coming week or two, depending on whether the Senate is focused on health care.

NYS | Top USA Cig Tax, $4.35/Pack of 20

New York State cigarette taxes are the highest. Map from
the Tax Foundation.

New York State ranks as the state with the highest cigarette taxes.

This is according to the Washington-based Tax Foundation, which describes itself as non-partisan.

That it may well be. The Tax Foundation, I can confidently assert, is anti-tax, and distaste for taxes is bipartisan.

However, the cigarette tax poses a problem for anti-taxers. It's a Pigou-approved tax. It's a tax on something that is bad for your health, and consequently bad for the productivity and longevity of the public.

The Tax Foundation argues against the tax on the basis that it creates incentives for people in New York State to buy their cigarettes out of state and increases the cost of enforcement.

On the other hand, it still brings in good revenue and cuts down on the cost of health care spending for those affected by smoking by making it harder for teenagers to start smoking.

Meanwhile, more enforcement of the New York cigarette tax laws would more than pay for itself...