A summary of the major changes in final Senate tax bill

· December 5, 2017  
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It’s a real shame Republicans started out with a bad tax bill and mismanaged the messaging for months, because the final bill is actually a substantial tax cut all around.

No, this is not the most pro-growth tax cut.

No, it is nowhere near a flat tax and does nothing to address the dependency and progressivity in the tax code, and might even exacerbate the progressivity.

No, this will not end the federal engineering over our lives and devolve power to the states by fundamentally restructuring the way the federal government taxes individuals.

Yes, it will blow a hole in the budget, but that hole is has already reached critical mass and nobody plans on cutting spending anyway.

Yes, the process stinks. Republicans act like a bunch of guilty bandits in middle of the night, shoving this through so quickly without any transparency, rather than openly and boldly messaging this is a massive tax cut. Sadly, because of the process, most people still think they will see a tax increase. That perception it itself is a testament to the political malpractice of this party.

Rather than pursuing certain guiding principles, Republicans built the bill off random revenue benchmarks and budget gimmicks. They landed in a good place in the end, but it was random, not deliberate. And they are paying for it.

This is all part of why many of us were never excited about this issue to begin with.

But to argue that the final bill is a tax increase, as I myself did regarding the House bill, is simply untrue. And as much as I dislike GOP leadership, we need to be honest about the specific bill going to conference.



Through the use of budget gimmicks, this bill essentially creates a much larger tax cut than would have otherwise made its way through the reconciliation process. Between the deeper rate cuts, the retention of many more deductions, the massive child tax credit expansion, the agreement on SALT, all middle- and middle-upper income families (except for the most anomalous situations) will wind up with a tax cut — many a significant cut of several thousand.

As for the wealthy, most will also wind up with a cut, especially those who could structure their income as S-Corp “pass-through” entities. While the cut is not tremendously pro-growth, we already knew that Republicans are having a hard time messaging against the progressive tax code.

Here are some of the major provisions adopted during the final hour.

Education savings accounts

For the record, I don’t believe government should be involved in using the tax code to fuel the higher-education bubble. But once the government already fuels the higher-ed cartel by allowing non-taxable “529 accounts” for college tuition, it’s only fair that we even it out across the spectrum of education.

Late Friday, Sen. Ted Cruz, R-Texas, passed an amendment, with vice president serving as the tie-breaking vote, to expand the use of tax-exempt accounts for K-12 education and permit the funds to be used for private, religious, or homeschooling expenses as well, for up to $10,000 of tuition.

This means that middle-class families with children in all schools could utilize these investment accounts without paying capital gains taxes. The added $1,000 per child in child tax credit (and, really, $2,000 for those earning above the current phase-out), in conjunction with the reduced rates, should be worth well over the loss of deductions, even in the worst-taxed areas, outside of a few anomalies, for families with dependent children.

Out-of-pocket medical expenses

Under current law, taxpayers can deduct out-of-pocket medical expenses from their income tax liability on any expenses that exceed 10 percent of adjusted gross income (AGI). This doesn’t apply to most people, but for those who rely on it (particularly seniors), it’s an important deduction.

If we are going to subsidize the insurance cartel through the tax code, it’s only fair that we equalize treatment for those who are willing to pay out of pocket, especially because it is this behavior that will eventually fix health care and ensure that it works like a functioning consumer-driven market.

The House bill completely abolished this deduction. Along with the elimination of the adoption credit, I think it was one of the biggest mistakes of the bill. The Senate bill not only maintains this deduction (as well as the adoption credit), it lowers the eligibility threshold from 10 percent of AGI to 7.5 percent for the next two years — the level it was before Obamacare.

State and local tax deduction (SALT)

The original Senate bill eliminated the deduction for both state and local income taxes and property taxes. The final version adopts the House provision of maintaining a lavish $10,000 deduction for property taxes.

I have already expressed my opposition to this compromise because it is the worst of all worlds – in that it fuels insane property tax jurisdictions while offering nothing for those living in reasonable income tax jurisdictions. A better compromise would be to allow for a deductions of any mix of state income and property taxes capped at $10,000. That wouldn’t affect those who benefit under this provision but would only further protect those in states with average property taxes but above average income tax rates.

Nonetheless, the inclusion of this provision ensures that even those in very high cost of living and high property tax jurisdictions will come out ahead when all other factors are added in.

Expanded tax cut for pass-through businesses

The deduction created under this bill for those who take their income as pass-through S-Corps was increased from 17.3 percent to 23 percent. This will ensure that many of those in the higher tax brackets could see a significant cut if they are able to remodel their income as pass-through.

So where did they get the extra revenue to add in these provisions, which will collectively lose about $300 billion in revenue? They decided to maintain some version of the original corporate and individual alternative minimum tax (AMT). It would appear that most of the revenue is coming from the corporate AMT, because the individual AMT provision also expanded the exemption by roughly 40 percent.

The only people who would be adversely affected by this ad hoc AMT are likely those earning between $500,000-$750,000. But again, most of those individuals will have the leverage to incorporate as pass-through entities and get a substantial tax cut via the S-Corp provision.

As for the corporate AMT, it will slightly mute the effects of the rate cut, but the rate cut is still substantial, and the under the final bill, the provision allowing deductibility of short-term investments to linger for an extra five years will further incentivize growth. The final version also slightly raises the rate by half a basis point on repatriation of foreign earnings, but is still better than the status quo.

Overall, these were very good changes on the individual side, but slowly but surely the corporate tax cut is getting more muddled over time. Which is why they need to slow down the process and do this right.

I still think at this point it’s better just to do clean rate cut without touching any deductions or personal exemptions because of the political problems and the perception that some will lose out on net with deductions. I’d prefer they cut spending and make the cuts deeper and permanent.

Fundamentally, I support the neutral tax, which would devolve all direct taxation to the states and replace the current source of federal revenue with a flat tax on the state revenue. But in terms of the current system with its inherent limitations – from the current rules on reconciliation, and the GOP refusal to reform the filibuster to their reluctance to cut spending – this is about as good as it gets.

In subsequent articles, I hope to address specific tax scenarios and some suggestions for how to make the bill better in conference.

Until then, buckle up. Because this might be the only positive bill Republicans sign into law before the next election.


 

 

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Author: Daniel Horowitz

Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.