Administration officials asserted September 28 that tax reform based on a framework proposal unveiled the day before could generate enough revenue from economic growth to reduce the federal debt and stood firm on the framework’s 20 percent corporate statutory rate.
“We think there will be $2 trillion of growth, so we think this tax plan will cut down the deficit by a trillion dollars,” Treasury Secretary Steven Mnuchin told Fox Business Network. Meanwhile on CNBC’s Squawkbox, National Economic Council Director Gary Cohn predicted that the tax plan’s boost to economic growth would be enough to “pay for the entire tax cut,” a departure from previous statements that it would be offset by a combination of base broadening and growth. Both are members of the “Big Six” group of tax reform negotiators.
Figures Mnuchin discussed later that morning, at a forum hosted by The Atlantic, seemed to offer a partial explanation for his trillion-dollar top line claim. Mnuchin said that tax reform had been — and would be — scored to target 2.9 percent GDP growth over the first decade. Tax reform would generate $2 trillion of additional revenue from growth assuming that target, he said, adding that adopting a current–policy baseline, instead of assuming current law, would account for $500 billion of deficit savings.
The Treasury Department did not respond to a request for clarification of Mnuchin’s remarks.
During his Squawkbox appearance, Cohn called attention to the previous quarter’s 3 percent growth in GDP, citing it as evidence that the administration has already begun to hit its growth target years before they initially predicted it would. “We think that we can now be substantially above 3 percent GDP growth,” he said.
The administration also continued its barnstorming tour to pressure Democratic senators, facing reelection next year in states Trump won, to support tax reform. Vice President Mike Pence told Michigan voters to urge their lawmakers, including Democratic Senate Finance Committee member Debbie Stabenow, to support tax reform — which he said would pass before Christmas.
Grains of SALT
Mnuchin seemed to confirm that the state and local tax deduction would be curtailed, calling the issue “something we’ll work with Congress on.”
“I think longer-term, getting the federal government out of subsidizing states is the right thing to do,” Mnuchin said. “It’s just not fair.”
The framework did not mention the deduction, but another Big Six member — House Ways and Means Committee Chair Kevin Brady, R-Texas — gave a similar assessment September 27, saying he had received “very good suggestions on how to address that issue in a very positive way forward.”
However, Senate Finance Committee Chair Orrin G. Hatch, R-Utah, told reporters September 28 that he would prefer to keep the deduction intact.
When asked if the state and local tax deduction’s repeal was negotiable, Mnuchin deflected, calling tax reform a pass-or-fail exercise. He added: “The president’s number-one issue, that’s not negotiable, is 20 percent corporate taxes.” Days before the framework set that target, Trump was publicly calling for 15 percent.
Filling in the blanks on several issues that the framework was silent or unclear on, Cohn said at the White House press briefing that Trump “remains committed” to ending the carried interest deduction. He also said that repeal of the estate tax would be immediate, unlike the one passed during the George W. Bush administration. Repeal of the alternative minimum tax would also be immediate, Cohn said, adding, “Everything’s immediate — the only thing that’s phasing out is the five-year expensing.”
Further addressing concerns that the special tax rate for small passthrough businesses could lead to a new method of tax avoidance, Cohn said that the House and Senate taxwriting committees are “acutely aware” of the issue and have spent “an enormous amount of time on the antiabuse language,” which he added would be released “as we deliver more of the details.”
As for whether tax reform will be made retroactive to the start of 2017, Mnuchin repeated his desire to do so. “I think we’d like to, but again, we’ll see where we get on that,” he said.
Tax Cut for Thee, Not for Me
Both Mnuchin and Cohn pushed back against criticism that framework elements, including repeal of the estate tax and the AMT, would make the GOP tax reform effort a boon to wealthy individuals at others’ expense.
“This is not about tax cuts for the wealthy,” Mnuchin said when asked if distribution tables would show no tax cut for top 1 percent income earners.
“I would just comment, we’re talking about income taxes,” Mnuchin added. “Obviously, if we change the estate tax, that has a different distributional. But it’s the president’s objective that income taxes will not be a cut on the wealthy.”
In a speech September 27, Trump declared that the framework contains the “explicit commitment that tax reform will protect low-income and middle-income households, not the wealthy and well-connected.”
“I’m doing the right thing, and it’s not good for me, believe me,” Trump added.
Similarly, Cohn punted several times on directly answering that question, arguing repeatedly that the tax framework is “aimed purely at middle-class families” and that those families care more about how tax reform affects themselves, rather than guarantees that no wealthy taxpayers would receive a tax cut.
Cohn also refused to guarantee that no middle-class family would face a tax increase, saying first on Good Morning America and later that day at the press briefing that there’s “an exception to every rule.”
“The one thing I would beg you all to do is don’t look at any one piece, look at the plan in its entirety,” Cohn said.
The framework document mentions distributional impact on progressivity once, in the context of personal income taxes: “An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
Mnuchin echoed that passage, saying a fourth statutory rate may be added to avoid shifting the individual tax burden to middle-income earners.
At the briefing, Cohn defended the push to repeal provisions like the AMT and estate tax, contending that those provisions would be irrelevant under the new plan.
Cohn said that the biggest advocates for estate tax repeal are farmers and small businesses. Wealthy individuals, by contrast, “do a lot of estate planning” and are able to avoid paying the tax. Cohn argued that repealing the SALT deduction would get rid of “the biggest add back in the AMT,” and that after other deductions benefiting wealthy taxpayers are eliminated, the AMT would be unnecessary.
Cohn also said the increase in the bottom tax rate from 10 percent to 12 percent should be seen as a tax cut for those currently in the 15 percent tax bracket, not a tax increase for those in the 10 percent bracket, because key provisions like the nearly doubled standard deduction would push many taxpayers into an effective 0 percent bracket.
Cohn and Mnuchin’s claims about the distributional effects of the framework sparked a disdainful response from Senate Finance Committee ranking minority member Ron Wyden, D-Ore., who said in a September 28 Senate floor speech that the pair are “running a sleight-of-hand shell game” and “aren’t leveling with those middle-class families.”
The Big Six leaders may tout nearly doubling the standard deduction, but what they don’t say is that “they’re going to eliminate the personal exemption that large middle-class families rely on,” Wyden said.
Wyden also derided the idea that Trump wouldn’t benefit from his own plan, stating that between a lower passthrough business tax rate and repeal of the estate tax and AMT, “the president is going to benefit enormously from this plan.”
‘Bunch of Whoppers’
Whether the economy can grow as robustly as Mnuchin and Cohn claim it would to more than offset the cost of their tax cuts stirred some skepticism.
Jason Furman of the Peterson Institute for International Economics and a former chair of the Council of Economic Advisers told Tax Analysts that it was “extremely disappointing to see top economic officials engage in magical, wishful thinking of a type no serious economist — from the left to the right of the political spectrum — would buy into.”
He argued that rather than reduce the deficit, as Mnuchin claimed, the “poorly designed” tax cuts that would likely have to be made temporary are more likely to “subtract from growth, swelling the price tag.”
On a static basis, the Committee for a Responsible Federal Budget estimated in a September 27 blog post that the framework would add $2.2 trillion to the deficit, in part because of the increase to the national debt. That would make it “impossible to offset this amount solely through higher economic growth. . . . If anything the added debt would slow growth over the longer term and further add to the cost of the tax plan.”
Wyden also blasted the administration officials’ claims of the tax cuts paying for themselves and reducing the deficit, remarking that they are what his 9-year-old son would call “a big bunch of whoppers!”
Meanwhile, Douglas Holtz-Eakin of the American Action Forum said that while the framework appears to be a “promising start” toward promoting faster economic growth in the country, “the notion that this is easy and somehow trillions of dollars is going to flow in automatically is at odds with the history of not getting it done.”
He also cautioned against using one quarter’s growth as evidence of long-term, sustained growth, noting that the first quarter of 2017 only notched 1.2 percent growth. If subsequent quarters report growth at 3 percent or more, “that’d be fantastic,” but he noted that recent years have showed a similar pattern of an economic slump in the spring followed by a pickup in the economy over the rest of the year. “It’s better to average the quarters out,” he said.
As for whether the framework contains the necessary provisions to facilitate the kind of aggressive growth to meet the administration’s expectations, Holtz-Eakin demurred, echoing Cohn’s plea. “I’m trying to personally take the vow and encourage everybody to not focus on any single provision,” Holtz-Eakin said. “I want to see the whole package.”
While, the Treasury did not respond to the September 28 query, it did respond to a prior request concerning the recent removal of an analysis from Treasury’s website. The analysis, which explained the method used by the department’s Office of Tax Analysis for determining the incidence of the corporate tax burden, said that 82 percent of the corporate tax burden falls on capital income while only 18 percent falls on labor income. This stands in stark contrast to statements from multiple administration officials, including Mnuchin, who have suggested that the corporate tax incidence ratio should be reversed.
The Treasury spokesperson echoed that point, telling Tax Analysts, “Studies show that 70 percent of the tax burden falls on American workers.” The spokesperson added that the removed document “was a dated staff analysis from the previous administration. It does not represent our current thinking and analysis.”
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