Featured Articles

Hassett Rebuts ‘Not-So-Flattering’ Tax Bill Analyses

Posted on November 22, 2017 by Jonathan Curry

Recent analyses indicating that the House and Senate tax reform bills would ultimately fall short of the promise of a middle-income tax cut are misleading because they don’t take into account that many expiring provisions will later become permanent, the White House’s top economist said November 21.

“The not-so-flattering distributional analysis . . . is not flattering only in the out years, where the provisions in the tax bill have expired,” Council of Economic Advisers Chair Kevin Hassett told reporters on a conference call. The White House “wholly supports regular order” and understands that for this particular legislation, lawmakers have to make some provisions temporary to comply with budget reconciliation rules, Hassett said.

But, he added, “I think it’s the intent of everybody involved in the process that these tax reductions become permanent.”

Under that assumption, Hassett said that both the House and Senate versions of the bill would “clearly accomplish the goal” of a middle-income tax cut, giving individuals more take-home pay to spend and rewarding them for taking on additional work by lowering marginal tax rates.

In its latest distributional analysis, the Urban-Brookings Tax Policy Center (TPC) projected that the Senate Finance Committee-passed version of the Tax Cuts and Jobs Act would reduce taxes on average for all income groups in 2019, but by 2027, a year after the scheduled phase-out of the individual income tax cuts, 50 percent of taxpayers would wind up paying more in taxes than they otherwise would. The November 20 analysis further indicated that the majority of that tax increase relative to current law would be spread mostly across the middle three income quintiles, which would contain between 56 percent and 66 percent of those seeing a tax increase.

The TPC’s November 13 analysis of the House tax bill similarly found that a substantial share of taxpayers would see a tax increase over time, from 9 percent in 2018 to 24 percent in 2027. The House bill includes fewer expiring individual income tax provisions.

Distributional estimates by the Joint Committee on Taxation of the House and Senate tax bills suggest similar outcomes, with early, broad-based tax cuts giving way over time to tax increases on many income subsets.

However, House Budget Committee member Jason Lewis, R-Minn., said on the call that the “pushback” he has received has come from the constituents on the upper end of the income spectrum who are concerned about the repeal of tax breaks like the state and local tax deduction. Lewis said that he strongly favors keeping repeal of the state and local tax deduction in the legislation, and “if somebody is getting nicked by removing that deduction they need to go to their state capital and take their concerns there.”

Lewis acknowledged that, as long as many of the individual income tax provisions are set to expire while the corporate tax cuts remain permanent, “the optics are a little difficult.”

Investment Paradise

Hassett said that the corporate tax reforms proposed in the bills — like lowering the corporate tax rate to 20 percent, shifting to a territorial tax system, and allowing full expensing — would cause the United States to “become perhaps the all-in most attractive location for investment on Earth . . . [and] that naturally would lead to more capital formation, more wage growth, and more economic growth.”

Asked whether he thought economic growth would still be sufficient to offset the cost of the tax cuts, assuming that the temporary provisions in the bills are later made permanent and the revenue loss of the bill exceeds $2 trillion, Hassett responded that it would require roughly 5 percent higher GDP, which he acknowledged “is the high end of our range.”

He added that, with the Congressional Budget Office projecting U.S. GDP in 10 years to be around $28 trillion, “you really don’t need a whole lot of growth effect on a $28 trillion base to cover the kind of numbers that you’re talking about.”

As for whether the CEA would publish its own distributional or other comprehensive analysis of the tax reform legislation, Hassett demurred, saying that it’s “not the traditional role” of the organization to do so, and that it doesn’t have the tax policy modeling capacity of groups like the JCT. He added that the Treasury Department’s career tax staff does have access to such models, but that he did not know whether Treasury intends to make that data public.

Lewis said the House’s relatively easy passage of H.R. 1 November 16 was because members “looked at this in its totality and realized this is the most exciting thing we’ve done since the Tax Reform Act of 1986.” He added that the bill should more properly be likened to the 1981 tax cuts, which he said led to a period of five straight quarters of 7 percent GDP growth.

After noting that the United States has been “stuck at 2 percent” GDP growth for the past several years, Lewis said that the economy has “already baked in tax reform, so we’re seeing a little spurt now,” with the two previous quarters topping 3 percent GDP growth. Lewis said that the tax bill isn’t intended to be a Keynesian-style stimulus, but rather has been designed to produce economic growth and encourage production. “If you have more production, you have more income,” Lewis said.

Keep It Moving

Mattie Duppler of the National Taxpayers Union maintained on the call that while there are still significant differences between the House and Senate bills that need to be reconciled, Republican lawmakers have momentum on their side.

“A month ago even, we hadn’t been thinking that we would be in the position where we would be pardoning turkeys after seeing passage of a House bill, after seeing Senate language released and make its way through the Finance Committee,” Duppler said, referring to the White House Thanksgiving ritual.

Meanwhile, Lewis warned that it was “imperative that we do not delay this,” or some of the economic activity that’s already taken place in anticipation of tax reform will come to a halt.

The Senate Finance Committee released legislative language of its bill late November 20. Lawmakers in both chambers are in recess until the week of November 27, when they’ll resume their efforts.

Senate Majority Leader Mitch McConnell, R-Ky., said in a November 17 statement that he intends to bring the Finance Committee’s legislation “to the floor for further debate and open consideration” when lawmakers return from the Thanksgiving recess.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

Asha Glover contributed to this article.