Tax reform is scheduled to blast off with a presidential speech in Indiana this Wednesday. The speculation here in Wasington indicates that the proposal will:
--lower the corporate rate to 20%;
--reduce the number of individual tax brackets to three with a top rate of 35%;
--double the standard deduction;
--lower the tax rate on smaller, family-owned "pass-through" businesses to 25%;
--set guardrails to prevent wealthy people from using the new "pass-through" rates to benefit themselves personally.
The bill will most likely also include some sort of repatriation tax for money currently held offshore and set up a territorial system for the U.S. so there will be no reason to hold earnings overseas in the future.
This will be a starting point for tax reform. It will go through markup in the House Ways and Means Committee, votes on the House floor, markup in the Senate Finance Committee, and votes on the Senate floor. There will be plenty of opportunity for the regular order process. It will be done as a reconciliation bill pursuant to the FY18 budget.
There are still a few issues to be settled before the Congress can pass the FY18 budget that creates a reconciliation bill for tax reform. Last week the Senate got over one of their big hurdles with an agreement to have tax cuts of $1.5 trillion over ten years. The House Freedom Caucus wants to see the tax legislation before they vote for the budget resolution. Whether the proposal, due to be released this week, will satisfy that demand is not clear. They also have recently raised a concern over immediate expensing. How big the deficit might be after ten years with tax cuts of $1.5 trillion is a potential problem for some. When the distribution tables are released for any legislation, they will probably show that rich people get more money reduced from their tax payments than middle class people do. This will cause a problem not unlike the current coverage issue for health care. Some Republicans won't want to support a bill that gives larger tax reductions to rich people than to the middle class. Part of the problem is that rich people pay more in taxes than do middle class people, and so their tax reductions are larger. The most important issue to solve here is that pass through businesses tend to have high nominal incomes, which makes them look rich. When you lower their tax rates to 25%, the distribution tables will make it look like the rich are getting huge tax cuts. However, most of those business owners do not take home huge salaries; they reinvest in their businesses, hire more employees, and create the small business jobs all claim to support. Every group that loses a tax deduction or credit to pay for lowering the rates will be importuning their Member to keep their benefit. In short, the real debate is just beginning and time is short.
It is still possible to get tax reform done before the end of the calendar year. But the odds against it are getting longer and longer. To get this done by the end of the year will probably require days, and possibly weekends, to be added to the Congressional calendar. It will also require the parties to compromise as President Ronald Reagan did in 1981 and 1986.
David Hoppe was Speaker Paul Ryan's Chief of Staff and left his post in the Office of the Speaker in January 2017.
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