Tax Scam 2.0
Last week Republicans on the House Ways and Means Committee issued “Listening Session Framework: Tax Reform 2.0” which is a proposal for new tax cuts for the rich. Some folks are calling it “TaxScam2.”
It's vaguely worded, but seems to be calling for:
Making permanent the individual tax cuts in TaxScam1. (In TaxScam1 the corporate tax cuts were permanent, but the individual cuts were temporary.)
Making permanent the special deduction for “pass-through” businesses. (Much of Trump's personal income comes from “pass-through” businesses.)
More deductions and possibly suspension of regulations for new “start-up” businesses. (A “start-up” business might be little corner bookstore or a Silicon Valley “start-up” with hundreds of millions in venture capital behind it.)
New Family Savings Plan called Universal Savings Account (USA). (Allows tax-favored savings for a broad range of potential expenses.)
Expanded Education Savings Accounts. (In addition to public schools these could be used to finance private and religious elementary and secondary schools and possibly homeschooling.)
This is not a proposed bill. What they mean by “listening framework” is that over the August recess they intend to discuss these vague ideas with constituents and their high-donors to “listen” to what they think.
The current wisdom among Congress watchers is that this is simply a political stunt to blunt constituent anger over the way that TaxScam1 favored corporations and the super-rich while leaving everyone else to foot the bill. They'll be telling constituents “We want to make the individual and pass-through cuts permanent, but the Democrats are blocking us.”
According to political pundits, few of these vague ideas have much chance of being enacted into law for a number of reasons:
It's not clear to what degree (if any) these proposals have Trump's approval.
If enacted, they would greatly increase the $1.4Trillion deficit created by TaxScam1 which the few remaining Republican “deficit hawks” are increasingly worried about.
Ryan, McConnell, and the other Republican leaders are claiming that the swelling deficit makes it necessary to cut Social Security, Medicare, Medicaid, SNAP, and other social safety-net programs. Voters not in thrall to Fox News might see simultaneously increasing the deficit as contradictory.
To ram Taxscam1 through the Senate without a filibuster they had to mendaciously claim that over it's 10-year time frame it wouldn't add to the deficit – that's why the individual tax cuts were made temporary. If they can't pull a similar “deficit-neutral” con with making the individual cuts permanent, they face a senate filibuster.
Brady Releases Tax Reform 2.0 Listening Session Framework (Ways & Means press release 7/24/2018)
House Committee Introduces Tax Reform 2.0 (Forbes 7/25/2018)
'Tax Reform 2.0' And How The GOP's Deal With The Devil Could Backfire (Forbes 7/26/2018)
Republicans Go For Broke on Tax Cut Message With 2.0 Effort (Roll Call 7/31/2018)
How America's Vision of Progressive Tax Reform Died (Atlantic 9/28/2017)
Tax Scam 2 Background Materials (Americans for Tax Fairness)
The one big gift that TaxScam1 failed to bestow on the billionaires was a significant reduction in capital gains taxes. Capital gains are the taxes paid on the profit realized when an investment such as a block of stock or a rental property is sold for more than its original purchase price. Now both Trump and Republican Party leaders have come up with a slick scheme to index capital gains taxes to inflation. According to a budget model from the University of Pennsylvania’s Wharton School of Business, indexing capital gains to inflation would reduce government revenues by $102 billion over a decade.
As it is now, if Billionaire Bob bought an investment in 1980 for $100,000 and sold it today for $500,000 he would pay capital gains tax on $400,000 profit. But under the indexing scheme, when it's adjusted for inflation that $100,000 invested in 1980 becomes theoretically equal to $324,000 today, so he would only have to pay taxes on a theoretical profit of $176,000 (rather than the actual real profit of $400,000).
It's not clear if the inflation rate that would apply is the general rate or whether specific rates would be applied to specific types of investments. For example, real estate prices have shot up much faster than the general inflation rate and indexing capital gains in investment property to a special real estate inflation rate would give even bigger tax breaks to the investor class.
This tax break benefits those with money to invest, and the richer they are the more they benefit. According to independent analyses, 97% would go to the top 10 percent of income earners in America, 86% to the top 1 percent, and 66% to the top 0.1 percent.
Ted Cruz (R-TX) and Devin Nunes (R-CA) have introduced the Capital Gains Inflation Relief Act (S.2688/H.R 6444). While this clearly has Trump's strong support, congressional observers give it little chance of being enacted into law for the same reasons described above regarding TaxScam2.
Knowing that the Cruz/Nunes bills probably won't pass, Trump is floating an idea to pull an end run around Congress by having his Treasury Department unilaterally change the rules to allow inflation indexing. A unilateral rule change would certainly face a serious court challenge. The Bush II administration studied it in 1992 and concluded that it would not stand up in court because redefining “cost” by regulatory fiat would be illegal — a conclusion buttressed by the Justice Department’s Office of Legal Counsel which found that “cost” means the price that was paid for something. Trump economic adviser Larry Kudlow and Grover Norquist, president of Americans for Tax Reform, however, are loud proponents of the scheme and they have Trump's ear so this might happen.
And the robber barons who finance the Republican Party will benefit even if the courts do eventually overturn it because they'll be able to reap the rewards until it's struck down. “No matter what the courts do, you’ll get the main economic benefit the day, the month after Treasury does this,” said one Republican insider.
Indexing Capital Gains to Inflation (Wharton School report, March 23, 2018)
GOP tax writer introduces bill to reduce capital gains taxes (The Hill, 7/20/2018)
Trump Administration Mulls a Unilateral Tax Cut for the Rich (New York Times, 7/30/2018)
Push for another upper-income tax cut gets Treasury's attention (Politico, 7/31/2018)