GOP resorts to lying about its tax bill (part one)

Rep. Martha McSally had a GOP talking points cookie-cutter op-ed in The Arizona Republic over the weekend to which she simply signed her name. McSally: Why I voted for the House’s tax reform bill.

Note: The House tax bill is merely a placeholder. The Senate is writing its own bill, and it will be a conference committee bill yet to be determined that is the actual bill that will matter.

Rep. McSally’s rumored replacement to run for her CD 2 congressional seat when she announces for the senate, Tucson Hispanic Chamber of Commerce president and CEO Lea Márquez Peterson, similarly had a GOP talking points cookie-cutter op-ed in the Arizona Daily Star to which she simply signed her name. Lea Márquez Peterson: Tax reform will help small businesses in Arizona.

Both opinions make assertions that are simply false and/or misleading.

Is lying to us the best that we can expect from Tea-Publicans?

Matthew Yglesias asks, If the GOP tax plan is so good, why do they lie so much about it?

In politics pretty much everyone shades the truth and engages in some convenient spin now and again. But if you saw a candidate standing on a dais pointing at his pet dog and telling you it was a cat, you’d think something pretty odd was going on.

By the same token, both citizens watching the tax reform debate in Washington and reporters covering it ought to ask themselves: Why, if this plan is so good, do its authors keep lying about what the bill does?

There’s a lot that’s controversial about tax policy, after all, but not everything is controversial. It’s obvious that if you cut a tax that’s only paid by married couples who’ve amassed at least $11 million that you are helping rich people. It’s obvious that if you enact a special discount tax rate for people who own LLCs then you are helping Donald Trump, who owns a ton of them. And it’s obvious that if part of your plan is permanent and part of it is temporary, and the part you made temporary is the part that helps the middle class, then helping the middle class wasn’t your priority.

And yet here we are. After a lead-up of more than a year — in which everyone who’s anyone in the Republican Party said they wanted to cut taxes for the middle class, and not for rich people in general or Donald Trump in particular — the Senate’s coalesced around a bill whose long-term distributional impact looks like this.

If that’s such a good idea, why did its proponents invest so much time and energy in pretending they were going to do the opposite?

Republicans promised a middle-class tax cut

The case Republicans are making for their proposal is simple, straightforward, and perfectly reasonable — while Democrats want to have the government give people a lot of new social services, Republicans want to just give them more money instead.

The difference is that while Democratic programs may or may not be a good idea, the bills they write that they say will expand the provision of social services in the United States really do expand the provision of social services.

Not so much with the Republican plan. As Vox’s Dylan Matthews has written, this hypothetical family of four that Paul Ryan cooked up and has instructed his caucus to meme about does get a one-year $1,182 tax cut. But under the bill the House passed last week, that tax cut shrinks over time and within a few years turns into a tax increase.

As a candidate for office, Trump ran on promising a middle-class tax cut. At a meeting with business leaders at the beginning of the month, Trump was on the same page, saying, “It’s a tax bill for middle class.”

But it’s not. Neither the House bill nor the Senate bill are good for the middle class. It’s also telling that though neither bill is good for the middle class, the two bills’ treatment of middle-class tax issues is actually quite different. Where they’re very similar is in providing large tax cuts to business owners and heirs to large estates. That’s because, obviously, the main intellectual and emotional core of the effort is an attempt to provide large tax cuts to business owners and heirs to large estates. The middle-class provisions are afterthoughts, scrounged together to meet messaging goals.

(See the GOP talking points cookie-cutter op-eds above).

Trump pretended he wouldn’t cut taxes for the rich

At his confirmation hearing, Treasury Secretary Steve Mnuchin made an unambiguous promise that there would be “no absolute tax cut for the upper class” in the Trump administration’s vision of tax reform.

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One way Trump frequently likes to make this point is to cast himself as a selfless champion of the people, willing to raise his own taxes for the sake of the country. Trump went so far as to phone up a group of Senate Democrats to tell them, “My accountant called me and said, ‘You’re going to get killed in this bill.’”

This is all a bunch of lies. As Mark Murray writes for NBC News, “Trump and his heirs potentially could save more than $1 billion overall under the GOP tax proposal.”

Rather than own up to the reversal and defend it on the merits, Trump’s team is now engaging in bizarre deflections. When Andrea Murray asked Office of Management and Budget Director Mick Mulvaney about why Trump flip-flopped on the question of whether tax reform should provide a windfall to the president, Mulvaney replied curtly, “I can’t speak to the president’s taxes. I think that was sort of litigated by the American public during the election.”

It was litigated. But the terms of the litigation were that Trump said he would release his tax returns in the future and Trump said he would put forth a tax cut bill that was bad for him, bad in general for the wealthy, and good in general for the middle class. If Mulvaney’s position is that voters should have realized Trump was lying, then that’s fair enough. But the fact is Trump lied about tax policy during the campaign, and his team is now covering for those lies with new lies.

The looting of America

A telling thing about the cavalcade of lies Republicans are telling about taxes is the party can’t quite get its story straight as to what the policy agenda even is here. They are telling deficit hawks that the bill is fiscally responsible, adding a large but manageable $1.5 trillion to the debt over 10 years but revenue-neutral in the long term. They’re telling others that statutory “pay-as-you-go,” or PAYGO, rules will be suspended, and the bill won’t really lead to the automatic cuts in Medicare and other programs that, by law, will result from its passage.

They’re telling some people the middle-class tax hikes written into the Senate bill will never be enacted, so there’s no need to worry. That’s the opposite of what they’re telling deficit hawks. So then some Republicans are telling some deficit hawks that the follow-up to the tax bill will be a return to entitlement reform.

Of course, that’s the opposite of what Trump promised his voters during the campaign (and the opposite of what they are saying about the PAYGO issue). But the good news — if you’re inclined to see it as good news — is that Trump is a huge liar, so you can always hope it’s someone other than you who’s going to get betrayed.

The reality is that the future is inherently uncertain, and promises made by the likes of Trump, Ryan, and Mitch McConnell are basically worthless. A bill passed on a party-line vote based on contradictory promises and false pretenses will have no long-term political sustainability and thus no positive impact on investment — even if you believe a permanent shift to lower taxes would. All we really know for sure is that for as long as Republicans manage to hold onto federal political power, the owners of highly profitable businesses and heirs to large fortunes will get to further enrich themselves — gorging on tax cuts while the rest of us end up holding the bag.

Paul Sullivan of the New York Times answers the question “What About Tax Cuts for Small-Business Owners?” It’s Complicated:

The House Republicans’ tax overhaul bill calls for reducing the tax burden on people who own small businesses like Steve’s Bike Shop — not giving breaks to professional athletes like Stephen Curry, the N.B.A. All-Star.

The rewrite of the tax code, which the House passed on Thursday, proposed a 25 percent tax rate for small businesses for owners who report their profits as income on their tax returns. It was slightly higher than the 20 percent rate for corporations but a break from the top individual rate of 39.6 percent.

In the end, though, the bill might not help the fictional Steve or the real Steph, who were named in the bill. But Mr. Curry’s wife, Ayesha, a TV personality who receives royalties and licensing fees from businesses she represents, could get a tax break. The reason is that the proposals for taxing small-business owners — whose companies are called pass-through entities, because the income passes through to their personal tax returns — hinge on the ownership of those entities.

Those who make money passively — by owning part of a pass-through entity they do not run or receiving endorsements and licensing agreements through a passive vehicle — could structure their payments to achieve a lower tax rate. Those who are actively running a business that is structured as a pass-through — for instance, a limited liability company, an S corporation or a partnership — will not see as great a reduction in taxes and may even see an increase in certain states.

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In other words, the House bill may seem like a tax cut for small businesses, but it is not likely to bring much relief to many of those owners, and it is certainly not comparable to what was proposed for large corporations. And some professions, like consultants, lawyers, doctors and other professional services companies, are not even eligible for the lower pass-through rate.

“What’s really going to happen is, people are going to change their behavior based on this tax act,” Mr. Reitmeyer said, like rethinking their business tax structure.

The House bill says that up to 30 percent of business income can be taxed at the lower 25 percent rate, with the rest at the personal income tax rate. At the highest level, this is a blended tax rate of 35.22 percent, at least for businesses that qualify. That is a far cry from the 20 percent proposed for corporations.

The Senate proposal, which is wending its way through the committee process, offers the possibility of a deduction of business income of up to 17.4 percent.

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What becomes of the two bills when they get reconciled is going to determine whether small-business owners will pay less in taxes. But it will also determine what resources they will have to invest in their businesses and still maintain their lifestyles.

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Jay Hatfield, the chief executive and co-founder of Infrastructure Capital Advisors, which runs two mutual funds and three hedge funds in New York, is preparing to change the tax structure of his business. “The language that I saw implied that businesses like ours won’t get any relief under the rules because financial service companies are under professional services,” he said.

He plans to convert his pass-through business to a C corporation, which will allow him to pay lower taxes and have more money to invest in the business. He has five employees and plans to hire two more.

“It makes sense from an economic perspective,” Mr. Hatfield said. “You’re increasing the incentive to save and invest and decreasing the relative incentive to consume.”

He said his decision was not driven entirely by taxes, but he was persuaded to make the transition now by what could be a huge difference between paying his taxes as a corporation and as an individual.

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Mr. Reitmeyer is working on creating a structure for a lending company that would allow bonuses for its senior executives to be taxed at the much lower 25 percent rate.

This would be done by dividing the assets of the firm between the existing corporation and a new pass-through company. The senior executives would be passive investors in that new company, which could then pay them “distributions” — or bonuses — at the 25 percent rate. Other employees, however, would still pay regular tax rates on their income.

Business owners in the Northeast and in California who pay state and local taxes are able to deduct those payments on their federal taxes, but they might see those deductions eliminated in the final tax bill. Structures like the C corporation will be even more appealing as a way for business owners to reduce their tax bill. Mr. Reitmeyer said the moves could hark back to the early 1980s, a heyday for tax-avoiding structures.

Yet for many small businesses, owners do not earn enough to benefit from the 25 percent tax rate. If the proposed 17.4 percent deduction in the Senate bill survives, small-business owners could incorporate and benefit from that deduction.

One amendment in the proposed bill reduces the bottom rate to 9 percent, from 12 percent, for smaller businesses. But the bigger advantage remains for those who can go to 25 percent from 39.6 percent.

If all of this seems confusing, take heart — it is equally frustrating to tax experts. “The pass-through section is the worst piece of legislation I’ve seen in 30 years,” said Steven M. Rosenthal, a former member of the Joint Committee on Taxation and a fellow at the Tax Policy Center in Washington.

“It’s addressing a non-problem,” Mr. Rosenthal added. Owners of pass-through businesses believe they deserve a lower tax rate, he said, but they could elect to be a corporation tax-free if they wanted.

He pointed out that the same economic activity could now be taxed at three different rates, depending on whether it was generated by a company, a pass-through entity or an individual.

Another worrying aspect is the rush by Republicans to enact tax change — previous efforts have taken years — which could lead to mistakes that the Internal Revenue Service will need time to correct.

“The loopholes and glitches will be preserved until the I.R.S. comes out with technical corrections,” Mr. Rosenthal said. “They take years, sometimes a decade, to get to technical corrections.”

Worse, from a behavioral standpoint, is what happens if certain provisions are delayed for a year or two while others are enacted in a few months. People will take losses in one year to maximize the tax benefit and wait to sell a company until the tax rate drops.

“They’re trying to fit all these goodies into a $1.5 trillion package, and it doesn’t fit,” said Ivan A. Sacks, head of the private client and tax group and chairman of the law firm Withers Worldwide. “So what they’re doing is waiting on some of these changes. That’s not stimulative.”

It may not be for business owners, but it’s sure to give accountants and lawyers a rush of work.

So this tax bill is not good for small businesses, those who actively run their businesses, as opposed to passive investors who just collect a check.