Washington Post
Democracy Dies in Darkness
As tax plan gained steam, GOP lost focus on the middle class
Now that the Senate and the House have passed two tax bills, there are some crucial differences they need to resolve in conference.
By Damian Paletta December 9, 2017
The GOP tax plan on the cusp of becoming law diverges wildly from the promises President Trump and top advisers said they would deliver for the middle class — an evolution that shows how traditional Republican orthodoxy swamped Trump’s distinctive brand of economic populism as it moved through Washington.
The bill was supposed to deliver benefits predominantly to average working families, not corporations, with a 35 percent tax cut Trump proposed on the campaign trail as part of the “Middle Class Tax Relief and Simplification Act.”
“The largest tax reductions are for the middle class, who have been forgotten,” Trump said in Gettysburg, Pa., on Oct. 22, 2016.
But the final product is looking much different, the result of a partisan policymaking process that largely took place behind closed doors, faced intense pressure from corporate lobbyists and ultimately fell in line with GOP wish lists.
As top lawmakers from the House and the Senate now rush to complete negotiations to push the tax plan into law, it amounts to a massive corporate tax cut, with uneven — and temporary — benefits for the middle class that could end up increasing taxes for many working families in future years.
A statue of George Washington stands in the Capitol. (Andrew Harrer/Bloomberg)
All told, the plan would cut taxes for businesses by $1 trillion, would cut an additional $100 billion in changes to the estate tax for the wealthy, and spreads the remaining $300 billion over 10 years among all households at every income level.
White House officials defend the tax bill emerging from the House and Senate negotiations, saying it follows through on Trump’s long-held promise of benefits for the middle class through a combination of exempting more income from taxation, expanding a tax credit benefiting families and cutting business taxes in a way that will flow through to workers in the form of higher wages.
“The middle class gets a tremendous benefit,” Trump said Wednesday.
Yet a review of more than 40 public statements that stretch back to the 2016 campaign and interviews with key officials in the White House and Congress shows how Trump and his top advisers have continuously prioritized corporate cuts — even though they have promised that middle-class cuts would be their focus.
Over several months, tax cuts for families were either stymied or scaled back. And corporate benefits only grew, a development that increasingly made some Republicans nervous as they saw the bill’s true impact.
“Fundamentally, the bill has been mislabeled. From a truth-in-advertising standpoint, it would have been a lot simpler if we just acknowledged reality on this bill, which is it’s fundamentally a corporate tax reduction and restructuring bill, period,” said Rep. Mark Sanford (R-S.C.). “I think they were particularly concerned about innuendo and what that might mean, so it was labeled as a middle-class tax cut.”
Big promises
After Trump was elected, his transition advisers faced immediate questions about whether he’d hold true to his promise of a tax cut focused on the middle class.
They could not have been clearer.
“Any reductions we have in upper-income taxes would be offset by less deductions, so there would be no absolute tax cut for the upper class,” Steven Mnuchin, Trump’s national finance chairman and future Treasury secretary, told CNBC.
Sen. Ron Wyden (Ore.), the ranking Democrat on the Senate Finance Committee, dubbed it the “Mnuchin Rule.”
After Trump was sworn in, his top aides immediately began discussions with House and Senate leaders on how to combine his campaign promises with long-held GOP views that cutting taxes for the wealthy and corporations ultimately benefit workers.
Inside the White House, Trump was being urged by his chief strategist, Stephen K. Bannon, a key voice behind the president’s economic populism, to hit the very wealthy.
At a meeting in April, Bannon urged that the Trump tax plan create a new 44 percent tax rate on income above $5 million, said three people briefed on his proposal who weren’t authorized to talk about Oval Office discussions. He argued that this was a way to ensure that the wealthiest Americans didn’t benefit too much from any changes and that working-class Americans could support the proposal.
Bannon “pushed that for several weeks as a way to gather political support for the tax bill. He’s more of a populist, obviously,” said Steve Moore, a conservative economist who helped Trump craft his tax plan during the campaign.
Mnuchin and National Economic Council Director Gary Cohn, both former bankers at Goldman Sachs, argued against the 44 percent tax rate, saying such a high rate would harm investment, pile up costs for small businesses and ultimately hurt growth.
As Trump neared his 100th day in office in late April, he was becoming restless because he didn’t have a concrete tax plan.
So he ordered Cohn and Mnuchin to present a version of the tax plan to the public by April 26. They scrambled to put together a one-page blueprint that called for lowering tax rates on all Americans and exempting more income from federal income taxes. The document said it would “provide tax relief to American families — especially middle-income families.”
But there was no mention of a 44 percent rate. Rather, the document revealed other clues that foreshadowed how the tax plan would take shape. It called for eliminating the estate tax and the alternative-minimum tax and lowering the top income tax rate — changes that would all benefit the wealthy.
As they faced questions about those provisions, White House officials began to walk back the promises about the wealthy not winning in the tax plan.
“What I said is the president’s priority has been not cutting taxes for the high end,” Mnuchin said in May at the Peter G. Peterson Foundation’s 2017 Fiscal Summit. “His priority is about creating a middle-income tax cut. So we’ll see where it comes out.”
Abandonment
Just after midnight on July 28, Sen. John McCain (R-Ariz.) shocked the Republican Party by voting to end a GOP effort to repeal the Affordable Care Act (ACA).
The summer had made at least two things painfully clear to Republican leaders.
There was virtually no hope of getting Democrats, even red-state moderate Democrats such as Sen. Joe Donnelly (Ind.) or Sen. Joe Manchin III (W.Va.), on board with the plan. That meant Republicans were going to have to make it on a party-line vote, and, as the ACA experience had reminded them, they had only two votes to spare.
So leaders began to make a priority of what they thought the entire party could rally around: big corporate tax cuts. The idea of reducing tax rates on American businesses had been core to the identity of the Republican Party ever since President Ronald Reagan did it as part of a comprehensive tax overhaul in 1986.
Within the White House, Cohn and Mnuchin were running the show. Bannon, a deeply controversial figure in the administration, had left, a voice for a more populist tax plan exiting with him.
On Sept. 27, the White House and GOP leaders issued another tax blueprint, this one called the “Unified Framework for Fixing Our Broken Tax Code.” It proposed reducing the current seven brackets in the individual tax code to as few as three, dropping the corporate tax rate from 35 percent to 20 percent, and creating a new rate of 25 percent for millions of companies that pass their income through to partners and sole proprietors, changes that could help small businesses but also law firms and professional sports teams.
Nonpartisan tax experts estimated the vast majority of the plan’s benefits would flow to the wealthy. Trump, by contrast, insisted that it would help the average worker.
“Our framework includes our explicit commitment that tax reform will protect low-income and middle-income households, not the wealthy and well-connected,” Trump said on the day of the plan’s release. “They can call me all they want. It’s not going to help. I’m doing the right thing, and it’s not good for me. Believe me.”
His advisers couldn’t say the same.
“When you’re cutting taxes across the board,” Mnuchin told Politico, “it’s very hard not to give tax cuts to the wealthy with tax cuts to the middle class.”
Seeking balance — and failing
Until now, Republicans had the benefit of not explaining how they’d pay for their tax overhaul, which was going to cost trillions of dollars without offsets. Ultimately, Republicans agreed to borrow up to $1.5 trillion to finance the tax cut.
The $1.5 trillion ceiling on borrowing would ultimately force Republicans to make tough trade-offs between helping the middle class on the one hand and the wealthy and corporations on the other.
In writing their bill, House GOP leaders had created a new $300 “family flexibility credit” that could help Americans lower their taxable income. It wasn’t large, but it would be widespread — and an easy way for Republicans to show they were trying to help the middle class.
But the night before they would release the bill, when top tax writer Kevin Brady (R-Tex.) was trying to sort out the tax changes and monitor the performance of his Houston Astros in the final game of the World Series, they made a major change to this provision, according to a person briefed on the changes who was not authorized to discuss private congressional deliberations.
Corporations were concerned their tax cut would last only eight years, a limitation that was necessary to keep the bill under the $1.5 trillion limit. Brady agreed. So in a last-minute decision, Republicans cut the duration of the family tax credit in half — ending it after only five years — to make the corporate tax cut permanent.
In effect, Republicans handed $200 billion from families to corporations. (GOP aides said, however, that the situation was fluid and that they always had hoped to make the corporate rates permanent.)
On Nov. 16, the House passed the tax overhaul, 227 to 205.
Senate doubles down
The Senate would take the principle of Brady’s last-minute move and extend it further by making virtually all of the tax cuts for families and individuals sunset after 2025.
GOP leaders tried to explain this discrepancy by saying they needed to give businesses long-term assurances about the tax environment so they could invest and make plans, but it fed into allegations from Democrats that the package was meant for businesses and the wealthy, not the middle class.
“We had to thread the needle,” Senate Majority Leader Mitch McConnell (R-Ky.) said in an interview. “Why did we make it permanent for corporations? Because they have to make investment decisions.”
Senate Republicans had hoped to pass their tax cut bill on Nov. 30, but there was a last-minute insurrection led by Sen. Bob Corker (R-Tenn.), who was concerned about the impact of the bill on the federal deficit.
Corker’s queasiness forced GOP leaders to search elsewhere for assurances that they had the votes to pass it, and that led them into the expensive demands of Sen. Ron Johnson (R-Wis.).
Johnson wanted a significant expansion of “pass through” tax cuts that benefit business owners who pay their taxes through the individual code. Although he and others described the beneficiaries of the pass-through rate as primarily small businesses, nonpartisan tax experts say it mainly benefits the top 1 percent of earners.
Ultimately, Johnson managed to extract an additional $114 billion in tax cuts for these entities out of GOP leaders.
Meanwhile, Republican Sens. Marco Rubio (Fla.), Mike Lee (Utah) and Susan Collins (Maine) were pushing proposals that would expand a child tax credit for working families, offsetting the cost by slightly bumping up the corporate tax rate.
“You’re telling me that if we have a corporate tax rate that goes from 35 percent to 20.94 percent, that [will] hurt growth?” Rubio asked on the Senate floor. “Twenty percent is the most phenomenal thing we’ve ever done for growth, but if you add 0.94 percent to that, it’s a catastrophe? We’re going to lose thousands of jobs? Come on.”
His amendment was voted down 71 to 29, and the bill’s other tax changes were still alluring enough to attract Rubio’s, Lee’s and Collins’s support in the final vote. Only one Republican, Corker, voted against the measure, out of concern that it would drive up the deficit.
A complete picture
GOP leaders are now working to resolve differences between the House and Senate bills, but the broad contours have come into focus.
The legislation would lower taxes for many in the middle class, but mostly temporarily, and fall far short of the 35 percent cut for everyone in the middle class that Trump promised last year.
For example, the nonpartisan Tax Policy Center has estimated that in 2019, a household earning between $50,000 and $75,000 would save $780 a year if the Senate bill’s changes become law. This is essentially an 8.9 percent tax cut.
Beginning in 2023, households that bring in less than $30,000 would all average a tax increase, according to the nonpartisan Joint Committee on Taxation, Congress’s official scorekeepers. And by 2027, all income groups that earn less than $75,000 would see their taxes go up. That’s because although the bill allows all the individual tax code provisions to expire, it retains a less generous method of calculating inflation than are currently in use, which effectively pushes workers into higher tax bracket faster.
Larry Kudlow, who advised Trump during the 2016 campaign and is a big supporter of the tax cuts for businesses, said the changes for individuals and families amounted to a “mishmash.”
Asked if the tax package in aggregate would mean a middle-class tax cut, Edward Kleinbard, a former chief of staff for the Joint Committee on Taxation, said: “That’s delusional or dishonest to say. It’s factually untrue.”
He added, “The only group you can point to that wins year after year and wins in very large magnitude is the very highest incomes.”
White House officials defend the temporary nature of many of the tax cuts, saying they will inevitably be extended by a future president and Congress because they are politically popular. They also say the tax savings for middle-class families would be much larger than outsiders have suggested, particularly when factoring in an expansion of a tax credit for working families.
Still, on Wednesday, for the first time, Trump acknowledged that some Americans may not benefit from the tax package, and he said they would try to make last-minute changes. But he didn’t specify what they might be.
“There are very, very few people that aren’t benefiting by it, but there’s that tiny little sliver, and we’re going to try to take care of even that very small group of people that just through circumstances maybe don’t get the full benefit of what we’re doing,” he said at a meeting with his Cabinet. “But the middle class gets a tremendous benefit, and business, which is jobs, gets a tremendous benefit.”
Erica Werner and Paul Kane contributed to this report.
Damian Paletta is White House economic policy reporter for The Washington Post.
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