DMR:  Analyzing the Tax Bill and Trump's National Security Strategy

There’s some good news and some bad news as we roll into Christmas vacation.

Since I like to end with good news whenever possible, I’ll start with the bad.
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The first topic I wanted to mention is the GOP tax plan. Actually, the news isn’t all bad. For this one, it’s both good and bad–a mixed bag. There are two parts to this: how the plan was constructed and the merits of the plan itself.

The way in which the plan was constructed is one of the universally negative aspects of the bill and is a prime example of how poorly Washington functions.

The bill, whose partial initial purpose was to simplify our tax code, ballooned in a matter of weeks to nearly 500 pages and many hundreds of thousands of words. (So much for simplification, right?) On top of that, it was written entirely by Congressional Republicans. There was no attempt to reach across the aisle. There was no attempt to seek the CBO’s input. In fact, the bill was thrown together so quickly that the CBO didn’t have time to score it, most think tanks didn’t get a chance to weigh in on the entire text, and members of Congress–Republicans–were admitting that they didn’t have time to read much of it.

This is a reform effort that will dramatically impact both our economy and our government’s finances, and it appears to have been done in haste and without much due diligence.

As evidence of this, consider what happened 20 December.

Only after having voted for the bill did the House discover that portions of it violate Senate rules. Now the House will have to vote on it again on 21 December.

Businesses don’t run this way. Most Americans don’t run their lives this way. Our government shouldn’t run this way either.

That said, the bill that emerged actually wasn’t all bad. So what about its merits? First and foremost, it thoroughly overhauled our corporate tax system. It may well be the most significant corporate overhaul ever. Among other things, it reduced the corporate tax rate to 21% and switched the U.S. to a territorial rather than a global tax system.

It created incentives for companies to bring cash back to our country too. This is universally a good thing. Our corporate income tax system was incredibly uncompetitive. Even with these major changes, we’re not even close to the most competitive country out there. We’re in the thick of the pack now though. These changes were long, long overdue. This will promote growth, increase the number of jobs, and could increase investment as well. (That part remains to be seen. There are good arguments both ways.)

There were also substantial changes to the personal income tax system. This is where the both-good-and-bad part starts to come into the equation. There were many changes to the way that our personal income tax system works. For the first few years after the bill’s passage, most Americans will see a very small reduction in their tax bills. That’s where the good part ends though.

Some Americans will actually have their tax burden increased. Even though their income tax rates may fall, the fact that so many deductions are being eliminated means that they may still end up having to pay more than they did before this bill (we’re looking at you Californians). Even for those Americans who do experience a reduction, it is likely to be relatively small. After around 2020, almost half of Americans could actually be paying more in taxes than they would have under the “old” system. Unfortunately, the half of Americans who are having their tax burden increased are the half who earn the smaller amount of income. Those who earn more will get to keep their reduced burden for longer.

By 2025, almost all of the personal income tax changes will then expire. That’s right: The personal income tax deductions were not made permanent. They are temporary. This means that whether the personal income tax changes were a good or a bad thing isn’t immediately obvious. Clearly most Americans would agree that having more money–even in one year–is good for them. There’s quite a bit of evidence, however, that temporary tax cuts have very little impact on the economy, can create imbalances and even bubbles, and can even harm Americans who plan their budgets around their new tax rates only to find them shoot up again shortly thereafter.

I believe that politicians at that time will just extend the tax cuts permanently (they are seeking reelection, after all).  This will throw off all of the accounting tricks that make this bill ONLY cost an additional $1Trillion in debt…  It will then cost more.

On the whole, the bill makes a large number of necessary, long overdue changes. I can’t shake the feeling that this was also an enormous missed opportunity though. The original goal of simplifying the tax code wasn’t met. Both the corporate and individual codes remain as long and as complicated as they’ve ever been. On top of that, as I said, many of the bill’s provisions are temporary anyway.

This brings me to my last point and the one point that is unquestionably bad: Why are those provisions temporary? The short answer: They almost certainly had to be. This last point is my primary concern with the bill and is the only true reason that I question the wisdom of the bill as it is currently written. (There are ways to reform our tax code without piling trillions of dollars in additional debt onto our backs.)

The previous sentence is the point: This bill adds a tremendous amount of new debt to our government. At an absolute minimum, it will add an additional nearly $500 billion to our national debt (according to The Tax Foundation). Most other analysis puts that total closer to $1 trillion or even $1.5 trillion. Bear in mind that that is debt above and beyond what we’d have already accumulated. We’ll still be accumulating the “other” debt too.

Republicans are now up against a harsh reality. They’ve campaigned for years on cutting the tax burden. For years–decades even–our government had a small enough debt load that we could easily have done this without significant adverse impact. The cold, hard reality now though is that we have such an enormous debt load (105% of GDP) that we’re actually quite constrained in how much–and for how long–we can reduce people’s tax burdens without causing government solvency problems.

Thus, Republicans opted to have most of this tax bill’s changes expire in less than a decade in order to slow the accumulation of debt.
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