As Republicans introduce tax reform, polls show public skepticism

In this Sept. 26, 2017 photo, Rep. Kevin Brady, R-Texas, right, listens as President Donald Trump speaks during a meeting with members of the House Ways and Means committee in the Roosevelt Room of the White House in Washington. (AP Photo/Evan Vucci)

The White House said Friday that the tax reform proposal touted by President Donald Trump will benefit all middle-class families, but some experts say Republicans are overselling the boost their policies will give the average worker.

The Tax Cuts and Jobs Act introduced by House Republicans Thursday reduces the number of tax brackets, nearly doubles the standard deduction, eliminates most other deductions, and chops the corporate tax rate from 35 percent to 20. It also reduces the tax rate for “pass-through” businesses and provides a reduced rate for corporations to bring cash back from overseas.

“At the end of this process, you’re going to see that no middle-income family is going to have a tax increase at all,” promised Assistant Treasury Secretary Tony Sayegh Friday.

Others have disputed that. Democrats on the Joint Economic Committee in Congress estimate at least 8 million families earning less than $87,000 would face an average tax increase of $794. They acknowledge, however, that the vast majority of taxpaying families would receive a cut.

Republicans have insisted their tax reforms are aimed at assisting middle-class families.

“We want to put more money in the pockets of average working people, the middle class,” Rep. Darin LaHood, R-Ill., said Wednesday. “More money for their children’s education, more money to save up for a mortgage, more money to buy a car, all those things.”

Democrats are not buying it.

“It’s a flim-flam,” House Minority Leader Nancy Pelosi said at a news conference Thursday. “It has to be rejected.”

Progressive organizations have dismissed the bill as a giveaway to the rich.

“The House tax legislation is a grade-A scam,” said Neera Tanden, president and CEO of the Center for American Progress, in a statement. “Its primary feature—huge tax cuts for millionaires, billionaires, and wealthy corporations—will be paid for by middle- and working-class families.”

Some conservative groups, meanwhile, have complained it does not go far enough in reducing or simplifying taxes.

“A few dozen tax preferences would be eliminated, and doubling the standard deduction will make it easier for many families to file their 1040s,” said Brian Riedl, a senior fellow at the Manhattan Institute. “However, complicated rules on a new small business tax rate and business interest deductions, a clawback on tax rate cuts for upper-income families, and the retention of many tax preferences will limit this simplification.”

Business groups have displayed mixed reactions as well, with some applauding the corporate rate cuts and others fretting changes that could discourage home ownership and investment.

As they struggle with special interests on Capitol Hill, recent polling suggests Republicans will also face an uphill battle to convince the public of their priorities.

According to an NBC News/Wall Street Journal poll conducted last week, only 25 percent of Americans believed Trump’s tax reform proposal was a good idea, while 35 percent opposed it. In addition, 25 percent expected they would face higher taxes because of it.

A CBS News poll conducted over the weekend found even more pessimism about Trump’s tax policies. Over 40 percent of respondents expected Trump would increase their taxes, and only 26 percent believed his tax policies would improve their family’s finances.

More than half of Americans (56 percent) said Trump’s tax ideas would benefit the rich, while 13 percent said the middle class would gain most and 26 percent said everyone would benefit equally. While Congress is racing to pass these cuts before Christmas, only 27 percent of respondents said tax cuts should be lawmakers’ top priority.

The CBS poll did show some openness to cuts for the rich, with 60 percent saying they were okay with it as long as everyone gets the same cut. With 52 percent saying corporations pay less than their fair share right now and 56 percent saying corporate taxes should be increased, a 15-point cut in the corporate rate could be a hard sell.

Experts say the specifics released by House Republicans Thursday might do little to sway opinions. Most taxpaying households would see cuts, but corporations and the rich would indisputably gain the most.

“I think it’s clear that the tax savings will be larger as a share of income for the people at the top,” said Alan Viard, a resident scholar at the American Enterprise Institute and former staff economist for the Joint Committee on Taxation.

This might not have been true for individual income tax rates since the top rate stays at 39.6 percent, if not for the provision that drops taxes for pass-through businesses to 25 percent. However, other changes are much more clearly weighted toward the wealthy.

“The corporate reduction and estate tax repeal clearly provide substantial benefits to the people at the top,” he said.

Randall Holcombe, a professor at Florida State University who once served on the council of economic advisers to then-Florida Gov. Jeb Bush, said the corporate rate cut outweighs other benefits.

“It’s probably not that big of a boost to the middle class,” he said. “Overall, if we just look at the income tax side of it, the big advantage of it really goes to the corporations.”

Holcombe is also skeptical that the guardrails implemented to prevent the wealthy from exploiting the pass-through rate for regular income will stop them.

“They’ll look at the law, they’ll figure out ways around it,” he said. “That’s just the nature of tax law.”

Republicans have talked about creating an online calculator that lets people plug in their income and see how they personally would benefit.

Assuming it is accurate, Viard said such a tool could be “a double-edged sword” for them. Some who currently believe they would not save anything would likely learn they are getting a tax cut, but other families would discover they are not.

Republicans maintain there are other gains for workers beyond just their personal tax rates. The White House Council of Economic Advisers has predicted the corporate tax rate cut will result in households seeing a wage increase of $4,000 to $9,000. Other experts say that is almost certainly a vast overstatement.

Analyses of the impact of corporate taxes and the percentage that is passed on to workers varies, with some concluding employees shoulder the brunt of the cost and others estimating a much smaller correlation. Since the studies are all over the map, Viard suggested it is best to rely on theory, and theoretically some of the benefits of a corporate rate cut should trickle down to workers.

“More investment by both American and foreign companies should be placed in the United States,” he said. That should lead to increased productivity and higher wages, although he also noted the tax cuts could result in increased federal debt and higher interest rates, which would reduce investment.

“It’s unfortunate that the White House maybe has raised expectations too high on this,” Viard added.

Holcombe was also unsure exactly what share of corporate taxes are currently being passed on to workers rather than shareholders or consumers, but they are being passed on to someone.

“Corporations don’t pay taxes,” he said. “People pay taxes.”

He expects reducing corporate taxes would help businesses and discourage companies from sending jobs overseas.

“It’s always seemed to me a better policy if you’re trying to attract businesses at home is to make it attractive to do business here,” he said.

Some of the other proposed changes have already triggered alarms for lawmakers and interest groups who say they are looking out for the middle class, particularly the reforms to the mortgage interest and state and local tax deductions.

Under the bill, interest would only be deductible on mortgages up to $500,000, and state and local property taxes would be deductible up to $10,000 while income taxes would not be at all. Republicans argue these deductions are primarily taken advantage of by the wealthy and the changes preserve the benefits for average families.

“By eliminating costly deductions that artificially raise taxes, our legislation is able to reduce the tax burden for Americans of all walks of life – regardless of where they live or whether they itemize their taxes,” Republicans on the House Ways and Means Committee said in a document responding to expected attacks on the bill.

Increased reliance on the standard deduction would vastly simplify tax preparation for many, but critics say eliminating some specific deductions could hurt families or discourage things like adoption and higher education. Although the deduction for charitable donations remains, if the standard deduction is a better deal, the tax benefit of those donations would be lost for many.

“By promoting an overall stronger economy – which is by far the biggest driver of charitable giving – our legislation will grow Americans’ paychecks, helping them donate more of their hard-earned money to causes they believe in,” Ways and Means Republicans argue in response.

Most low and middle-income families will find the doubling of the standard deduction makes most of these other changes irrelevant, according to Holcombe.

“For a lot of taxpayers, it does, and it also makes it easier to get support for removing those deductions,” he said.

The legislation released Thursday is far from a final product, but Senate reconciliation rules leave little room to maneuver. Any changes that increase the cost will need to be paid for elsewhere, potentially setting up new battles with other stakeholders.

Some provisions under the current bill are only temporary or phase in later in the 10-year window in an apparent attempt to stay under the $1.5 trillion cost laid out in the Senate budget resolution. If Republicans intend those to be permanent, the effect on the deficit could rise in later years.

“We’re obviously looking at a deficit-financed measure,” Viard said.

Inevitably, that will lead to either tax increases or spending cuts to make up the difference, and those too could impact the middle class.

Holcombe noted that broad tax reform of the sort Republicans are proposing would be expected to disproportionately benefit the rich because the rich pay a disproportionate share of taxes.

“If you’re reforming the income tax system, it’s hard to cut taxes for people who are paying very little in taxes already,” he said.

Independent economists are still crunching numbers on the bill, but Viard predicts their estimates will conclude that wealthy taxpayers and businesses get a bigger cut than middle-class workers, clashing with Republican rhetoric.

“Obviously it calls into question the strategy of trying to market this as a middle-class tax cut,” he said.

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