Focus On One Particular Loophole In GOP's New Tax-Cut Plan

Treasury Secretary Mnuchin has been meeting with GOP leaders to come up with a plan both the White House and congressional Republicans can get behind.
09/18/2017 08:45 pm ET Updated Sep 18, 2017
Joshua Roberts / Reuters

The Republicans are getting ready to unveil their tax-cutting plan. Reportedly, Treasury Secretary Steve Mnuchin has been meeting with congressional GOP leaders to come up with a plan both the White House and congressional Republicans can get behind. So far, they’ve been fairly secretive about this effort, because no matter what they decide they’re bound to annoy at least one faction of their own party. To say nothing of Democrats, or the public at large.

The original effort was supposed to be a “once-in-a-generation reform of the entire tax code.” It was supposed to be “revenue-neutral,” which makes the entire exercise nothing more than redistribution of the tax burden. After all, if you make a whole lot of changes to the tax system but wind up collecting the exact same amount of money, then all you have done is to shift some of those taxes from one group to another. Republicans generally abhor “redistribution of wealth,” but not in this particular case, because in practice it would almost certainly mean shifting a large part of the tax burden from businesses to individuals, and from the wealthy to the middle-class.

The original GOP idea has already jumped the rails, though. Now they’re not even going to pretend to shoot for the “revenue-neutral” target. They’ve decided it is too hard to do that and yet still create big new tax breaks for the wealthiest among us. Even with their fake math (or, as they call it, “dynamic scoring”), the numbers just don’t add up. So tax “reform” has already morphed into merely being a round of tax cuts. Which will add to the deficit. This is the first hurdle Republicans are going to have to grapple with, because while most congressional Republicans are accomplished players of the game titled: “The Deficit/Debt Problem Must Be Addressed Before All Else... But Only When Democrats Are In Control,” there are actually some Republicans who remain deficit-hawks no matter who is running things. If the new tax plan explodes the deficit, there will be pushback from the fiscal conservatives who don’t shed their ideology with every change in political power.

Already you can figure out what their highest priorities are from how Republicans are talking about tax reform. First mentioned is always cutting the corporate tax rate, so that has to be seen as their highest priority. This would mean a lot less money coming in, so what usually follows are ideas as to how to at least partially make up the difference. But you’ll notice that almost all of these ideas revolve around cutting “loopholes” that ordinary people (and not businesses) use when filling out their taxes. They’re going to attempt a massive rewrite of Schedule A, in other words. Perhaps state and local income taxes will no longer be deductible. Or some of the deductions on Schedule A like the mortgage interest deduction will be capped at a certain amount. All of this tinkering will affect those income tax filers who do not use the standard deduction, but instead itemize their deductions. To further confuse the issue, some Republicans are talking about offsetting this in part by doubling the standard deduction. This would make it more advantageous for more people not to itemize, and instead use the higher standard deduction. This could indeed soften the blow of changing the rules for Schedule A, but it’ll be so complicated that each tax filer will have to calculate whether the changes actually help them or hurt them in the end, and by how much.

What I haven’t heard discussed at all is changing any other loopholes. The ones that businesses routinely use, for instance. All the talk on the business side is about lower tax rates and actually expanding loopholes, in order to lessen business tax burdens. Which ultimately means shifting the tax burden from businesses to individuals, as previously mentioned. Businesses pay less, so individuals will have to pay more to take up the slack. This is all part of an ongoing trend that has taken place over decades, so it’s really nothing new.

After the Republicans reveal their new tax-cutting plan, most of the discussion will revolve around the changes to so-called “loopholes” that average people actually have the opportunity to use. But keep an eye on two specific things to see how this is nothing short of a massive distraction to what Republicans are really trying to do.

The first is an issue Donald Trump explicitly campaigned on. He would, he promised from the campaign trail, make hedge fund managers pay their fair share in taxes by getting rid of their ability to use the “carried interest tax loophole” in order to pay roughly half the tax rate they should be paying. But it’s doubtful this promise will be reflected in the GOP tax plan, at least if Paul Ryan and his ilk have anything to say about it. Hedge fund managers are big political donors, after all.

The second is the most blatant example of slashing taxes on the rich currently under discussion. Both Trump and the congressional Republicans want to get rid of the Alternative Minimum Tax. The A.M.T. was created for precisely the same reason that Republicans are now theoretically supposed to be trying to accomplish ― to limit the number of loopholes wealthy people can take to reduce their taxes to a rate <em>far below</em> what average working Americans pay on their income. Here’s how it works. A tax filer fills out all the forms, claims all the deductions allowable, and comes up with the amount of taxes they should have paid for the year. Then, if they are high-income filers, they have to do another worksheet to see if they have deducted too much of their income. If their taxes are too low, then they are charged an extra tax (the A.M.T.) which in effect limits their ability to write off most of their income.

Most workers with few deductions don’t even have to use this worksheet ― it is only for high-income filers, and only for those who have a lot of deductions of one sort or another. Now, it could be argued that the A.M.T. is hitting far more middle-class Americans than it was originally intended to, which could be fixed by raising the bar for who has to fill the worksheet out. But that’s not what Republicans are calling for ― instead, they want to abolish the A.M.T. This would mean massively lower taxes for the wealthiest Americans, because instead of closing loopholes, this would be flinging the loophole door wide open.

Think that is an overstatement, or hyperbole? Think again. As I’ve pointed out previously, we only have one of Donald Trump’s recent tax returns available to look at. On it, Trump paid quite a lot on the line for the A.M.T. So much, in fact, that if the A.M.T. were abolished, Trump would have saved a whopping 81 percent of the taxes he owed for that year. If Trump abolishes the A.M.T., he will be cutting his own taxes by over 80 percent, to put it slightly differently.

So when the media examines the new GOP tax proposal, they need to be ready to ask very specific questions so that the public can see exactly what is going on. “Donald Trump promised he’d raise taxes on hedge fund managers, so why doesn’t this tax plan do that?” should be the first question asked, in fact. A good followup would be:

If the Alternative Minimum Tax is abolished, President Trump would have saved more than eighty cents of every dollar he paid in taxes, which means while lower-income filers may get tossed a bone, doesn’t the meat of this proposal mean that the wealthiest of the wealthy will get jaw-droppingly enormous tax breaks?

Trump, as usual, has been all over the map on tax cuts. He wants the biggest drop in the corporate tax rate of anyone (from 35 percent down to 15 percent), but has only proposed closing one business loophole at all (carried interest) ― which might not even make it into the final proposal. So businesses get to keep all the write-offs that they currently use to lower their taxes (virtually no business winds up paying the full 35 percent in reality), and their tax rate will also be slashed. Meanwhile, Schedule A filers are going to have to do some calculating to even see whether they’ll save a little bit of money, or have to actually pay more, because individual deductions are on the chopping block.

Last week, during Trump’s dinner with “Chuck and Nancy,” they apparently got him to agree that cutting taxes on rich people wasn’t the way to go. Trump’s been making some noises about this, but it remains to be seen whether anyone in the GOP group writing the actual tax plan is even listening. After all, by orthodox Republican ideology, the entire point of cutting taxes is to reduce taxes on the wealthy. That’s what all their talk of “job-creators” is all about, after all. Paul Ryan isn’t going to change his entire worldview because of a Trump tweet or two, in other words.

But Trump can’t have it both ways, especially since we do have that one year of his own tax returns to look at. While many will get distracted by all the other proposed changes, what I’ll be focusing on will be whether the A.M.T. is eliminated. Because this one change would have saved Donald Trump 81 percent on his taxes. That is indisputably a gigantic tax cut for the wealthiest of the wealthy. And unlike the other tax the Republicans reportedly want to eliminate (the estate tax), this one change would positively impact wealthy tax filers every single year, and not just when they die. So Trump can claim until he’s blue in the face that the GOP tax plan “doesn’t cut taxes on the wealthy,” but pointing out that he’ll personally be saving four out of every five dollars he used to pay in taxes will show this to be the giant lie that it is.

Chris Weigant blogs at ChrisWeigant.com
Follow Chris on Twitter: @ChrisWeigant

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