FAKE MIDDLE CLASS TAX REFORM!

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Like I said last week, when you have the 2 Keystone Cops of tax reform aka Cohn and Mnuchin running the "biggest tax reform for the middle class ever" we should expect a few little details to be missed.

First kudos . . .according to the IRS they are correct that only 26% of tax filers use itemized deductions. The part they missed is the top 20% American income earners pay 95% of ALL income tax--and virtually all itemize.

Also true eliminating the state and local tax (aka SALT) deduction would raise an estimated $1.3 trillion over a decade, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, two Washington-based policy and research groups. That total HAS to be included to count toward offsetting steep individual and corporate rate cuts Trump and Republicans are proposing.

But the $2.6 trillion 800-lb gorilla in the tax reform room is Employer-sponsored health insurance that:

  1. Is a $2.4 trillion giveaway to the top 20% of American tax payers
  2. Is $100 billion a year MORE in lost revenue than SALT, mortgage interest, charitable giving and 401-k/IRA deductions combined
  3. Easily could make (at the margin) a $200-$300 billion annual dent in health care costs in America if we turned this giveaway into a fixed tax credit that evenly spread the tax benefits of ESI to all taxpayers (see below for details).

Here are just a few little glitches in the Cohn/Mnuchin tax reform fantasy league team draft 

1) A complete State/Local tax (aka SALT) deduction repeal? Can't you count Senators and Congressmen? The GOP tax plan folks are ALREADY beginning to cave on this "must do" tactic.

Here are the Top Ten highest tax rate states (PS: look at CA...ever wonder why high income people are moving from CA?)

  • California 13.3%
  • Oregon 9.9%
  • Minnesota 9.85%
  • Iowa 8.98%
  • New Jersey 8.97%
  • Vermont 8.95%
  • District of Columbia 8.95%
  • New York 8.82%
  • Hawaii 8.25%
  • Wisconsin 7.65%

Notice anything about these states and DC? Yea...they are mostly all BLUE aka majority Democrat states. The only time citizens of these states are red is when the sign a check to pay their state, property and federal tax returns. Senators from these states were never going to vote YES for the GOP Tax Reform bill.

But there are 52 GOP House members from these states and 62 including states with high property taxes ...ring a bell now? FYI: The House has 240 Republicans and 194 Democrats. 

Now let's peak at the states with high property taxes: The following are the 12 states that paid the highest average annual real estate taxes in 2016:

  • New Jersey: $8,374
  • Connecticut: $6,222
  • New York: $5,881
  • New Hampshire: $5,511
  • Rhode Island: $4,529
  • Vermont: $4,527
  • Massachusetts: $4,993
  • Illinois: $4,845
  • California: $4,422
  • Maryland: $3,688
  • Texas: $3,550
  • Wisconsin: $3,523

There are 63 GOP House members from these states. Already a few Republican House members who represent districts with high property taxes have already said they plan to fight for keeping the deduction, including Leonard Lance of New Jersey and Chris Collins of New York. Other Republicans represent districts that are near the top of the list for the deduction and were won by Clinton. They include Barbara Comstock of Virginia and Darrell Issa, Dana Rohrabacher and Mimi Walters of California.

Yes It’s true that most of the districts with above-average use of the SALT deduction are clustered around the biggest U.S. cities; the 12th Congressional District in New York, represented by Democrat Carolyn Maloney, ranks at the top of the list with $31,078 claimed for each return filed. (As a side note--while the GOP is obsessed with marginal tax rates it's mostly Democrat districts that actually pay the VAST majority of Federal income taxes and it's the Red States that take-in FAR more Federal dollars than they pay out in federal income taxes . . . but I digress). 

But in fact significant SALT use also surfaces in places not typically associated with Democrats: southwest Iowa, northern Colorado, central Arizona and northern Georgia. Even the southern Wisconsin district represented by House Speaker Paul Ryan has average state and local tax deductions of $4,005, above the national average of $3,598.

Conclusion: A cap on non-deductible SALT deductions is inevitable and will increase the deficit over 10-year period which takes out at least 3 GOP Senators (see below) ergo no Tax Reform in 2017. 

On to the mortgage deduction

To add additional revenues to offset the expected $1.5 trillion deficit from the Tax Reform plan (and excuse me for NOT including the fantasy that tax cuts will increase GDP by 1% from 1.9% to 3% and pay for themselves AND "reduce the deficit"--that economic canard has been blown apart by actual economic data since 1980) there will HAVE to be a cap on the size of mortgage with deductible interest payments (currently one $million).  

What works? $500,000. Will that happen? No..the actual number depends on how many House Republicans are still needed. 

Of course the National Association of Realtors denounced the blueprint, saying in a statement Wednesday that the proposal to double the standard deduction would “all but nullify the incentive to purchase a home” for most taxpayers. 

“This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5 percent who would still itemize their deductions,” William E. Brown, president of the National Association of Realtors, said in a statement. “Plummeting home values are a poor housewarming gift for recent home buyers and a tremendous blow to older Americans who depend on their home to provide a nest egg for retirement.”

Conclusion: $500,000 mortgage cap won't fly. $695,000 (the max Freddie/Fannie Jumbo loan) maybe. $750,000 likely. Which increases the defict. That brings us to the reality of this plan. 

Let's Tell it "Like it Is": We Are Borrowing $1.5 Trillion MORE 2018-2028 for Deficit Spending So the Top 20% Income Households Pay $1.4 TRILLION LESS in Federal Income Taxes 

Currently, the Senate budget blueprint would allow a tax cut bill to add $1.5 trillion to the deficit over 10 years (which is much less than the GOP blueprint would actually add BTW). Since the Top 20% income households pay 95% of Federal income taxes, we are actually borrowing $1.5 trillion to reduce their tax bill by $1.4 trillion over 10 years.

Fair? As they say in DC "When it comes to politics, fair is a weather report."

But on the House side, their existing  budget plan would not allow tax cuts to add to the budget deficit at all. Magically these differences need to be bridged over the next 10 days before Republicans can even begin to put together an actual tax reform bill.

YES ALL the Hopes and Dream of getting GOP Tax Reform Passed Rest on Converting our 1.9% GDP Growth Rate since 2000 to a NEW Permanent 3%+ GDP Growth Rate aka Voodoo Economics

Now to the kicker: the debunked "trickle down" economics aka Voodoo Economics aka "dynamic scoring" baked into the GOP plan. Tweedledee and Tweedledum rapture on and on about how the $1.5 trillion in tax savings (not counting repatriated foreign profits "investment"--another economic canard) will be "reinvested" by large corporations and small business owners in an orgy of new spending on capital equipment and hiring. Voila!--a permanent 3%+ GDP growing economy 2018-2028.

Ignoring the 1.9% avg GDP growth rate since 2000 for a second, there is this tiny problem with their assumption. We have a $18 trillion economy in 2017. A 1% rise in GDP is $180 billion additional GDP growth which seems like a doable number, no?

Let's wander back to your Economics 101 class and not forget that the core components of higher GDP growth require HIGHER RATES of 

A) Population Growth--slowing due to slowing births-to-deaths ratio and Trump mandates for radically reduced levels of immigration

B) Labor-Force Participation Rate--currently reducing as 16,000 Boomers turn 60 and 70 every day for next 12 years replaced by just 10,000 Millennials turning 21 a day

C) Labor Productivity (output per hour of labor)--under 1% EXCEPT for advanced manufacturing which actually REDUCES manufacturing labor requirements to produce a $1 million of goods by up to 80%. 70% Service economies don't have bursts of productivity except perhaps with technology in health care services. 

Question: If ALL the components of a permanent 33% INCREASE in GDP are going SOUTH, where does that permanent 33% increase in GDP come from that pays for the tax cuts? 

NO serious macroeconomic analyst has EVER claimed that tax cuts generate enough growth to pay for themselves. Estimates by a wide range of economists and the nonpartisan scorekeepers at the Joint Committee on Taxation have found that the additional growth associated with well-designed tax reform may offset 20% to 30% of the gross cost of tax cuts—not counting the wishful thinking of sustained dynamic feedback. 

Moreover, the 20% to 30% offset applies only to a well-designed tax reform. Reducing tax rates is NOT well-designed tax reform. They can help the economy short term (a few years), but the sustained higher deficits eventually hurt it.

Yes Virginia, over time increased deficits will outweigh the benefits from rate reductions, resulting in lower growth and a smaller economy. The Penn-Wharton Budget Model, run by Kent Smetters, a respected economist who served in the George W. Bush administration, found that over two decades dynamic scoring would add to the cost of the Trump tax cuts.

PS: We are already at a 10% LOWER rate of Federal Revenue as share of GDP and 200% HIGHER debt ratio as share of GDP.  

The REALLY Key point? True tax reform happened 31 years ago for a reason; it's friggin' hard to pull off.  TEFRA 1986 worked because it killed the tax shelter monster (and my tax shelter financing business, too). Senator Bob Corker is speaking the truth when he says " Republicans' battle on tax reform will make health care look like a "piece of cake," and he won't vote for legislation that adds to the deficit — something the Trump administration's plan does to the tune of $1.5 trillion. 

The Tennessee Republican Senator said there's a big difference from tax reform — actually overhauling the system — and tax cuts. Tax reform takes intestinal fortitude, and staring people down for the good of the country, he said. Tax cuts are simple, he said. Corker sent shock-waves across Washington when he announced Tuesday that he will not be running for reelection next year.

Now Corker is "free for the next 18 months." He said there's no way any legislation that adds to the deficit will pass, and there's certainly no way he would vote for such a bill. We all better believe him. 

Senator Rand Paul thinks the same way. So now we are down to 50 Senators...and then there is Sen. John "Thumbs Down" McCain in his last Senate term like Corker. McCain is scripting his "Maverick" legacy and my bet is he can't WAIT to vote no and stick his one good middle finger at Trump and the GOP who treat him like one of the bastards not named "Snow" from the Game of Thrones.  

NO Democrat will vote for "Tax Reform" where 80-90% of the benefits go to the Top 20% and 60%+ go the Top 1%. 

Here Is What WOULD Work for Serious Tax Reform: Kill the Tax Deduction for Employee Sponsored Insurance.

IF WE WERE SERIOUS about actual fundamental improvement of our tax system (which requires the goring of an antiquated sacred cow) we would rescind the 70+ year old "temporary" IRS agreement to not tax employee benefits as compensation/earned income.

What was a ONE TIME ruling to exclude warship labor at Kaiser Shipyards in Oakland from taxes on their employer-sponsored health insurance plan provided by the Permanente Medical Group (during the war there was a freeze on hourly labor) turned into an estimated $260 billion annual tax revenue giveaway by 2017.  

The ESI EXCLUSION IS WORTH A LOT MORE TO TAXPAYERS IN HIGH TAX BRACKETS

The ESI exclusion almost exclusively benefits the Top 20%. Because the exclusion of premiums for employer-sponsored insurance (ESI) reduces taxable income, it is worth A LOT more to taxpayers in higher tax brackets than to those in lower brackets. 

The estimated $260 billion ESI exclusion in income and payroll taxes in 2017 is also the single largest tax related expenditure by nearly $100 billion.  In 2018, households will save about $110 billion by deducting state and local tax payments and about $59 billion by deducting charitable donations, according to the Joint Committee on Taxation.

But Employer-sponsored health insurance, likely to be left alone, will lower federal revenue by at least $260 billion in 2018, according to the Tax Policy Center.

IF we were serious about real tax reform, we would gore this giveaway to the top 20% of income earners who pay 95% of all Federal income taxes. 

Note, too, that the open-ended nature of the tax subsidy has likely increased health care costs by encouraging the purchase of more comprehensive health insurance policies with lower cost sharing or with less tightly managed care.

Replacing the ESI exclusion with a tax credit would equalize tax benefits across taxpayers in different tax brackets, as well as between those who get their insurance through their employers and those who obtain coverage from other sources aka ACA plans.  Making the credit refundable would extend that benefit to those whose tax liability falls below the value of the credit. And designing the credit so that it does not subsidize insurance on the margin (i.e., to be a fixed dollar amount as opposed to a percentage of the premium) would lower health care costs because employer sponsored health plan beneficiaries would not have an unlimited source of payments.

To repeat: The $2.6 trillion 800-lb gorilla in the tax reform room is employer-sponsored health insurance that:

  1. Is a $2.6 trillion giveaway to the top 20% of American tax payers
  2. Is $100 billion a year MORE lost revenue than SALT, mortgage interest, charitable giving and 401-k/IRA deductions combined
  3. Easily could make (at the margin) a $200-$300 billion annual dent in health care costs in America if we turned this giveaway into a fixed tax credit that evenly spread the tax benefits of ESI to all taxpayers 

THAT would be tax and significant health care reform in one swoop...but as in all things political this reform will ONLY HAPPEN when we are in an economic crisis.

When we hit national debt at 100% of our GDP. . . and as many people OVER 60 as under 60 years of age . . .bingo . . . there's our economic crisis. 

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