Rep. Sanford on Tax Reform Vote


My Tax Reform Vote Explanation

It’s been 31 years since a major tax bill was signed into law, and Congress is on the verge of passing another one this week.

Today’s bill, H.R. 1, the Tax Cuts and Jobs Act of 2017, has been much debated over the airways, and there are many perceptions – and even a few misconceptions – about the bill as well. After much back and forth in my office in reviewing provisions of the bill that I did not like, I ultimately voted yes because I believe that the whole of the bill represents more good than bad for the people that I represent in the First District and the country at large.

In the paragraphs that follow, I will first lay out my general reference points on this bill and then go into a host of its provisions, some of which were helpful in growing America’s economy and capital base and others which are not.

Revenues not Rates

My first reference point is in recognizing revenue is not rate…and rate is not revenue. Let me explain. In tax policy, you may cut rate but still have revenue go up. People tend to conflate the two, believing that a cut in rate ultimately leads to a cut in revenue. This particularly bothered me when I was governor because I remember hearing lots of politicians talking about “cutting taxes.” But when you actually looked at the amount of money coming into government, it wasn’t happening…revenue (government’s take from its citizenry) was actually going up. The tax rate had been cut, but the revenue still coming into government was actually going up.

Such is the case in this bill. Without the tax bill, revenue coming into the federal government will rise from about $3.3 trillion annually to right at $5 trillion over the next 10 years. With the tax bill, it’ll rise to about the same number but get there more slowly in the intervening years – which amounts to the tax cut component of the bill itself. Both of these numbers represent about a 50% increase in revenue to the government as you move from the $3.3 trillion number to about $5 trillion.

Let me try two other bites at this apple.

Over the next 10 years, the federal government is projected to take in $43 trillion from American citizens. With the tax cut, that number will drop to $41.5 trillion – and that $1.5 trillion difference is indeed the cost of the bill. The question we all have to ask ourselves is whether or not you think our federal functions can work at the $41.5 trillion number instead of the $43 trillion number. That’s a 3.5% difference – and most folks I talk to at home believe that government could afford a 3.5% cut so that they as individuals, and the economy at large, could use and invest that money instead.

What has happened in this debate is misleading from both sides. From a Democratic standpoint, you would think that the end of the world was coming to government services as a result of the tax code. From a Republican standpoint, you would think that they’re cutting off the spigot in Washington, and that you and I will be keeping a much larger chunk of the money we earn at home. In fact, we’re talking about a 3.5% difference. That 3.5% difference hardly fits the hyperbole that we’ve heard in this debate.

Here’s one more iteration of this idea.

This bill keeps us about where we’ve been on revenue to the federal government as a percentage of the overall economy, and as you look at these numbers, it reinforces how vital spending restraint will be. In sum, we can certainly reconfigure the existing revenue stream to the federal government so that it produces more in the way of economic effect, but if this number stays constant, which it in essence does with this bill, it again highlights how vital spending restraint will be in what comes next.

On average, the federal government has brought in about 18% of GDP in taxes. This has been remarkably consistent – regardless of tax rates. Sometimes high rates, other times low rates…but always about the same take to government. In short, you can only squeeze but so much juice from a lemon. On the other hand, spending has risen steadily during those same years. Today, we are at about 20.7%. It takes no mathematician to recognize that if you take in 18 but spend 20, you have a problem. What this tax bill would do is to leave us within less than half of 1% of our historic norm on taxes. Meanwhile, spending is projected to rise to 23.4% over the same ten years….about 3.5% above what we have been doing.

It’s with this reasoning that I have always at the end of the day voted for tax cuts. The biggest bill I’ve previously voted for was on August 5th of 1999 during my first time in Congress. That package was $792 billion over the 10-year window, which in inflation-adjusted terms would equate to a $1.16 trillion tax cut measure. President Clinton ultimately vetoed that bill, but the basics of that debate were the same as they are today: do you or don’t you believe in getting power and authority out of Washington, DC?

I believe I was elected to limit the size and scope of government – and limiting taxes and spending are close proxies in efforts to do so.

It was indeed because I believe in limited government that I voted no on the budget a few weeks ago. This year’s budget proposed increased spending over the next year…and the 10 years contemplated in the budget itself. And that’s hardly a formula for limited government and the individual freedom that comes with it.

If you really believe that government should be smaller, then cutting both spending and taxes are essential. The catch here is that Congress oftentimes has voted for one but not the other, but I can only control the one vote that I have been vested with by people at home. And I’ve consistently voted to do both.

Many people in the debate that has occurred have been 100% disingenuous on this point, as they have found newfound religion on the importance of avoiding deficits. Some of these folks in fact have been some of the biggest spenders in Congress – and how they now make their argument as they do is just a touch curious…but politics are politics.

We’re Toast Without Change

Here is the conundrum on this point. If we do nothing, our debt-to-GDP numbers are projected to continue to rise dramatically over the next ten years from 77% today to 91%. It was 35% as recently as 2007. With this tax bill, it would rise another 5% to 96%. In short, we are in real trouble either way, if we have not done something material to cut spending and to increase economic growth. The bet on this bill is that it will help with the latter. It is not a guarantee but an educated bet.

Part of solving our deficit problem rests in moving this beyond the 1.8% growth that is currently forecast for the next 10 years. That’s significantly below the 3.1% growth our economy has averaged since 1950. Without additional growth, it is near impossible to make the budget math of our nation work without draconian cuts to programs that are very important to people. I do not fall in the Pollyanna camp on growth solving all of the costs of this bill. In business, I was taught to look at the downside and recognize that the upside would take care of itself. Where people get into trouble is that they only focus on the upside and do not make proper preparation and accounting for the possibility of the downside.

So, in looking at this, I think that there are two possibilities. First is some measure of growth that would indeed help Americans’ personal income as well as the finances of our government. On this point, various experts and think tanks that have analyzed the bill agree. They disagree on the extent to which this bill will boost economic growth, but all agree that there will be growth. The Tax Foundation has historically done good work and they project this bill will increase economic growth by 2.86% over a decade. The Joint Committee on Taxation predicts increased growth of 0.8%.

The more optimistic view here tries to suggest that the bill is fully paid for. I don’t believe this, but their argument goes as follows: the tax extenders, which would largely go away with any tax reform measure, account for $450 billion in cost of the bill. When one subtracts that from the one trillion in economic growth groups like the Tax Foundation believe would come with this bill, they believe we can get to zero cost on the bill. People like Treasury Secretary Mnuchin have made this argument, and I think it’s way too optimistic. At minimum, they say that there is a cost to moving to a new system of taxes and that whatever cost might remain should simply be recognized as the cost of a new way of doing business with our tax code.

Most Systems Can Occasionally Use An Upgrade

The bill has been described as comprehensive reform. In the House bill, it was certainly not because fundamentally it was a corporate tax cut and reform bill. Indeed, of the $1.5 trillion in anticipated cost, in broad strokes, $1 trillion of the benefit accrued to the corporate side while about $300 billion went to individual tax reduction and the last $200 billion went to estate tax reduction.

After the Senate and Conference changes, the bill is much more balanced. Its benefits were arguably overdone on the corporate side and underdone on the individual side. It’s still skewed that way with businesses receiving slightly over $1 trillion of benefit in the bill while individuals now receive about $700 billion in benefit. The bill was brought down to the $1.5 trillion budget threshold by an increase in revenue on the international side. $300 billion is projected to come into federal coffers as a result of a one-time 15% tax on repatriated funds now held overseas by large corporations. There are about $2.6 trillion held overseas and while the corporations would get an especially attractive tax rate to induce them into bringing the money home, more than $2 trillion of additional capital stock in the U.S. would be a decidedly good thing.

But on my point here…

One can argue for or against the change in distribution of tax benefit, but from the standpoint of raw competitiveness of the American society versus others around the world, this bill moves us toward being more competitive. Over the last ten years, industrialized countries have moved their rates down to the point that America’s marginal corporate tax rate is the highest in the world. Ireland has moved theirs to 12.5%, while Canada has moved its to 15%, and both have seen substantial capital inflows as a consequence. The industrialized average on corporate tax rates is now 23%, and this bill moves us from 35% to 20%. Lowering corporate rates is in fact a bipartisan idea. Senator Ron Wyden, a democrat from Oregon, has proposed doing this for the last seven years in his Bipartisan Tax Fairness and Simplification Act of 2010. Furthermore, President Obama even suggested dropping the corporate rate to 28% as recently as last year.

The bill would also move us from a global corporate tax system to a territorial one, which aligns with the way that most other countries tax corporate earnings. Our not addressing these two things has driven companies like Johnson Controls, Burger King, and a long list of other long-time American companies to move their corporate headquarters overseas. This bill attempts to rectify this and is the main selling point of my reading of the bill. It certainly does other things like full expensing at the corporate level, but at the end of the day, these are features rather than the main benefits of what this bill offers – and I believe a more competitive corporate rate and system are ingredients to American competitiveness. I say this because the wellbeing of a company like Boeing will affect many people at home along the coast of South Carolina.

A Few Specifics on the Pro Side in the Conference Report

It Improved Small Business’ Standing

I believe that the pass-through provisions for small businesses, LLCs, and Sub-S corporations is substantially improved in this bill. The House version had a complicated approach wherein 30% of a business’s income was designated “qualified business income” and taxed at a maximum 25% rate, while the remaining 70% of income was taxed at the full individual income tax rates. The Conference Report instead allows small businesses organized as pass-throughs to deduct up to 20% of their net income. This provision in the final bill is in essence the same as in the Senate bill, except with a lower deduction of 20% as opposed to 23%. It becomes ridiculously complicated after that, given a wages or capital allocation cap in determining the formula by which a final rate is derived, but the net effect that matters is that small business taxes are moved closer to parity with what’s happening on the corporate side.

Modifications to Individual Deductions

The House version repealed or substantial changed a whole host of deductions on which people registered great concern. From the standpoint of raw capital formation, I don’t know that throwing these things back into the tax bill was helpful, but they were certainly viewed as political necessities. This included the child credit, the historic tax credit, student loan interest, out-of-pocket medical expenses, mortgage interest, tuition for graduate students, and more.

The ability to deduct interest on mortgages for primary and secondary homes remains in the final version of the bill, but the cap is lowered from $1 million to $750,000. In the House version, the threshold was lowered even further to $500,000, and the deduction could only be claimed on primary residences. The Senate bill, on the other hand, made no changes to this deduction. It’s not hard to see how the conference got to a number halfway between $1 million and $500,000…but so goes political math.

I think that the House proposed very good policy in its attempt to repeal the deduction for state and local taxes. It is crazy that states that have been measured in the way they pay public employees were forced to subsidize states that had been outrageously generous in spending other people’s money with the pensions they offer. Take, for instance, states from the northeast or places like California that have been ridiculous on this front.

Let me give you a few examples. Stephen Maguin of the Los Angeles County Sanitation District No. 2 retired in 2012 with an annual pension of $345,408. Michael Johnson retired from the County of Soland in 2011 with an annual pension of $390,485. When you read these numbers, they will make your blood boil, and there are thousands upon thousands of examples that will do so. The House attempted to say “if you want to pay more as a state, then you pay it.” This unfortunately was beaten back by both the Senate and Conference Reports, and the compromise ended up at a cap on state and local property taxes of $10,000. It’s not enough to curb these excesses but, from a policy standpoint, was hopefully a meaningful start in this important debate on cross subsidies. Better policy would have been to eliminate the deduction entirely.

Double Estate Tax Threshold

I think that this was a reasonable compromise. It has become dogma that Republicans believe in complete elimination of the estate tax, but as a practical matter, I think that this raising of the deduction is the most that you will ever get. The Conference Report would double the estate exemption from $5.49 million to $10.98 million.

Very few people I know have estates of more than $11 million, and given the fact that the government has to generate revenue somehow, I think that there are advantages to lowering the tax on every one of us as we accumulate wealth and leaving something in place on estates so that we don’t end up with a permanent aristocracy in the United States. I don’t think that most people I talk to believe that it would be reasonable for Jeff Bezos to be able to hand off his $94 billion estate tax-free to his kids and grandkids.

AMT Thresholds Change

Under the category of tax simplification, the Alternative Minimum Tax (AMT) stands out as a poster child for that which causes many people to hire an accountant in helping them wade through their taxes. The House version eliminated the AMT; unfortunately, the Conference Report does not. But it does raise the threshold for single and joint-filers, and again this is a step in the right direction in curtailing one of the tax code’s most awkward provisions.

A Few Specifics on the CON Side in the Conference Report

All Tax Cuts on the Individual Side are Temporary

Let me say that again. All tax cuts on the individual side end in year 10 of this tax bill. All tax cuts on the corporate side are permanent.

This is bad policy.

As a reality, it won’t work out this way because temporary tax extenders have a way of developing eternal life. There are a whole host of tax extenders in the present tax code that get renewed annually, and that’s what will happen next here. This was simply a way of gaming the system to fit more into this tax bill. This still leaves you with dealing with the effects in year 10 and how you make modifications to taxes, spending, and the code. It’s a disingenuous way of getting around the budget’s limits on the size of the tax bill itself.

Little to No simplification

While the House bill eliminated four tax brackets and a host of deductions and credits, the final bill does not. If you have any sort of complexity to your tax return, you’re unfortunately still going to need an accountant to help you work through the maze that still exists in the tax code. This bill retains the existing seven brackets, though their thresholds are slightly altered. This bill retains a host of deductions and credits…some of which I mentioned earlier, some of which are horrible policy. as you think about things like football stadiums and the federal taxpayer. This bill hardly represents the simplification that you would see in a Fair Tax or Flat Tax proposal, and I’m a cosponsor of both of those bills.

Fewer People Have Skin in the Deal

This bill takes people off the tax rolls. I know this has been sold as a feature of the bill, but I think it’s a mistake.

I believe that there is a value to people looking at their tax return at the end of the year and asking whether or not they got their money’s worth. There is a value to having all Americans with skin in the deal on whether or not their government is working. We’re getting dangerously close to a tipping point in our society wherein more people get from government than give to government. And what we do by taking more people off the rolls is to give them reason to be unlimited in their demands for government since they’re not tangibly paying part of the freight of the cost of the government from which they benefit.

The Bill Still Raises Taxes on Some

The bill actually raises the tax load on some individuals. This seems a bit crazy to me. I don’t like some rich folks any more than the next guy, but it needs to be recognized that we have a progressive tax system, and as you go up the income tax scale, you pay more. In fact, the top 10% of earners in America pay 70% of the income taxes in our country.

Many of these folks in this group aren’t exactly rich since the top 10% in America begins at a family income of $133,000. That means a school teacher married to a truck driver could find themselves indeed in the top 10%. What Republicans have done here is to continue down this line of class warfare that I think is counterproductive. The bill does deliver tax relief to about 90% of those who have filed (and this has been noted by even the Washington Post), but by the numbers I’ve seen over the weekend, the bill will mean a tax increase for about 10% of the taxpayers. This is flawed. If we’re going to go down this route of alleged tax reform, then it would seem reasonable to me that all people would get some degree of tax relief as opposed to government penalizing some who are very productive in our society.

Full Expensing is Not Real Accounting

The bill includes substantial levels of full expensing, and while generous from an economic standpoint, it’s equally unrealistic from an economic standpoint. If one buys a jet or tractor, they don’t evaporate at the end of the year. They actually have useful lives, and for a tax code to represent the real accounting that should take place in the business, they should be represented over the useful life of the asset. Not doing this is at one level a testimony to the power of lobbying influences in Washington and, at another level, a desire to juice the economy and raise our numbers from the current 1.8% zone that we’ve been living in. This may prove to be a double-edged sword, given our unemployment numbers and the possibility of real inflation being introduced to our economy as a result of efforts to rev the economy through the tax code at a time of near-full employment.

Arctic National Wildlife Refuge (ANWR) Drilling

Alaska’s Arctic National Wildlife Refuge has nothing to do with taxes in Washington, DC. This provision was added to buy Senator Lisa Murkowski’s vote. It’s bad policy because there is no nexus between this tax bill and the Arctic Refuge. It’s these kinds of trades that sour people on their belief in a democratic system, given this add-on did not see the normal deliberation which you would see in subcommittee and full committee hearings.

It’s for this reason that I wrote an op-ed with David Yarnold, the president of the National Audubon Society, and it was published in The Hill and to read the op-ed I’d ask that you click Here.

Could Well Result in Tax Increases

This seems counterintuitive, but let me explain. The national debt represents our nation’s greatest challenge. It will become an issue that dominates the headlines, though it is dormant today and sadly not focused upon by the president or many in Congress these days.

For the reasons already expressed in this piece, the bulk of addressing that debt challenge will come in cutting expenses, but it’s vital that we look at every angle toward addressing this issue and that indeed includes the stability of our revenue stream to the federal government. While this bill won’t add the $1.5 trillion that has been so widely reported…present tax extenders are about $450 billion of the bill’s cost, and while there is going to be some measure of economic growth that comes with this package, my concern here is where we are in the economic cycle. We’re now in the third-longest economic recovery in American history. We are due for a slowdown. When that happens, our revenues will slow, and my concern is that people will point to the tax cut as the reason for the deficits that come with an economic slowdown. This will likely lead to a strong opposite reaction so that taxes are raised, but I can’t perfectly predict the future and what will come next. So, you take each vote as it comes and accept the tug-of-war that is politics to be the reality of what we will contend with as a result of this or any other bill.

Refundable Child Tax Credit Expanded

The Conference Report doubled the child tax credit to $2,000…up from $1,000 currently. To pay for this increase, the bill limited its availability to higher-income earners. It would also require a valid Social Security Number for each child claimed, which was not previously required. This credit would be refundable, which means that if the credit is more than the individual’s tax liability, the government still sends the taxpayer money.

This is really bad policy. The expansion was insisted upon by Senator Marco Rubio, and things like the Child Tax Credit represent social engineering of a Republican flavor. This component of the bill goes the opposite of what the bill is largely about, which is lowering marginal rates and increasing investment in capital in the United States. It’s particularly galling that someone that pays nothing in taxes will be getting a refund simply based on the number of children that they have. This is not the kind of policy that leads toward more in the way of capital formation. If one wants to add these sorts of things as a standalone bill, that’s a different debate with its own merits and demerits, but if you’re going to build a tax bill based on the idea of capital formation, we ought to narrowly restrict the code to things that do that.

I’m now at eight pages on my way to nine, and I guess it’s probably best that I call it quits in this analysis. The long and short here though is I end where I started: I believe that on the whole this bill does more good than bad. There are provisions that still disturb me, but I’ve learned to pray the Irish prayer on a lot of things and to focus on the things that I can effect and control. If I had a magic wand, I would certainly take provisions of this bill out. In fact, I think Senator Bob Corker said it best here when he said, “In the end, after 11 years in the Senate, I know every bill we consider is imperfect and the question becomes is our country better off with or without this piece of legislation. I think we are better off with it. I realize this is a bet on our country’s enterprising spirit, and that is a bet I am willing to make.”

Comments

  1. Excellent, very well explained. Thank you!

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