Not Just “Something”

The Republican Congress is moving ahead with passage of a bill to enact tax “reform.”  Actually, if one takes a close look, it really is not tax reform, but rather a tax cut.  Some of us may be for it, some of us may be critical of it, some of us may think that there is no need for a tax cut at this point.  Whichever approach you favor, there are elements to the proposal that all of us need to understand as we will all hear different spins on the bill as more and more of it becomes clear.

The one thing we do not need or want — whether or not one favors the current tax cut proposal — is what I increasingly hear from Republican members of Congress.  That refrain is something along the lines of what’s important isn’t so much the details of the legislation but that this Congress must pass something.  Anything.  They could not deliver on Repeal and Replace and have so far not enacted any significant legislative at all.  Something has to pass or voters will think that they are ineffective and unable to govern.  As a result, the argument goes, they will be decisively punished at the polls in 2018 and therefore something is better than nothing.

Wrong.  I could not think of a worse reason to pass a bill, especially one that will impact every single American tax payer and business.  The last major attempt at tax reform took place under President Reagan in the early 1980’s.  Thus we hear that this is a once in a generation legislative achievement.  True or not, it is clearly significant and will have a lasting impact on our economy.

So, whether or not one supports the current bill, there are some things of which we all need to be aware as we decide if this is a good idea or not.  As usual, a few caveats apply.

The final version of the bill is unknown.  Even as I write, negotiations are taking place that will cause certain provisions to change or get modified as the wheeling and dealing takes place.  This deal making can substantively change the bill and not necessarily for the better.  Even as the version in the House is getting all of the attention, the Senate is working on its own bill, the provisions of which are being kept under wraps.  We can assume that it will probably be similar to the House version, but there is no guarantee.  The competing bills then go to conference where negotiators hash out the differences.  The question will be whether or not the “deals” see the light of day before voting takes place.  Finally, recall that the Republican leadership in the House and the Senate have decided to lock out the Democrats and pass the bills on a straight party-line vote.  Regardless of whether or not this is a good idea, certain Senate rules kick in as a result which means the House and Senate may not be able to do all that they want.  If they break certain rules — outlined in the just passed budget bill which got little attention because of other events — then the Senate will require 60 votes to pass the legislation, which is unlikely if the Democrats are locked out of any input to the bill.

I know, a lot of inside baseball type maneuvering, but it matters because the rest of us have to live with the results.

There are two major economic reasons for fooling around with taxes (either raising or lowering them).  One is to stimulate the economy to get it growing again.  The other is to bring about a balanced budget to stop or bring down the growth of our national debt.  The two are not necessarily mutually exclusive, but they tend to act in competition in a modern economy.

Some argue that the economy cannot be stimulated further because current unemployment rates are very low.  According to the Labor Department, unemployment in October was 4.1% and there were 6.2 million open jobs on the market.  Demand for workers is exceeding those available.  During the presidential campaign, the Republican candidate claimed that the government’s statistics were “false” and that the unemployment rate was really much higher.  He now argues that the numbers are correct.  Regardless, an argument can be made that although the unemployment rate is the lowest in decades, there are many people that have stopped looking for jobs even though there are 6.2 million available.  Why the disparity?  Probably because the skill levels needed for the empty jobs is greater than, or a poor match with, the skills of those that stopped looking for jobs.  Couple this information with the fact that worker productivity is the highest ever — thanks to automation and other technology advances — and one can rightly ask how this tax cut is going to further stimulate growth in the economy.

The usual reply is that corporations will create more jobs by using dollars that would have gone to taxes to instead expand production.  This assumes that there is more demand for their products, an assumption that may or may not be true but is an unknown and should not be assumed.

The use of “dynamic scoring” helps the case for the tax cuts.  This is the theory that more money not spent on taxes will enter the economy as people have more cash to spend and this in turn causes the economy to grow and will actually bring in more tax dollars in the long run than are lost with the cuts.  Historically, this has rarely if ever happened.

The proposed tax cuts now before Congress will not balance the budget and will in fact increase the national debt by at least 1.5 trillion dollars over ten years.  (By the way, this is one of those intricate rules that the Senate must follow under the just passed budget.  They cannot go over that number or 60 votes will be required for passage.)  One might ask what happened to the Republican “deficit hawks” that argued for the past decade that the debt was growing too fast and even argued for a balanced budget amendment to the Constitution.  Beware of the need to pass something.  One can also argue that it is not good governance or good policy to finance a tax cut through increasing the deficit.  It narrows the options going forward when it may be necessary to finance a major catastrophe or war through deficit spending.

In fact, the current proposal cuts government revenue by roughly 4 trillion dollars.  For those that argue for smaller government and less spending, that may be attractive.  Remember that many in Congress are also arguing for increased defense spending, major infrastructure spending, no cuts to Medicare or Social Security in an aging population, and other measures that will increase spending.  The money has to come from somewhere.

To get the 4 trillion in cuts down to 1.5 trillion in actual lost revenue, the bill makes up the difference by eliminating many current deductions.  This is where it starts to get interesting to you and me.

There are always winners and losers in these types of bills.  Depending on where you sit, you may or may not like what you see.  To me, we need to understand who wins and loses and decide for ourselves whether or not our elected representatives should vote for or against the bill.  There are philosophical reasons to support or oppose it and there are also practical reasons to do so or not.  Sometimes those line up, sometimes they do not.

As an aside, it is impossible to know if the president makes out well or not through the provisions of this bill because we do not have his tax returns.  Every analyst that I have seen opines that if his stated worth and holdings are true, the man and his family makes out “bigly” if the bill passes.  Call it a tycoon real estate developers dream.

Those that authored the tax cuts tout it as a huge win for the middle class and not so much for the wealthy.  Please investigate it for your self and do not take as gospel the talking points of anyone in the House or Senate, Republican or Democrat.

Here are some of the more eye-opening provisions.  These are only a sample.  Read the 429 page proposal for yourselves and see if it meets your needs.

According to the talking points, the attempt at tax reform is to simplify the tax code.  If you dig through the details, it really does not do that.  There will be no “post card” sized tax form unless you already use the “1040 EZ” form and use photo shop to make it fit on a post card.

According to the talking points the cuts will put about $1,182 into the “typical family of four.”  First, I’m not sure what a “typical” family might be (more on that in a minute), but more broadly, of the $1.5 trillion cut about $1 trillion goes primarily to corporations, about $300 billion to tax payers, and about $200 billion to the most wealthy Americans via the elimination of the estate tax.

Back to the typical family.  Some will receive a tax cut, although how much is in dispute by some economists, but they generally agree that some will get a cut and that some middle class folks will actually have their taxes go up.  The main argument from the bill’s authors is that increasing the standard deduction ($12,000 for individuals and $24,000 for married couples) will eliminate the need to itemize deductions as most people will be better off not doing so.  Perhaps.  Individual circumstances vary so widely that it is hard to generalize.  But middle class tax payers should know that among other deductions that are to be eliminated include:

  • Federal deductions for state and local taxes (known as SALT) are eliminated.  Property taxes will be deductible up to $10,000.  The argument against “double taxation” — used in eliminating the estate tax — doesn’t seem to matter here.  For states with state and local taxes (including sales taxes) one will pay twice on the same income.  Arguments that high state taxes that are deductible means those with no or low state taxes subsidize them do not hold up.  There are many ways to analyze the return on investment, but in general, states with low or no state taxes get back more from the federal government than they send to Washington in taxes and just the opposite for the supposed free loaders.  For example, New York (high state tax) gets back about 75 cents for every dollar it pays in federal taxes and Florida (no state income tax) gets back about $4.50 for every tax dollar.
  • The Alternative Minimum Tax (AMT) is repealed.  This is the methodology that hits many middle class tax payers (although it was originally designed to keep wealthy people from paying no taxes through shelters and other tax dodges) requiring that when certain marks are reached, the owed tax is calculated in two different ways and the higher rate prevails.  Estimates are that the president will save tens of millions of dollars every year with the elimination of the AMT.
  • Elimination of the deduction for medical expenses.  Currently, one can deduct all expenses over 10% of adjusted gross income.  No deductions will be allowed under the new proposal.  This obviously impacts people with major medical bills, often the elderly, as it includes long-term care and other services needed for the aged or infirm.
  • Deductions for student loan interest is eliminated.
  • Estate Tax limits rise from the current $5.9 million to $11 million and then is eliminated in 2024.  This is a hot button issue.  Most of us will never be impacted by it, but Republicans claim it is “double taxation” (see above) and harms small businesses.  Its elimination adds about $200 billion to the deficit over ten years.  Estimates are that about 80 businesses were impacted by it last year.  The president’s family is expected to increase their inheritance by approximately $500 million through its elimination.  Keep an eye on this.  One proposal to pay for this change would provide for estates passed to heirs to be valued at their original prices (such as stock you bought 20 years ago and want to pass on) rather than the current rule where the origination value is that that it held at the time of passing.  This would impact far more people than currently affected by the estate tax.
  • A lower rate for “pass through” business income also sometimes called the “Trump loophole.”  This applies to businesses such as partnerships, “S” corporations, sole proprietorships, and the like.  It allows the owners to “pass through” profits from their businesses to be taxed as their personal income.  Thus pass through income is taxed at no more than 25 percent — far below the 39.6 percent top individual income tax rate that now applies to pass-through income, or the 35 percent top rate that would apply to individual income under the Republican plan.  Many very wealthy people such as the president use these types of arrangements for their businesses.  It is expected that many will restructure their business arrangements to take advantage of this new loophole.
  • There are proposals over the weekend to include repeal of the Affordable Care Act, or portions there of in the tax bill.  Mixed signals from law makers make it unclear whether or not they will try to sneak that into the bill after failing to pass it into law over the last seven years.
  • And a whole lot more, but you get the idea.

Clearly a “typical family” with a mortgage (deductions are limited under the bill) who are suddenly hit with catastrophic medical bills while paying off the student loans they took out to meet the needs of the new work place will fare totally differently than those families used in the talking points.  Very little is “typical” of any family.

Primarily we all need to keep an eye on the negotiations that will keep specifics of the bill in flux until the day it is voted up or down.  Whether for or against these provisions, we should insist on a fair and transparent process where our representatives know what they are voting on and what the implications for the new laws will be.  All of us will be impacted in some way.

Tax reform is a good thing.  There are many complicated elements to the current law and other elements that are unfair to some or too generous to others.  It’s complicated.  It’s messy.  Not everyone will be happy.  What we don’t need is a closed door, rushed job, unclear bill that gets passed only because they had to do something.

 


A Road Map For Success

Today President Obama signed a two-year budget deal passed by the House and Senate last week in a bipartisan deal to get the nation through and beyond the election of 2016.  Indeed, it is called the Bipartisan Budget Act of 2015.  It accomplishes several things.  Foremost among them is that it suspends the nation’s debt ceiling until March of 2017, taking that issue off the table until after the next president is sworn into office. Additionally, it provides relief from the Budget Control Act of 2013. That is the bill that set spending levels for domestic and defense programs that many thought were too severe.  It has become known as the “sequester bill”  putting arbitrary limits on spending.

This is a good deal — not perfect for either Republicans or Democrats — because we would have hit our debt limit tomorrow (3 November) with the distinct possibility of a major financial crisis as a result. It also provides for increases in defense and domestic spending above the sequester limits. Perhaps more importantly, it provides a two-year deal that will finally give some stability to military and other planning and allow for more long-term investments, rather than living weeks or months at a time on Continuing Resolutions (CR) that may or may not be held hostage for political reasons each time they come up for renewal.  The CRs provided the ever-present opportunity to threaten a default or a government shutdown should certain minority demands not be met.

There are of course other provisions in the 144 page bill addressing a number of issues, but perhaps the most important of the other provisions is a fix for Medicare to keep premiums from rising drastically and a provision to keep the Social Security Disability Insurance trust fund solvent through 2022.

It also shows that members of both parties in the House and Senate can work together and actually accomplish meaningful results.  To me, this reinforces my belief that many of our nation’s problems can be solved with moderate Republicans and Democrats working together to compromise on important legislation rather than letting the extremes of either party hold the rest of the body hostage.

From a political standpoint, this may be the last gift from the former Speaker of the House John Boehner to the rest of us.  Given his imminent retirement, he was freed from having to negotiate with the Freedom Caucus — the group of 30 or 40 Tea Party conservatives in the House — and could get sufficient bipartisan support for it to pass.  The Senate recognized a solution when it stared them in the face and ignored objections by Senator Ted Cruz (R – Texas), another Tea Party favorite and Senator Rand Paul (R-Kentucky).  Both are running for president as “outsiders” and condemn the leadership of both parties in Washington.  I suppose the bill gave them another meaningless grand standing opportunity to make it look like they are “standing up” to Washington when they knew full well that the bill would pass anyway.

While this is a major milestone — even as one might argue that doing the nation’s most basic business should not be a “milestone” — there are obstacles ahead.  It is too early to sing kumbaya as we all hold hands around the campfire.

The new Speaker of the House Paul Ryan (R-Wisconsin) has promised to use the Hastert Rule in bringing bills to the floor of the House.  The Hastert Rule is named for the now disgraced (he is on his way to jail) former Speaker Dennis Hastert (R-Illinois).  Basically, it is a “majority of the majority” rule whereby a Speaker will not bring a bill for a vote if it is not guaranteed that the majority of the party will vote for it. Speaker Boehner often invoked this same rule.  What it does, is give groups such as the Freedom Caucus inordinate power within the House of Representatives to veto any legislation that they do not like, regardless of the ability otherwise to get a majority of the Representatives to vote for a given bill.

Speaker Ryan may be a new face and a respected leader.  I hope that he is able to get the House working again.  Unfortunately, he seems to have already tied his own hands by promising over the weekend that he would  continue to use the Hastert Rule, thus again inordinately empowering the minority of Tea Party Republicans in the House.

Another reason to keep from breaking out in song is that the deal is not done.  The bill that President Obama signed today is really only a framework for work yet to be done.  Because the legislature and White House could not reach a deal prior to the start of the new fiscal year, the nation’s business is currently conducted under a Continuing Resolution that keeps things going only until 11 December this year.  The CR is based on the sequester spending caps and there are some in the House and Senate that believe those caps should stay in place regardless of the just concluded compromise. As we all know from our civics classes, the budget is meaningless until the Congress passes Appropriations Bills (to say exactly how much money goes where) and Authorization Bills (allowing the government to actually spend the money).  Normally those are passed in 12 individual bills to fund each area of government (Defense, Education, Homeland Security, etc.).  Given the time remaining (and the propensity for Congress to take weeks off for holidays such as Thanksgiving), it is likely that there will be an omnibus bill (all of them rolled up together in one big bill) to cover the ability to spend money to the new budget guidelines.  This will give those that oppose the agreement more time to undermine it, especially by adding amendments to the bill that have little to do with the subject at hand but are used because they know that the overall bill needs to be passed and thus their individual proposals get little scrutiny.  There is also the possibility that some of those amendments may be “poison pills” added to scuttle the agreement totally.  One example would be to add a rider totally defunding Planned Parenthood.  That would open up a new debate that could cause the 11 December deadline to pass and result in shutting down the government after all.  There are some presidential candidates that think that would be a very fine idea.  Only time will tell on how skilled House and Senate leaders are in moving forward.

For all us political junkies, last week there was further cause for hope that maybe the House could act in a bipartisan way for the good of the country.  Many Tea Party members in the House (and Senate) want to eliminate the Export-Import Bank (Ex-Im Bank).  Most moderate Republicans and Democrats see the bank as important to American commerce and small businesses.  Without going too far into the arcane rules of the House of Representatives, moderate Republicans utilized a little used rule to set up a petition, signed by enough Republicans and Democrats to force a vote on a bill that was previously held from the House floor by Speaker Boehner and the rest of the leadership as a “bone” to the Freedom Caucus.  The measure to restore the Ex-Im Bank passed on a vote of 313 to 118, (within the Republican Party the vote was 127 for and 117 against), demonstrating again that the majority can work together to accomplish common goals when the full House is able to cooperate. After debate, the Senate is also expected to pass the bill.

I hope that these two accomplishments are more than a mere flash in the pan but are instead a positive sign of things to come.  It does demonstrate that there is a road map that can lead to success when compromise is not considered a dirty word and our leaders work together to move our nation forward.


Cleaning Things Up

I do not often give a “well done” to Speaker John A. Boehner (R–Ohio) for his leadership in the House, but today I’ll give him a nod and a smattering of applause for getting fed up with his own party and getting something done.  Yesterday the House approved a “clean” extension of the government’s borrowing authority, or in common terms, they passed a bill allowing for an increase in the debt ceiling.   It was accomplished without amending any other elements to it and without creating another crisis such as the country went through last fall.  Unfortunately, it still had its share of drama, at least in the Republican Party.

The bill passed by a vote of 221 to 201 with only 28 Republicans voting for it.  Speaker Boehner made it clear that there would be no shutting down the government again this time and that the bill needed to pass sufficiently ahead of the government hitting the debt ceiling so as to remove the uncertainty and drama of the past several years.  I hope that he determined this was necessary in order to insure the full faith in the word of the United States government, and not because we are approaching mid-term elections and most of the American voting public is fed-up with the shenanigans from last fall and he did not want to risk losing control of the majority in the House.

The Speaker worked hard since the start of the new year to find a suitable compromise that would bring in both Republican and Democrat House members to vote for the bill.  He tried several different amendments to bring Republicans on board such as lifting the Cost of Living Allowance (COLA) cut to military veterans benefits (see my post from 7 January 2014) without losing Democrats’ votes.  It also had to be realistic enough that there would be a chance of getting the bill through the Senate and signed into law.  He was unable to come up with any compromise positions on the bill because the extremely conservative elements in his party opposed any effort to raise the debt ceiling — even though that ceiling is necessary to pay the bills already authorized by the Congress.

In a surprise move on Tuesday morning, he told the Republican caucus that he was moving ahead with the clean bill and, essentially, letting the Democrats move ahead with actually governing the country.

What rankled me a bit, although I was happy they finally did what they should have done long ago, is  that many Republican Congressmen wanted the debt ceiling raised knowing what the consequences of not doing so would be, but refused to vote for it because of fears that they would be challenged in this year’s primaries.  As Representative Devin Nunes (R-California) put it (he was one of the 28 Republicans that voted for the bill); “It wasn’t exactly a profile in courage.  You had members saying that they hoped it would pass but unwilling to vote for it.”

The Senate is expected to pass the same legislation (although just one hour ago a filibuster by some conservative Republican Senators was narrowly averted) and the President has declared that he will sign it.  Now we can get on with the business of governing.


What Just Happened?

It turns out it is impossible for me to resist writing about the recent shenanigans in the House of Representatives.  I did not intend to write more about it as it seems self-evident to me as to what occurred, but here I am writing none-the-less.  I’ll try to be brief in addressing two main points.

I think what we just experienced is primarily a battle for the future of the Republican Party.  I feel strongly that we need a vibrant two-party system as part of the checks and balances inherent in our way of government.  For this citizen, I hope that the mainstream Republicans in the Senate and the House prevail over the Tea Party zealots that prefer ideological purity over actually running the country.  To this observer, it seems a lot like fundamentalists trying to take over our nation.  Thankfully the cooler heads in the Senate prevailed, which actually is not unusual in the history of our legislative process and a reflection of the way it was intended to be done.  The House tends to be more impetuous and the Senate tends to be the more deliberate body willing to look at long-term impacts rather than the fad of the moment.  Obviously, there are exceptions to the rule on both ends of the equation, but generally the system works.  It worked this time, but it took way too long.  Time will tell what this all means for the future, but I hope that the fundamentalists in the House have figured out that Senator Ted Cruz is not the Speaker of the House.  In my view, Ted Cruz really is only out for himself and has merely hitched a ride with the Tea Party in order to gain attention for self-promotion.  The majority of Republicans in the House and Senate need to stand up to Cruz and his kind and appeal to the large majority of us that take a middle of the road approach.

I’m no fan of his, but kudos to Senator Mitch McConnell who is fighting his own re-election challenge from the far right.  He was missing in action for far too long, but got it done in the end.  Hopefully the experience for both he and Senator Harry Reid will lead to some productive efforts to straighten out the problems that we face in a bi-partisan manner.

My second thought has to do with opposition to Obamacare which, ostensibly, was the reason for the shutdown.  For now I will ignore the view that simply because it was championed by President Obama that there was visceral opposition to it regardless of its possible merits.  Instead I have several thoughtful colleagues that worry that our country cannot afford it.  This is a more reasoned argument and one that needs to be further explored.  As I have said in earlier posts, I do not believe that Obamacare will be trouble-free — no undertaking of such magnitude can be counted upon to be trouble-free.  However, the fixes should be well thought out and not attempts at outright sabotage to ensure its failure.  But I digress.  While I do not accept that the Affordable Care Act will be the ruin of our country, either socially or economically, let me concede for arguments sake that it may put a burden on our national finances.  I still do not get the logic behind the reasoning that what may (may) be a burden over the long haul — several years into the future — needs to be “fixed” by destroying the nation’s economy now.  That is what many Tea Party supporters and Congressmen tried to do with the run-up to the current Continuing Resolution (CR).  Some still say it would have been worth it and given the chance, they would do it again.  I do not get it.  While I am no Nobel Prize winning economist, I do understand what the Nobel Prize winning economists are saying, along with financial experts of every stripe and leading CEOs of major corporations.  All indications were that a failure to extend the debt ceiling would over time have a catastrophic impact on our economy and destroy any chance for a continued recovery.  Even those staunchly opposed to Obamacare were appalled that the Tea Party Republicans would be willing to cripple our nation economically in order to stop it.  I will never understand it.  Never.  Such an approach runs counter to everything that I understand as a patriotic American.  If every one of us acted this way to oppose laws that we disagree with (and there is probably some significant law that most Americans oppose and it is unlikely that it is the same one) then we would be a nation without laws and anarchy would prevail.

I just do not understand how people who say they love their country actually hate it so much that they are willing to risk destroying it to get what they want.