The House Republican tax reform package met immediate resistance after it was unveiled Thursday. Some blue-state GOP reps were wary of the measure’s treatment of state and local sales taxes. Sens. Marco Rubio, Mike Lee, Jeff Flake, and Bob Corker expressed their own concerns. The National Federation of Independent Business, normally a Republican ally, announced its opposition to the legislation in its current form.
This sort of dissent about fine details is to be expected in a proposal as ambitious as this one. But it’s wise to look at the big picture even briefly: Washington’s majority party has produced a consequential bill that is politically deft, unlike its repeated whiffs on health reform. It moves around money for tax credits and deductions in a way that both saves the government dollars and still gives Republicans tangible, sellable ideas. It lowers individual tax rates overall, but cleverly preserves the percentage the top bracket owes, clouding the significance of the changes. This is not cynical policymaking: It’s all part of the necessary marketing component of advancing a bold legislative agenda. For the first time in nine months, the GOP has come to play.
Both Republicans and Democrats emphasize that the term “tax reform” entails scrapping all sorts of breaks and incentives, while disagreeing on who the eliminations should affect. But the rhetoric is partly a smokescreen for the highest stakes of a bill. It is impossible to contextualize the unique circumstances of hundreds of millions of Americans who will be affected by Congress yanking a hundred different levers to produce a new tax system. For passing legislation, the aggregate, which mostly comprises a handful of the costliest tax policies, is what matters.
On the individual side of the tax code, this includes the personal exemption and the standard deduction, hallmarks of the country’s tax system. The former allows filers to deduct taxable income for every taxpayer and dependent they claim on their returns. The exemption is more than $4,000 a head—a massive amount for middle-income families. The GOP bill ends it. You won’t hear House speaker Paul Ryan or Ways and Means chairman Kevin Brady bragging about it.
But as they said on Thursday, their legislation nearly doubles the standard deduction taxpayers can shave off their returns: from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples. It also expands the child tax credit from $1,000 to $1,600 per child, and creates a new credit of $300 for each spouse. These are positive changes Republicans are keen on touting.
They could help cover up for ending the personal exemption, as well as some other breaks with less impact on the overall economy: the deductions for student loan interest, medical expenses, and home mortgages, for example, which the Tax Cuts and Jobs Act either repeals (the first two) or limits (the latter). How any single person or family would benefit or lose from these modifications is circumstantial. But the Joint Committee on Taxation, Congress’s reporting arm for proposals of this sort, estimates that nixing the personal exemption and curtailing nine deductions, including the three mentioned in this paragraph, would save more than $2.8 trillion. Enhancing the standard deduction and expanding the family credits would come at a price of “just” $1.56 trillion.
The bill’s rate reductions and consolidation of individual tax brackets would cost $961.2 billion. Instead of seven brackets, there would be four, at 12 percent (up to $90,000 for joint filers), 25 percent (up to $260,000), 35 percent (up to $1 million), and 39.6 percent for each additional dollar.
That same 39.6 percent also happens to be the top tax rate under the current tax code. But instead of applying only to millionaire earners, as it does in the Tax Cuts and Jobs Act, under current law the 39.6 percent rate applies to couples beginning at $470,000. Still, the Ways and Means fact sheet about the legislation cunningly says it “continues to maintain 39.6 [percent] for high-income Americans”—a useful, if misleading talking point for blunting Democratic attacks.
All this says nothing of how the House Republican bill alters the country’s corporate tax structure, which is estimated to move around trillions of dollars, too. Comprehensive tax reform is dynamic; in some way, it could be said that ending the personal exemption helps pay for reducing the corporate tax rate from 35 to 20 percent. But it also could be said that the legislation’s new limitations on businesses deducting interest ($172 billion in savings) somehow helps pay for more robust family tax credits.
The personal nature of this debate comes down to how the tax reform package affects individuals. Republicans aren’t lacking for material, and, in turn, hopes that their vision becomes law.
