How Can Republicans Entrench the Tax Cuts?

The peculiarity of Congressional 10-year budgeting has left its mark on the tax debate. In the UK, if something like the Republican bill had passed, it would be regarded as a significant tax cut, pretty much across the board. And rightly so.

As JCT analysis has shown, in 2019, 44 percent would see tax cuts of more than $500, 17 percent tax cuts between $100 and $500, with just 8.1 percent seeing tax increases greater than $100. Even by 2025, just before most of the individual income tax cuts would expire, 56 percent would see tax cuts of more than $100, with just 13.5 percent seeing tax increases of $100 or more. And this includes as “tax rises” the reduction in subsidies paid out as the removal of the individual mandate penalty leads to fewer people opting for health insurance.

As Chris Edwards has explained, even on the JCT’s own figures (which attribute most of the burden of corporate income taxes to the rich), the biggest financial winners in terms of a reduction in the proportion of federal income and corporate taxes they bear will be the middle-class.

Yet the 10-year budget, with expirations of income tax changes required to pass the bill through Senate reconciliation procedures, means Democrats and much of the media have effectively portrayed the reforms as tax cuts for the wealthy. As the income tax cuts and the increase in standard deduction evaporate, the penalty associated with the individual mandate is removed (reducing the extent of subsidies) and the new lower inflation rate for uprating tax band thresholds is maintained, more and more households lower down notionally face a “tax increase” in financial terms according to the law.

The way the media has not explained this distinction between the short and longer-term implications of the law (and how it would be up to Congress to let provisions expire) is breathtaking. On Tuesday, for example, the Associated Press tweeted “BREAKING: House passes first rewrite of nation’s tax laws in three decades, providing steep tax cuts for businesses, the wealthy.” No wonder just 17 percent of people think they are getting tax cuts in 2018, against the 80 percent estimated to actually be getting a tax cut of any amount. Liberal economists such as Paul Krugman have embraced the seeming unpopularity of the reform package, and believe the political and electoral implications for Republicans will only be worse once they now start proposing spending cuts.

The Republicans say they want to keep the provisions in the bill in the longer term, making the tax cuts permanent. So what should their message be to voters to make tax reform durable?

First, it seems clear they need to make a huge deal of the expanded paychecks most people will see in February. Given how warped people’s view is of the bill now, critics of the bill will have their credibility undermined if individual voters suddenly realize they really have seen higher take-home pay.

But, second, and more importantly, Republican proponents need to flip critics’ attack lines around. Yes, under the law the income tax changes do expire, they should say. But we do not want that to happen. If you like your tax cut, and want to keep your tax cut, then you need to ensure it has Congressional support, and you should pressure your congressmen and congresswomen to curb spending growth so that the tax cuts can be locked-in sustainably.

In other words, they need to use the new baseline from the tax cuts to their advantage, and play on the endowment effect: if you want to keep this extra take-home pay, then push for lower spending delivered by members of Congress committed to smaller government.