In light of the recent reconciliation package that repeals the Cadillac tax on high-cost health insurance plans and Democratic Presidential candidate and former Secretary of State Hillary Clinton's (D-NY) call for repeal, 101 economists -- including CRFB board members Robert Reischauer, Alice Rivlin, and Eugene Steuerle -- wrote a letter to the Chairmen and Ranking Members of the House Ways and Means and Senate Finance Committees recommending that they spare the tax.
The letter cites three main reasons to keep the tax. First, the tax will help control health care costs by discouraging overly generous employer-provided health insurance plans. Second, it could help wage growth by reducing the share of employee compensation that goes toward insurance. Finally, repealing the tax would cost $91 billion over the next ten years. The letter concludes that:
We, the undersigned health economists and policy analysts, hold widely varying views on other provisions of the Affordable Care Act, and we recognize that measures other than the Cadillac tax could have been used to restrict the open-ended health insurance tax break.
But, we unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth.
Republican presidential candidate Donald Trump announced his tax reform plan yesterday to lower tax rates and simplify the tax code with the goal of promoting economic growth. It cuts taxes for both individuals and businesses, lowering tax rates across the board and eliminating the income tax for some people while scaling back or eliminating some tax preferences and changing international taxation to offset some of that cost. The campaign has stated that the plan will be revenue-neutral, though outside organizations have estimated it could cost as much as $10 to $12 trillion.
Individual Income Tax Reform
On the individual tax side, Trump's plan would reduce the number of tax brackets from seven rates ranging from 10 percent to 39.6 percent down to three rates of 10, 20, and 25 percent so that nearly every taxpayer would face a lower marginal tax rate. This is similar to but more aggressive than Gov. Bush's plan to reduce rates to 10, 25, and 28 percent.
The House Ways & Means Committee today approved tax and health breaks costing nearly $420 billion over ten years, or almost $520 billion with interest. Most of these provisions are part of the "tax extenders" that are routinely extended and most recently expired at the end of 2014. These bills would revive and permanently extend the breaks, with the revenue loss added to deficits. Taken together with other tax bills approved by the Ways & Means Committee earlier this year, they would cost about $1 trillion (or $1.2 trillion) with interest.
About two-thirds of the costs arise from the permanent extension and expansion of bonus depreciation. This provision, enacted in 2008 as a temporary stimulus measure and then repeatedly continued, would cost over $280 billion in lost revenue over the next ten years. We've written previously about how bonus depreciation should be treated separately from the rest of tax extenders because its rationale was to provide stimulus when the economy was weak. We've also pointed out that making it permanent is best done in tax reform because of interactions with other parts of the tax code.
Two other provisions being made permanent allow American corporations to defer paying taxes on their overseas profits, and a third continues a deduction for teachers who buy school supplies.
Presidential candidate Governor Jeb Bush (R-FL) announced his tax reform plan to trim deductions and lower tax rates yesterday. It is one part of his self-described plan to raise economic growth to 4 percent per year. The "Reform and Growth Act of 2017" cuts taxes for both individuals and corporations, lowering tax rates while reducing or eliminating some deductions. According to two estimates, the plan would reduce taxes on net and would increase deficits over a decade by between $1.2 and $3.7 trillion, depending how it is estimated.
Individual Income Tax Reform
On the individual (and "pass-through" business) tax side, Gov. Bush's plan would reduce the number of tax brackets from seven rates between 10 percent and 39.6 percent to three rates of 10 percent, 25 percent, and 28 percent.
In addition to the lower rates, the plan has several other tax cuts, including:
- Repeal of the Alternative Minimum Tax (AMT)
- Near doubling of the standard deduction
- An increase in the Earned Income Tax Credit (EITC)
- A reduction in the top capital gains and dividends rates from 23.8 to 20 percent (interest would also be taxed at 20 percent, instead of as ordinary income)
- Repeal of two provisions that limit tax benefits for high earners – the Personal Exemption Phase-out (PEP) and the Pease limitation on itemized deductions
This blog is part of the “Fiscal FactChecker” series designed to examine the accuracy of budget-related statements made during the 2016 presidential campaign.
Claim: Tax Reform Can Accelerate Economic Growth
Since the 2016 Presidential campaign began, a number of candidates have touted tax reform – either overhauling or replacing the current income tax – as a way to promote economic growth. In fact, well-designed tax reform can and probably would promote economic growth; though perhaps not by as much as some of the candidates claim.
Both the Joint Committee on Taxation (JCT) and Department of Treasury have attempted to measure the economic impact of tax reform. Depending on the type of tax reform, official estimates suggest the size of the economy can be boosted by between 0.1 and 2.4 percent on average over 10 years. This is equivalent to a 0.02 to 0.5 percent change in the annual growth rate, which would increase projected average real economic growth to somewhere between 2.35 and 2.8 percent over the next decade.
Tax reform could help to promote growth in several ways. Most significantly, it can improve incentives to work and invest (increasing labor and capital supply, respectively) by reducing effective marginal rates and can reduce the crowd-out of productive investment by increasing revenue collection for deficit reduction. Tax reform can also eliminate distortions in the tax code to help money flow to activities and investments which produce more welfare or yield greater economic returns, reduce the cost of tax compliance and avoidance, encourage certain pro-growth activities such as research and development, or improve America's global competitiveness.
Much of the press coverage of the updated projections issued by the Congressional Budget Office last week focused on the fact that the deficit would be $59 billion lower in FY 2015 than it was in FY 2014. But those headlines overlooked a major reason the deficit is projected to decline: Congress is waiting until after the fiscal year ends to revive a host of expired tax breaks. These tax breaks expired last year but are expected to be taken up by the end of the year, adding potentially over $150 billion to the 2016 deficit.
CBO's current law baseline, which assumes these "tax extenders" expire, shows deficits declining for the next two years. Given likely action on the extenders however, those projections may be unrealistic. If lawmakers continue the extenders for two years, as legislation approved by the Senate Finance Committee would do, the 2016 deficit would be about $150 billion (37%) larger than CBO's projections. Increased deficits means it's important to offset the cost for any action on extenders, unlike what lawmakers did last year.
Allowing these tax breaks to expire and retroactively extending them one or two years at a time is one way Congress masks the extenders' impact on the deficit. More than half of the deficit's drop between FY 2014 and FY 2015 is explained by the delay of Congress in extending these tax breaks beyond 2014. If the provisions had already been extended, the deficit would have only declined to $468 billion in FY 2015, instead of $426 billion. However, because the tax breaks will not show up on the government's balance sheet until FY 2016, their costs will be shifted. Ultimately, this would push the deficit in FY 2016 to $566 billion. One stimulus provision, bonus depreciation, represents 60 percent of the package's cost in the next two years.
The three-month highway law that passed last month was intended to buy time for a more lasting solution for the Highway Trust Fund's finances, so it is encouraging to see Sen. Tom Carper (D-DE) propose a plan to do exactly that. His TRAFFIC Relief Act would gradually raise fuel taxes by 16 cents (bringing the gas tax to 34.4 cents and the diesel tax to 40.4 cents) and index them to inflation. However, the bill falls into the same trap as some other plans by double-counting the revenue going to the trust fund to pay for other tax cuts.
The bill would gradually increase fuel taxes by 16 cents over the next four years and index them to inflation once the 16 cent increase fully phases in. No official revenue estimate is available, but we estimate the fuel tax increases would raise around $200 billion over ten years, enough to fully close the Highway Trust Fund's projected $165 billion shortfall over that period and cover the spending authorized by the Senate highway bill that was considered in July. Importantly, because revenue would continue to grow each year, it would ensure a more lasting solution since revenue would be better able to keep up with spending if it grew with inflation. Because the tax increase is phased in, it would seem to require another revenue source in the short term, although presumably money could be loaned from the general fund and repaid in later years when trust fund revenue will exceed spending.
The Senate Finance Committee today approved a package of 50-plus tax breaks that expired last year known as "tax extenders." Unfortunately, they chose to extend almost all of them for two years by adding the costs of the tax cuts to the national debt.
The tax breaks are called the "tax extenders" because Congress typically only extends these expiring provisions a year or two at a time, but many of these provisions are quasi-permanent. (The research credit, for instance, has been extended at least 15 times since its creation in 1981.) The provisions expired at the end of last year, but Congress can extend them retroactively because most people do not pay their 2015 taxes until 2016.
The bill costs $95 billion over ten years to extend all 50-plus provisions for two years (retroactively for 2015 and forward for 2016). The Committee did not offer a way to pay for the cost, so the amount will be added to the deficit. In markup, the Committee did slightly expand more than a dozen of the provisions and the expansion was paid for, as opposed to extenders legislation in the House of Representatives which dramatically expanded some provisions by adding to the deficit.
The House Budget Committee Democrats jumped into the transportation debate last week with a proposed surface transportation reauthorization that mirrors the President's proposal. The six-year bill includes $478 billion of spending, which would increase spending above current levels by about $56 billion over six years and $93 billion over ten years based on the score of the President's budget. The Highway Trust Fund is funded with $41 billion of revenue from limiting inversions, enough to keep the trust fund solvent through FY 2017.
The inversion policy change would lower the threshold for determining when a U.S. company has inverted and is still treated as a U.S. company for tax purposes. Currently, when a U.S. and foreign company merge, the new company is still treated as a U.S. company if 80 percent or more of the shares remain American-owned. Last fall the Treasury Department introduced rules to prevent companies from gaming the current threshold, while this new bill would lower it to 50 percent. The $41 billion of revenue would fund part of the transportation reauthorization, although it is much less than the $210 billion one-time tax on U.S. companies' foreign-held earnings that the President proposed to keep the Highway Trust Fund solvent into 2023.
The Senate Finance Committee has been working all year in five bipartisan working groups on tax reform, and today they have reports to show for it. Of particular interest is the international tax reform working group's report, since there has been some potential common ground emerging between the two parties, and this reform has been linked to a Highway Trust Fund solution. We will summarize the other four reports in a later post.
For background, the federal government taxes U.S. multinational corporations on their foreign income with a deferral system. This means that "active" foreign income is generally only taxed when it is repatriated to the U.S., while "passive" income – basically financial income that is highly fungible and mobile – is taxed immediately. The companies get foreign tax credits for the taxes they pay to foreign governments to prevent double-taxation.
The working group's framework discusses five issues in international tax reform: