Fresh off their failure to pass another Obamacare repeal bill, Republicans revealed a somewhat more detailed framework of the tax reform they plan to pursue next. But there are still more questions than answers.
Let’s be clear about one thing from the outset: The framework lacks some details because it’s intended to be just that — a framework, to guide legislators as they fill in the specifics through the committee process. In other words, it’s not one of those “backroom deals” put together by leadership and “rammed through,” as critics noted about the Senate GOP’s various Obamacare bills. That lack of details leaves it open to criticism by people who will try to persuade Americans to assume the worst about how it will evolve — some of the very same people, in fact, who excoriated Republican senators for not moving Obamacare bills through said committee process. If you attacked Republicans for not using regular order to mold and vet an Obamacare bill, but are now taking advantage of ambiguity in this tax-reform framework to demagogue it while it is being molded and vetted through regular order, you just might be a hypocrite.
With all that said, let’s look at some questions about the framework that need to be answered as it moves through the legislative process.
The general direction is sound: fewer brackets, less complexity (including deductions/loopholes) and lower rates (for the most part — we’ll discuss a possible exception in a moment). But there aren’t enough details to know whether this general direction will work to most Americans’ benefit when the specifics are applied.
An example: The framework calls for doubling the standard deduction, which Republicans have been promoting as a win for working Americans. But it also calls for eliminating personal exemptions in the name of simplicity. In principle, that is a good example of removing complexity; in practice, it means the benefit of a larger standard deduction is lessened. And with the lowest rate rising to 12 percent from 10 percent, that could mean some tax bills go up.
Or maybe not: The framework is silent on such specifics as how far up that 12 percent bracket goes. If it basically replaces the 10 and 15 percent brackets, all the way up to where the current 25 percent bracket begins, that ought to reduce the tax bills of a lot of Americans. But if the 25 percent bracket creeps downward into the current 15 percent level, not so much. The framework also calls for a “substantially higher” child tax credit; that might offset increases elsewhere, depending on how much higher it goes. There’s also a reference to “additional tax relief that will be included during the committee process” to make sure “typical families in the existing 10 percent bracket … are better off.” So we can’t really say what will happen to the tax bills of people at the bottom of the new 12 percent bracket until we see what’s added during the committee process.
The specifics of the child tax credit will be especially important to a lot of working families. A tax credit is a direct reduction in the amount of taxes owed rather than a decrease in the amount of taxable income, as with a deduction or the personal exemption. Based on the current personal exemption for dependents of $4,050, that credit would need to rise by $405 to offset the removal of the exemption in the 10 percent bracket, by $607.50 in the 15 percent bracket, and so on. A higher credit of, say, $1,000 would be basically neutral for those in the 25 percent bracket and a cut for those in the lower brackets. (By “in the bracket” I’m referring to people’s marginal tax rate — what their next dollar of income is taxed at.)
Because we don’t know such details as the income ranges for the new tax brackets and the size of some of these tax credits, you should be extremely skeptical of anyone trying to tell you not only what the proposal would cost (or save) a family, but also what it would do to federal revenues. If you don’t know where the 12 percent bracket ends and the 25 percent bracket begins, you have no way of modeling the effect on individual taxpayers — much less the aggregate effect on the Treasury, and thus budget deficits. Anyone who tells you otherwise is probably trying to pull a fast one on you.
There’s a lot to like about the framework in principle, both on the individual and corporate sides. But those details are going to matter a lot — which is why it’s good to see that Congress will fill them out via the legislative process. And hey, if it works, maybe Congress will figure out it’s not such a bad model for replacing Obamacare either.