It is time for Tax Vox’s 11th annual Lump of Coal Award for the worst tax policy ideas of 2017. Given the recent all-consuming tax debate, this year’s award is all about the Tax Cuts and Jobs Act (TCJA).
The new law has some benefits. For instance, it increases the standard deduction and lowers the corporate income tax rate. But is also a dogpile of complexity, unsustainable claims, and just plain bad tax policy. Here are our 11 nominees for this year’s Lump of Coal Award. If you’re playing along at home, you may have some of your own.
11. The bill’s name: Republicans called it the Tax Cuts and Jobs Act, which may be half accurate. Democrats, who never engaged at all in the legislative process, finally won one argument. At the last minute, they convinced the Senate parliamentarian that the GOP’s informal title violates the Senate’s arcane budget rules (don’t even ask). So the bill will henceforth be known by its official name: “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” This is what passed for a tax policy debate in 2017.
10. Rushing to meet the Christmas deadline. This is one of those artificial deadlines Washington always creates for itself. And they almost never end well. Remember, for instance, the fiscal cliff. This time, trying to change hundreds of provisions of the federal tax code in a month-long sprint will inevitably yield embarrassing mistakes and unintended consequences.
9.Democrats missing in action. Politically, it made perfect sense for Democrats to just say no when it came to the TCJA. They were never going to have much influence in the final product, and engaging in a policy debate would have allowed the GOP to attack Democratic ideas rather than defend their own plan. Still, it would have been good to hear what Democrats meant when they said the words “tax reform.”
8.The early demise of the destination-based cash flow tax. For a relatively brief moment, it looked like Congress was going to have a serious discussion about a business consumption tax. But retailers and, eventually, the White House had no interest. The idea collapsed and, with it, any real chance for this kind of tax reform.
7.President Trump’s claim that he’ll pay more in taxes. Of course we can’t know for sure, since Trump is the first president in nearly a half-century to refuse to disclose his tax returns. But we know that the TCJA reduces individual income tax rates, cuts taxes for pass-through businesses (Trump’s favorite form of business organization), cuts the corporate income tax rate, and roughly doubles the exemption from the estate tax—all provisions that would benefit taxpayers like Trump.
6.Adding $1 trillion-plus to deficits over the next 10 years. Let’s see if we have this right: The national debt is equal to about 77 percent of Gross Domestic Product and rising. The economy is growing at close to capacity, the unemployment rate is 4.1 percent, and the Federal Reserve is raising interest rates. It seems like an especially bad time for Congress to pass a big front-end tax cut that would add more than $1 trillion to deficits over the next decade and do almost nothing for long-run economic growth.
5. Making tax cuts temporary. Congress started its tax cutting exercise by building itself a $1.5 trillion box. Then it had to jam all its hopes and dreams into the container. When it couldn’t, it turned to timing gimmicks. The two worst: Allowing nearly all the individual income tax provisions to expire before 2026 and fiddling with business depreciation rules for the next nine years before returning to current law in 2027.
4.Tax cuts on pass-through businesses. Creating a big gap between income tax rates on pass-through businesses and on wages and salaries will prove unworkable (just ask Kansas). Writing rules to prevent the predictable gaming while protecting certain industries from those anti-abuse rules is awful tax policy.
3.The Zombie AMT. The TCJA almost killed the individual alternative minimum tax, but didn’t quite get there. The new law changes the AMT so that only about 200,000 taxpayers would get hit—way down from 5 million today. But with the law still on the books, and with Congress always hunting for tax revenue to offset new tax cuts, it won’t be hard for lawmakers to expand it again soon.
2.The territorial tax and failed efforts to prevent base erosion. As early as his presidential campaign, Donald Trump insisted that keeping companies from moving production offshore would be a primary goal of his tax policy. Yet the TCJA may very well do just the opposite. Big loopholes in the law’s rules may encourage firms to locate more manufacturing assets overseas to avoid its tax on excess offshore income, which applies primarily to patents, royalties, and other intangible assets.
And the winner is…
The claim that the TCJA will pay for itself. It won’t. No major tax cut ever has. While the Trump Administration never stopped asserting it would, the White House never provided any research to back up its claim. Independent analysts including TPC, the Joint Committee on Taxation, the Tax Foundation, and the Penn Wharton budget model all debunked the assertion. For months, Treasury Secretary Steven Mnuchin insisted he had a Treasury report to support it, but apparently it did not ever exist. The best he could do: A one page press release with no supporting evidence.
