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One of former President Trump’s unfulfilled campaign promises from 2016 was to “repeal and replace” the Affordable Care Act. Trump tried, but a Congressional vote failed in 2017, in part because Trump and his fellow Republicans never had a coherent plan to replace the ACA with.
President Biden is now trying to repeal and replace a signature Trump achievement—the 2017 Tax Cuts and Jobs Act. Biden isn’t using Trump’s language, but a series of tax changes he and his fellow Democrats want to make would essentially dismantle the 2017 tax law, which Republicans passed with no Democratic votes. And unlike Trump, Biden has detailed alternatives plus a solid rationale for overturning a law that has never enjoyed majority support.
The first part of Biden’s tax overhaul is a higher corporate tax rate and other changes meant to bring revenue from business taxes back to historical levels. Those higher taxes would finance some of the infrastructure programs in Biden's “American Jobs Plan.” In a few weeks, Biden is likely to call for higher taxes on wealthy individuals to help finance social programs in the forthcoming “American Family Plan.”
Republicans and business groups, surprising nobody, are slamming these proposed tax hikes as job-killing government overreach. But the problem they face is that the Tax Cuts and Jobs Act was poorly designed in some ways and hasn’t come close to delivering what its backers said it would. Even with super-slim majorities in the House and the Senate, Democrats have a good case for killing a tax law that enriched businesses and the wealthy with no discernible improvement in growth, employment, wages or federal revenue.
'Substantially flawed' and 'regressive'
At 35%, the U.S. corporate tax rate was too high before the TCJA went into effect, because many other countries had lowered their rates, undercutting the United States. A new draft paper by William Gale and Claire Haldeman of the Tax Policy Center finds that lowering the tax rate from 35% to 21% did improve efficiency. But the analysis also finds that many other changes in the TCJA were “either ill-conceived or substantially flawed. TCJA is regressive and reduces federal revenue substantially.”
Defenders of the tax cuts point to a burst of growth in 2018 as evidence that the tax cuts stimulated the economy. But that was ephemeral. Overall GDP growth in 2018 was a respectable 3%, but that was still a tick lower than the 3.1% growth in 2015, before the tax cuts. In 2019, GDP growth fell back to 2.2%, clearly not a boom. Data from 2020 isn't meaningful because the coronavirus pandemic dominated the economy.
Gale and Haldeman document other changes in the economy following the tax cuts that reveal no stimulus effect whatsoever. The annual growth rate in employment was 1.68% in the two years prior to the TCJA, and 1.55% in the two years following. So job growth slowed. Annual growth in median earnings was 1.35% before the TCJA and 1.14% after. That fell, too. There was much fanfare about companies that got tax cuts and gave bonuses to workers in 2018, but at companies that gave bonuses the typical worker got just $225. Averaged across all workers, the bonus amounted to $28.
The annual growth rate in new business formations was 6.8% during the two years prior to the TCJA, and 4.7% during the two years after. Another decline. Business investment grew modestly after the TCJA, but that seems to have been driven mostly or completely by rising oil prices and subsequent investments in the oil and gas sector. Big multinational companies did repatriate nearly $1 trillion after the tax cuts, but most of that went to stock buybacks and there’s no evidence it boosted investment, as intended.
Trump and his fellow Republicans claimed the 2017 tax cuts would “pay for themselves” through stronger growth, more earnings and more tax revenue. Nothing like that happened. Before the law passed, the Congressional Budget Office estimated the tax cuts would cost the federal government $1.5 trillion in foregone revenue. After two years, revenue loss was worse than forecast. The CBO forecast for revenue loss in 2018 and 2019 was $416 billion. The actual decline in revenue was $545 billion. That suggests the ultimate loss could be well above $1.5 trillion. Gale and Haldeman conclude that “the Act reduced revenue and did not raise output growth.”
Biden obviously thinks he can do better, and if he gets much of what he wants it will essentially erase the Tax Cuts and Jobs Act. Here are major changes Democrats are proposing:
Raise the corporate tax rate from 21% to 28%. The TCJA cut the business tax rate from 35% to 21%, but some tax experts think that went too far. Even Gary Cohn, Trump’s former chief economic adviser, thinks it would be fine to push it to 28%. This tax hike could raise around $73 billion per year during the next decade and $121 billion per year during the following decade. Congress might not approve a 28% rate but could probably approve at least 25%.
Stricter rules on overseas earnings. The TJCA included changes meant to reduce profit-shifting to other countries with lower tax rates, but there’s little evidence that worked. Some changes may even have given U.S. firms more of an incentive to move money out of the United States. Biden wants to tighten these rules so U.S.-based multinational firms pay more taxes at home.
A minimum tax on big companies. Biden wants to prevent U.S. firms with more than $2 billion in net income from using legal tax breaks to pay less than 15% of their income in taxes. As a candidate, Biden wanted to impose a 15% minimum tax on companies earning more than $100 million. But he’s now raised the net income threshold to $2 billion, probably to exempt smaller companies claiming tax breaks much as Congress intended them. Only about 200 large companies have more than $2 billion in net income and perhaps only one-fourth of them would pay the 15% minimum tax.
These are just the business tax changes Biden wants to make. He has already identified changes in tax rates for individuals he’s likely to seek later this year as well, including:
Higher income tax rates for households with more than $400,000 in income. The TCJA cut the top individual rate from 39.6% to 37%. Biden wants to restore it to 39.6%, which seems plausible given that the wealthy have thrived during the coronavirus pandemic, while lower-income workers have borne the brunt of job and income losses.
Higher capital gains taxes on millionaires. For households with $1 million in income or more, the capital gains rate would rise from the low-20% range to the top rate for income, which Biden wants to raise to 39.6%.
Higher estate and inheritance taxes. The TCJA raised the exemption threshold from $5.45 million to $11.4 million. Biden would lower it to $3.5 million and raise the estate tax rate from 40% to 45%. He’d also require estates to pay capital gains on assets that are now exempt from that tax when the owner dies.
Eliminate the $10,000 cap on state and local tax deductions. The TCJA put a new cap of $10,000 on the amount of state and local taxes filers could deduct from their federal tax payments, a move that hit blue states harder than red states. Biden hasn’t called for undoing this, but some Democrats in Congress have said repealing the so-called SALT cap is a requirement in any Democratic tax package. A possible compromise is repealing it up to incomes of $400,000, and leaving the cap in place for higher earners.
If Congress were to pass most or all of these provisions, what would be left of the TCJA? Republicans could still claim credit for lowering the corporate tax rate in the first place, even if it didn’t stay at their preferred level of 21%. Modest tax cuts for middle-income taxpayers would remain. And some provisions lowering taxes for “pass-through” businesses could survive. But the TCJA as we know it may end up having a very short life span of less than five years. Many voters won’t miss it.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.