The Corner

Economy & Business

The GOP’s Tax Plan: Paving the Way to a Democratic Majority

Like the Titanic steaming towards that iceberg, the GOP’s tax plan is reported to be moving forward at some speed. No, no, what am I saying? For all his faults, the Titanic’s captain did not actually design the iceberg that sank his ship. The Republican leadership, on the other hand….

Even if we forget about their impact on the deficit (and we shouldn’t), the Republican tax plans have been characterized by extraordinarily sloppy thinking, so sloppy indeed that it’s impossible not to wonder what, if anything, was going through the heads of the GOP leadership.

To be fair, one or two bullets now appear to have been dodged. For example, Senate Republicans have backtracked on their nutty plan to tax stock options on vesting rather than exercise, a scheme (explained here) that would have been a significant blow to the tech sector, and which can be explained only by malice, ignorance or the desperation of politicians looking under every stone they can think of to cut the cost of their broader tax ‘reform’.

But tax reform’s latest iterations still have room for plenty of ideas that make little sense. To take just one instance (there are plenty of others to choose from), the GOP’s lawmakers want to make it more difficult for taxpayers to benefit from the capital gains tax exemption currently enjoyed by an individual on the first $250,000 in gains on the sale of his or her primary residence ($500,000 for a couple).

Leaving aside the question whether tax should be payable at all on the sale of a primary residence (in many OECD countries it is not), the current tax regime at least allows for that $250/500k ‘break’, so long as the individuals concerned have lived in that home for two of the past five years. Now, the Republicans are proposing to lengthen that residence requirement. To benefit from an exemption from this (to me, highly questionable) tax, people will now have to have lived in their primary residence for five out of the last eight years.   In an age when we need to encourage labor mobility, this will have exactly the opposite effect.

I note this from The Mercury News:

Zillow estimates the GOP proposal would hit 11 percent of home sales in the country.

There’s a vote winner!

Looking at the GOP’s proposals, the Wall Street Journal’s Richard Rubin notes (my emphasis added) that:

There are trillions of dollars of tax increases embedded in the bills. Some of those higher taxes are canceled out by the tax cuts, but the proposal still creates multitudes of winners and losers.

And (again, my emphasis added):

House members voted to raise taxes on 1 of every 12 households, a number that would rise to 1 in 5 by 2027. They voted to repeal or limit tax provisions that once seemed untouchable, like the deduction for medical expenses often used by nursing home residents, the capital-gains break for home sales, and the deduction for casualty and theft losses used by people whose homes are destroyed in fires and disasters.

Lovely, and, so far as the first of those two deductions is concerned, a remarkably self-destructive piece of politics by a party with support that skews older. Google ‘dementia tax’ and then see what happened to the lead enjoyed by Britain’s Conservatives before they went to the polls in that country’s election earlier this year. Spoiler: Nothing good.

To repeat what I’ve written in earlier posts, by turning against tax breaks that until now have enjoyed bipartisan support, the GOP will remove some of the last defenses that might have held up in the face of the next Democratic raid on taxpayers, a raid that will be coming along sooner or later. And, if the tax plan passes in anything like its Senate or House forms, it will be sooner.

It doesn’t help that the Senate provides for individual tax cuts to expire after 2025, while the corporate tax cut is permanent, a difference in treatment that is unlikely to go unnoticed by voters.

The WSJ (my emphasis added):

As a result, in the Senate bill, there would be tax increases for all income groups below $75,000 in 2027, though Republicans say future Congresses would prevent that from happening.

The way the GOP’s tax reform is likely to be received, it will be up to the Democrats to decide on that and, for that matter, on those ‘permanent’ cuts in the corporate tax rate. What could go wrong?

This will not end well.

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