The TCJA: In the eye of the beholder
By Roger Russell
The House Ways & Means Committee hearing on “The 2017 Tax Law and Who It Left Behind” resulted in a report card for the Tax Cuts and Jobs Act, which predictably varied in accord with the analyst’s view of the importance of economic growth versus equality.
Republicans at the hearing in late March touted the lowest unemployment rate in 50 years, and rising wages at all levels, with the greatest increase at the lowest levels. Democrats cited a continuing rise in income inequality, saying that the greatest benefits of the TCJA were squandered on the wealthy and noting potential adverse effects on the working poor. “For the poorest of the working poor, incomes generally fall below the income tax threshold and the law may not impact actual income tax liability, per se,” stated Nancy Abramowitz, professor of practice and director of the Janet R. Spragens Federal Tax Clinic at American University Washington College of Law. “However, for some households, depending upon their circumstances, changes such as the interplay of the suspension of dependency exemptions and new Child Tax Credit rules may result in less favorable results post-2017. The largely unchanged Earned Income Credit and revised Child Tax Credits seem to result generally in rather small, if any, changes for the low-income wage earners. For taxpayers who cannot meet new rules about Social Security numbers for qualifying children, the refundable CTC disappears, so we would expect to see an additional burden on immigrant taxpayers.”
“Income inequality is the primary reason why the vast majority of Americans experienced disappointing growth in their living standard over the last four decades,” testified Elise Gould, an economist at the Economic Policy Institute. “In other words, most Americans are seeing slow income growth because most of overall income growth is going to households at the top. Labor market income represents the largest source of income for most Americans, and that is why we cannot tackle income inequality without tackling wage growth,” she said.
“Wage growth in the last four decades has been uneven, with notable growth only at the top while wages for most workers have failed to rise with productivity growth,” she continued. “This uneven wage growth — what we can call growing wage inequality — continued through the 2000s, as wage gaps between demographic groups persisted, and, in some cases worsened. Further, the growth in inequality cannot be explained by growing demand for college-educated workers.”
She cited recent wage gains for the lowest-wage workers as the result of tight labor markets and the institution of a number of state-level minimum wage increases. “Going forward, policymakers should prioritize keeping labor markets tight while also strengthening institutions and policies that provide workers the leverage they will need to achieve decent wage growth even when the economy is not at full employment. These policies and institutions include strengthening and enforcing labor standards, making it easier for workers to collectively bargain, and raising the federal minimum wage.”
Jason Oh, professor of law at the UCLA School of Law, distilled his testimony into five major points:
The tax cuts in the TCJA are weighted toward the rich.
The distribution of tax cuts from the TCJA will become even more unequal over time.
The Joint Committee on Taxation predicts that the TCJA will increase the deficit by over a trillion dollars.
Although the pass-through deduction will provide some tax cuts to small businesses, the primary beneficiaries are rich Americans who can structure their business activities to take advantage of this provision. The JCT predicts that roughly half of the benefits of the pass-through deduction are distributed very unequally.
Tax legislation is unstable, especially partisan tax legislation, which makes long-term planning for businesses and families uncertain.
Douglas Holtz-Eakin, president of American Action Forum, testified that it was important to frame any evaluation of the TCJA relative to the rationale for tax reform in the first place, which he stated was the weak U.S. economic outlook. As part of this assessment, he made the following three points:
The overriding rationale for the TCJA was the need for better incentives for long-term economic growth, improving disappointing wage growth and raising the growth of the standard of living for American families;
The TCJA, while imperfect, addressed many of the most anti-growth elements of old Tax Code; and,
U.S. economic growth has improved meaningfully since the passage of the TCJA, including objectives like top-line economic growth, business investment, and wage growth. While promising, this is not definitive, and at this juncture it is simply premature to pass judgement on the TCJA.
“As of December 2017, the need to support more rapid-trend economic growth was the pre-eminent policy challenge,” he explained. “The nation experienced a disappointing recovery from the most recent recession and was confronted with a future defined by weak long-term economic growth. Left unaddressed, this trajectory would leave to the next generation a less secure and less prosperous nation.”
Writing the next day in “The Daily Dish,” Holtz-Eakin said the politics regarding a law passed with only Republican votes are pretty obvious and pervaded the hearing, “but beneath the partisan veneer were some interesting substantive agreements and disagreements.”
“The biggest agreement is that it is simply too early to pass definitive judgment on the TCJA,” he said. “The hearing also revealed a fundamental difference in focus when evaluating the TCJA. The liberal side of the panel focused on the specifics of individual provisions of the TCJA. How many individuals are affected by, for example, the larger standard deduction? How much did it save in taxes? Did it make the Tax Code more, or less, progressive? In contrast, I am less interested in any specific provision of the Tax Code, or even the size and composition of the tax cut as a whole. Instead, my focus is on the overall impact on the economy, especially investment, productivity, and real wages. Notice that the latter affect everyone in the economy, including the roughly 45 percent who pay no income taxes. Focusing attention on just the tax provisions cannot reach those individuals.”
Closer to home
Despite the obvious effect that the TCJA has on practitioners, there was little acknowledgement of the impact of tax reform on the professional preparer at the hearing. “It was more about tax policy than reality on the ground,” said Beanna Whitlock, a San Antonio-based preparer and educator and former director of IRS National Public Liaison. “It should have been after April 15. The panel should have heard from tax professionals — not agencies or bureaucrats. If they really wanted the proper assessment of the act, they would have called in seasoned tax professionals who saw what the TCJA did and did not do to their taxpayers. Policy is one thing, and as long as it continues to be a matter of politics, fundamental policy is on the sidelines.”
“There are winners and losers — those who owe say it’s not fair, and those that benefit think it’s the best thing since a pocket on a shirt. But above all, the losers are the tax forms,” Whitlock continued. “They are confusing, difficult to follow and taxpayers are lost. My client who pores over tax forms with a passion to understand everything called back and said, ‘File it.’ When I said she had reviewed it so quickly, she said, ‘I could not understand the first number after 45 minutes.’ So much for the postcard!”
“You can talk about inequality all day, but how are you going to fix it?” said Roger Harris, president of Padgett Business Services. “I don’t hear people who talk about it talk about fixes. If I take $1,000 from you because you make too much money, how does that help someone else? Income inequality pervades professional sports, but we accept the fact that someone that can make a three-point shot gets paid more than someone that can’t.”