Republican legislation to cut and reform taxes has the potential to be the most significant policy development of the past year. If it passes Congress, it will not only boost productivity growth and incomes, it will spur further pro-growth legislation.
Key similarities in the House & Senate bills
Here are similar provisions in each bill that will likely be in the final bill.
The most important difference between the bills is the Senate bill repeals the mandate to buy health insurance. The House bill does not. In addition, the House bill limits deductions for some higher earners, raising the top marginal tax rate for certain payers. The Senate bill slightly lowers the highest marginal tax rate.
How Senators will vote
Predicting votes in the Senate can be hazardous, but here’s what I expect and why.
Sen. Ron Johnson (R. WI) says he opposes both the House and Senate bills because they fail to allow a tax cut for pass through businesses, such as limited liability companies and partnerships. Johnson is a businessman who has identified a major shortcoming in both the Senate and House bills. The flaw is a mistake that will be corrected in each bill. Johnson will then vote yes.
Sens. Jeff Flake (R. AZ) and Bob Corker (R. TN) have expressed concerns about the budget deficits caused by the tax bill. They already voted for the budget which included the $1.5 trillion loss in revenue. There is no reason for them not to support the final bill. They vote yes.
Sen. Rand Paul (R. KY) was the only Senate Republican to vote against the budget. However, he has been instrumental in promoting many of the provisions in the Senate bill. He will vote yes.
Sen. John McCain (R. AZ) was one of only three Republicans to vote against repealing Obamacare. He said his vote against repeal was due to the lack of transparency regarding its replacement. He agrees that the procedure for tax cuts and reform has been more transparent. McCain will vote yes.
Sens. Susan Collins (R. ME) and Lisa Murkowski (R. AK) are the other two Republicans who voted not to repeal Obamacare. They have expressed concern over repeal of the mandate to buy health insurance, saying it can increase the cost of health insurance premiums.
The Senate tax bill includes Murkowski’s main objective of expanding oil drilling in ANWR (Arctic National Wildlife Refuge). Murkowski will vote yes. This leaves Susan Collins as the only no note.
If this analysis is correct (and no other Senators step up to block the bill), the Senate will approve the tax legislation with 51 votes.
The final step will be the compromise between the House and Senate. It is likely to repeal of the mandate requiring people to buy health
insurance. Doing so not only counts for reducing the deficit, it also increases savings for those earning less than $50,000 a year.
The compromise will also eliminate most of the deductions associated with state and local taxes. The House will probably get to keep their $10,000 allowance for state property taxes.
Eliminating the state and local tax deduction will encourage high-tax states to reduce both their tax rates and their spending in an effort to stay competitive. It will further boost real growth nationally and curtail the cycle of raising taxes to increase public employee benefits to fund contributions to liberal lawmakers.
Voting to prevent most individuals from a tax cut might seem to be a difficult decision for Democrats. It isn’t. Many recognize how this bill will lead to explosive growth and the demise of many of liberal assumptions. All Democrats will oppose the legislation.
The final vote will be close. However, with the jobs of so many Republicans depending on a victory, the odds favor passage of this important policy change.
The Congressional Budget Office (CBO) was created by Congress to provide a nonpartisan assessment of the impact of policy proposals. All policy involves politics. Hence, there is no such thing as a nonpartisan analysis. As with every other agency, the CBO has an agenda.
In terms of the country’s two most pressing policy issues the CBO agenda includes opposition to free markets and tax cuts as well as an affinity for government-controlled healthcare. To implement its agenda the CBO makes use of accounting principles rather than economic principles in assessing the impact of policies.
Accounting principles involve the straightforward use of numbers. In contrast, economic principles incorporate the impact of changes in individuals’ behavior when assessing policies.
By relying on accounting principles rather than economics, the CBO has been able to effectively wrestle control of policies from Congress. This shift in power has had severe consequences for both political parties and for the public.
The current fiasco over healthcare legislation is the most recent example of how the CBO controls policy.
When the Affordable Care Act (ACA) was proposed in 2009, Democrats wanted to know how much the new regulations would add to the cost of health insurance. The CBO concluded that eventually premiums would increase by at most 10% to 13%.
A new detailed analysis from HHS shows the actual increase in insurance premiums due to the ACA regulations was 105%. Had the CBO produced an accurate assessment of the impact of the ACA, it never would have passed. Few politicians would knowingly vote to double the cost of insurance.
Last week, the CBO produced an equally flawed analysis when it was asked to assess the impact of repealing the ACA. Since costly new regulations had doubled insurance premiums, simple logic (i.e. economics) suggests removing those regulations would lead to substantially lower premiums.
Incredibly, the CBO concluded that repealing the ACA would double insurance premiums from today’s already record high levels. The CBO wasn’t through. It followed this illogical conclusion by stating that doubling premiums would make insurance so expensive that 32 million people would become uninsured.
According to CBO reasoning, putting costly regulations on insurance wouldn’t raise premiums by much, but removing those regulations would double the cost. Clearly, the CBO wants government-controlled healthcare.
After blindly accepting the CBO’s biased and inaccurate prediction of the impact of the ACA, Democrats went from a majority to a minority party. A similar fate awaits Republicans who blindly accept CBO’s analysis on either healthcare or tax cuts.
The CBO also doesn’t like lowering tax rates. As a result, when the agency assesses the impact of tax cuts it has a similar type of agenda-based analysis. The only time the CBO finds a positive impact from major tax cuts is when Congress also raises taxes to offset any lost revenue.
My book, Rich Nation/Poor Nation, shows how almost all increases in US living standards since 1900 have come when tax rates were low or during periods of major tax cuts. Don’t expect the CBO to consider any of this historical evidence. It simply doesn’t conform to its agenda.
Congress has the responsibility to use its own judgment in assessing the impact of its policies. Allowing the CBO to usurp this power represents a dereliction of duty taking us deeper into the swamp.
To reestablish control, Congress must abolish the CBO and use its own judgment to assess the impact of major policy changes.
In its May 13th issue The Economist magazine’s lead editorial trashes Trumponomics. Although admitting Trump’s policies could raise productivity and create a mini-boom, the article suggests low and middle income workers will be worse off. Here’s my response.
In your lead editorial for May 13, (the one where you compare President Trump to Henry VIII), you admit Trump’s policies “could stroke a mini-boom” but say it “offers no lasting remedy for America’s economic ills.” You also claim the economic assumptions in Trump’s plan “are internally inconsistent” and “based on a picture of America’s economy that is decades out of date.”
Your criticisms of Trump’s economic program are remarkably similar to those leveled whenever Americans have attempted to reverse a series of failed progressive economic experiments. Such criticisms involve opinions and references to orthodoxy rather than referring to any evidence.
Trump’s economic plan is based on principles that have successfully guided America’s economy for over two centuries—substantially lower tax rates, slower growth in federal spending, fewer regulations and free markets.
In my book Rich Nation Poor Nation there is extensive historical data on the performance of wages in America. Since 1900, there have been only 50 years when America clearly pursued the type of economic policies Trump has proposed. Almost all of the gains in real wages in America since 1900 occurred during those 50 years.
You reference the left’s criticism of Trump’s policies for the “…poor distributional consequences, fiscal indiscipline and potential cronyism.” There have been five periods totaling 52 years when America decided to heed these critiques. In each of these periods policies shifted to higher tax rates, faster growth in federal spending, more regulations and restraints on free markets. For the entire 52 years as America was pursuing this progressive economic agenda there was no increase in workers’ real wages.
America’s extraordinary success has not been achieved by what you refer to as “orthodox” policies agreed to by “most economists.” Rather, it has been achieved by reducing the government’s power and control over individuals and enhancing their economic freedom. This has been and always will be the key to providing the greatest amount of goods and services to the largest number of people. Trumponomics is consistent with these principles.
Saugatuck, Michigan USA
The House managed to cobble together just enough votes to resuscitate healthcare reform. This bill is toxic to Democrats. It allows states that favor government controls to retain much of Obamacare’s costly mandates. States that prefer freer markets can opt out of many regulations and lower their costs. Choice means liberals get to eat their own cooking and then pay for it.
The main reason Congress is having a difficult time with healthcare legislation is a failure to recognize the costs of our current healthcare system. These costs have become so great that a move to free market healthcare can save Americans $2.3 trillion a year. Data from the World Bank show the cost of healthcare in the US can be three times what it is where a country relies on the free market.
My own experience with healthcare in Mexico confirms the World Bank data.
Six years ago I had a first-hand opportunity to compare costs in Mexico’s private healthcare system to those in the US. At the time I estimated healthcare costs in Mexico were approximately half the cost in the US. A more recent experience suggests the cost difference has increased substantially.
My wife, who has asthma, recently contracted the flu while in the US. For two days (Friday and Saturday) her doctors refused to see her due to an influx of other patients seeking appointments. The office is closed on Sunday.
In spite of a difficult Sunday night, she insisted on keeping our scheduled flight to Los Cabos, Mexico on Monday. That afternoon we called a private sector Mexican doctor. He saw her immediately at the hospital. After several exams, an x-ray and blood tests, he said bronchitis had turned to a beginning case of pneumonia.
After three hours of intravenous feeding with antiviral medicine and antibiotics, her condition stabilized. Before leaving, we received seven different medications to help her recover. The total cost for doctors, assistants, x-rays, intravenous feedings, blood tests, medicines, and follow up visits was $403. In the US, we would have felt fortunate to pay that amount for the x-rays alone.
The total amount was payable on demand with a credit card, as with all normal transactions in a free market system. Comparing healthcare costs elsewhere to those in the US are complicated by many factors. The most significant factor is the lack of a free market in the US. Without a market, it’s almost impossible to know the real cost of any item.
The current US healthcare system resembles the old Soviet system. Government dominates the decisions of who gets healthcare coverage, when, where, and at what price. This is a highly inefficient system, which has been made even more inefficient by the “Affordable Care Act.” The question is how much more?
Aside from my personal experiences, there are other indications we are paying three times the amount we could be paying for healthcare. This conclusion is supported by data compiled by the World Bank. It shows healthcare costs per capita in the US are three times what they are in Singapore.
Singapore’s healthcare system utilizes many of the efficiencies of a free market system. Most routine healthcare expenses are paid by individuals out of their health saving accounts and prices are fully transparent. There is also significant government involvement to make sure everyone has access to high-quality, inexpensive healthcare.
Current US healthcare costs are upward of $3.5 trillion a year. The World Bank comparison suggests $2.3 trillion of this amount represents the waste due to our inefficient system.
Eliminating such waste through a free market system would lower the cost of healthcare so dramatically there would be more than enough resources to provide high-quality healthcare to all.
Step one: Repeal Obamacare
Step two: Replacement Bill:
Section one: Individuals in every state shall have the freedom to purchase any health insurance that meets their needs
Section two: Companies shall have the freedom to offer any health insurance plan in any state at any price in order to serve the needs of individuals
Section three: All healthcare insurance must be portable so individuals have continuous coverage
Section four: Government shall pass no law preventing access to the delivery of healthcare to individuals
Section five: All health providers must openly display their prices for any services, procedures and medications they may provide.
Section six: Government shall provide funds for the care of the indigent and those with special needs
Financial markets are weighing in with positive signals. Both stocks and interest rates are anticipating positive policy changes, a faster pace of growth and stronger earnings.
The policy changes have already begun. President Trump is using his vast executive powers to deregulate as much of the economy as he can. His cabinet appointments are also working to take the shackles off the economy. Deregulation alone can add hundreds of billions of dollars to real growth.
One of the most critical areas for deregulation is healthcare. The US healthcare system has devolved into Soviet style system where government controls the prices and shape of the product. This has led to healthcare costs that are two to three times what they would be under a free market.
The House GOP plan for reforming healthcare revolves around cuts to Medicaid. The worthwhile objective is to block-grant Medicaid funds to the states. They would then be responsible for reforming the system. The plan also promotes medical savings accounts, which hold the potential to control costs.
The major problem with the House plan is the government would continue to dictate what must be included in health insurance policies. This is the same approach that contributed to the explosive rise in insurance premiums before Obamacare and escalated the costs after Obamacare.
In contrast, true free-market reforms would give individuals the freedom to buy whatever type of insurance the free market comes up with from anyone anywhere in the world. Based on what has been accomplished in other countries, free market reforms would cut the cost of healthcare anywhere from 50% to 66%. Since the US will spend upwards of $3.5 trillion this year for healthcare, the potential savings would amount to roughly $2 trillion a year. Savings of this magnitude would make it much easier to solve the problem of those who are unable to take care of their own medical needs.
The bill introduced by the House does not repeal Obamacare. It amends it. For this reason alone, the bill should be rejected. Anyone who promised to repeal Obamacare will be violating a major campaign promise by voting for this bill.
As for the bill itself, it’s a major disappointment because it deals mainly with insurance instead of moving toward a free market in health care. The entire bill includes details surrounding the insurance market, which is why it takes over a hundred pages. Focusing on insurance instead of making healthcare more of a free market, means the bill falls short in an effort to dramatically reduce the cost of healthcare.
There is one provision that does hold the potential to reduce costs. This is the expansion of health savings accounts (HSAs). Shifting incentives for more people to pay for healthcare from their own accounts creates an incentive to reduce costs.
However, the House bill has no further incentives for freeing up the healthcare market. The President’s plan to give individuals the freedom to shop for insurance across state lines is missing. Creating a national market for healthcare would open the market to the greatest number of low cost plans.
There is also no movement toward transparent healthcare pricing. Doing so would enable both individuals and insurance companies to make informed decisions about the costs of health-related services. In Singapore, where healthcare costs are a third of what they are in the US, prices are clearly posted everyone knows what they are.
The bottom line is both the President and the House GOP have failed in their first major legislative effort--reforming healthcare. Unless they can recover, it does not bode well either for a successful tax reform or for the type of growth in the economy everyone is hoping to see.
Will President Trump rely on his instincts or will he allow the political establishment to dictate tax policy? The answer will determine the extent to which Trump can to deliver on his ambitious promise of real growth in excess of 3%.
During his campaign the President proposed cutting taxes by $1 trillion a year. His instincts on taxes are correct. Every successful tax cut in US history had one thing in common—sharply reduced tax burdens without major offsetting tax increases.
In September, Trump released a detailed tax plan, which The Tax Foundation estimates would cut taxes by about $500 billion a year, or 2.6% of GDP. Interestingly, the Tax Foundation also estimates the size of the 1981 Reagan tax cuts at 2.6% of GDP. Both estimates are based on static analysis, meaning they do not allow for any increase in revenues from faster growth in the economy.
The House GOP plan extols the virtues of tax cuts. However, instead of using successful tax cuts as a guide, the plan looks to the Tax Reform Act of 1986.
The 1986 tax act was a complete failure. Although it reduced some tax rates, it was designed to be revenue-neutral. This means any shortfall in revenue from cutting taxes had to be offset by raising other taxes. Among the offsetting tax increases were a higher tax on capital gains and a major change in depreciation allowances.
Given the complexity of the tax system, any tax increase can have unintended consequences. This was the case with the 1986 tax reform. Its tax increases contributed to a collapse in real estate prices, the failure of over 1,000 banks, and a recession in 1990. President Trump has rightfully criticized the destructive impact of the 1986 reforms.
Similar to 1986, the current GOP tax plan “...envisions tax reform that is revenue neutral.” The Tax Foundation estimates the GOP plan would cost the government $740 billion a year based on static analysis. In order to make up for the lost revenue, the GOP plan increases other taxes by an estimated $500 billion a year. The net tax cut of $240 billion is at the most 1.3% of GDP.
The Tax Foundation estimates that most of the net loss of $240 billion will be made up from faster growth in the economy. As a result, the real loss in revenue to the federal government would amount to only $19 billion a year.
There are two main issues surrounding the ability of the GOP tax plan to generate the type of growth the President hopes to achieve. The first is with respect to the magnitude of the tax cut. The static analysis cut of $240 billion a year represents less than half the magnitude of the 1981 tax cuts. Call it Reagan lite. After allowance for growth, the GOP tax plan represents a statistically insignificant tax cut of only .001 percent of GDP. This is not a major tax cut.
The second issue comes from the plan’s tax increases, primarily the border tax. This restructuring of the corporate tax will disrupt the international supply chain. Doing so promotes the same type of unintended consequences found in the 1986 reform.
President Trump’s instincts on the magnitude and type of tax cuts necessary to ignite rapid growth are correct. His plan is similar to all successful historical tax reforms. One of the President’s challenges to achieving his growth targets will be to convince the Congress to trust his instincts over those of the political establishment.
Blog with Dr. G
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