Opinion

Opinion: The Politics of Tax Cuts Are as Complex as the IRS Code

Republicans are rolling the dice on the political outcome

Speaker of the House Paul Ryan is touting the House Republican tax bill as a boon for middle-class families. (Tom Williams/CQ Roll Call file photo)

In a political world filled with bizarre surprises like a high-decibel public debate over the causes of the Civil War, there was something reassuring about the predictable partisan reaction to Thursday’s unveiling of the House Republican tax bill.

This was, in short, not a moment when Capitol Hill speechwriters spent anguished hours hunched over their computers searching for the right metaphors.

Harking back to old McDonald’s commercials, Paul Ryan  hailed the bill as a plan “for the middle-class families in this country who deserve a break.” Since Ryan got his start as a young aide to Jack Kemp — the original supply-side Republican — no one should have been surprised when speaker hailed the $1.5 trillion tax package as “pro-growth.”

When Ronald Reagan introduced his 1981 tax cut bill, House Speaker Tip O’Neill growled, “His bill is geared for the wealthy of America and that’s what this fight is all about.” Thirty-six years later, Nancy Pelosi  dusted off the same argument when she denounced the GOP plan as a “deficit increasing, job killing, tax-cutting for the rich bill.”

This evergreen rhetoric helps explain the limitations of polling in the tax fight. While there are strong partisan differences, most of these sentiments are already baked into a voter’s allegiance with either the Republicans or the Democrats.

A recent Pew Research Center poll, conducted before the GOP plan was released, found that 73 percent of Republicans earning more than $75,000 believed that corporate tax cuts would stimulate the economy. In sharp contrast, only 13 percent of Democrats in the same income bracket thought such corporate tax cuts would be beneficial.

The long game

None of this is to deny the political importance of the Capitol Hill debate over taxes. But it would be a mistake to place too much emphasis on short-term polling to unravel the political implications.

What makes the tax fight so devilishly complex (beyond the tax code itself) is that Congress is working with three separate political calendars.

The most obvious timetable is based on the weeks (Donald Trump’s fantasy) or months (a more realistic assessment) it will take Congress to resolve the tax issue.

This is the period when both sides will be drowning in estimated numbers — especially varying partisan assessments of how much an average family might save in taxes and what percentage of taxpayers will see their taxes rise.

Admittedly, the Republicans are off to a bizarre start. A year ago, no one would have predicted that a GOP tax bill would be opposed by such potent business groups as the Realtors, the National Association of Home Builders and the National Federation of Independent Business. It is akin to the Democrats trying to pass legislation over the vehement objections of the AFL-CIO and NARAL.

Perhaps the most controversial single provision in the tax bill is the $500,000 cap on mortgage interest deductions for new home purchases. That is why the purported GOP war on the real-estate industry will probably lead to a negotiated settlement. Otherwise, middle-class voters are apt to panic over fears that the tax bill would undercut the resale value of their homes.

Other aspects of the Republican tax plan may also be hard to defend politically. After the failed GOP effort to repeal Obamacare, Democrats may highlight the end of a personal deduction for excessive medical costs.

You can imagine the argument: First Republicans wanted to take away your health insurance when you get sick. Now they want to take away your right to deduct your own health-care spending when you get sick. With the GOP, you simply can’t afford to get sick.

The odds remain high that the Republicans will pass some kind of tax bill — out of embarrassment, if nothing else. So how might a tax-cut bill play in the 2018 elections?

This is the true no-spin zone. What matters to voters are their actual taxes — and not political claims about the purported effects of tax cuts.

Since the tax bill would, presumably, take effect on January 1, 2018, the legislation would not affect 2017 returns filed next April 15. So the provisions for medical and mortgage interest deductions would be the same as in the past.

But voters are apt to see the difference in their take-home pay. Within weeks after the passage of the bill, the IRS would adjust withholding schedules for all taxpayers.

The fantasy factor

This is the moment that animates Republican fantasies — most voters would see, at least, a modest increase in their take-home pay.

Since the IRS in developing withholding schedules assumes that taxpayers will take the standard deduction (doubled under the GOP plan), the political benefits of the tax cuts are likely to be felt immediately.

For a significant portion of taxpayers, the downsides of the tax legislation would only be apparent in early 2019 when they file their 2018 returns.

This is the moment when many taxpayers would discover that familiar deductions are gone — for state and local taxes, for certain types of mortgage interest, for interest on student loans, for large medical costs and for purchasing electric vehicles.

Other voters may discover on April 15, 2019, that their expected tax refund has disappeared. The reason: Fewer taxpayers will itemize their deductions, which means that their tax withholding in their paychecks should be a more accurate reflection of what they owe.

All this leads to a fast-and-dirty political calculation: The current GOP legislation would probably help the Republicans in the 2018 elections but then hurt them in 2020. But there are no certainties in life when it comes to the political effects of tax bills.  

Roll Call columnist Walter Shapiro is a veteran of Politics Daily, USA Today, Time, Newsweek and The Washington Post. Follow him on Twitter @MrWalterShapiro.

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