Congress used the tax and spending bill enacted this holiday month to wrap a lot of valuable presents. Lawmakers did not work from a list of who was naughty and nice. Instead they delivered big gifts to the political donor class, especially the big corporations enjoying record profits, while finding clever ways to mislead or mollify voters about what they were doing.
An examination of the list of tax favors shows that unlike the jolly fellow in the red suit who gives selflessly, Capitol Hill’s Santas are calculating investors.
The rising influence of corporate values, especially marketing and advertising, in setting government policy is evident in the misleading name of the bill: the Protecting Americans from Tax Hikes Act of 2015, or PATH.
Several tax-rate hikes are built into the new law, hidden in the fine print of the bill and some official pronouncements.
A good example is the $1,000 per child tax credit. Under the new law, this credit is reduced by $50 for each additional $1,000 of income for married couples making more than $110,000 a year. That means no tax credit for spouses with one kid and $130,000 in income or two kids and $150,000. That is a stealth 5 percent bump in federal income taxes on the next $20,000 of income per child for prosperous married couples until the tax credit shrinks to nothing.
Read the statement by the Republican majority that controls the House Ways and Means Committee and you won’t learn about the clawbacks on affluent families described above. Instead, you’ll learn Congress reduced the minimum income to qualify for the child tax credit, from $10,000 to $3,000, and made it permanent, or at least as permanent as any tax law ever is.
This provides a good example of why Congress loves clawbacks — tax breaks Congress declares but then stealthily takes back from this or that class of taxpayers. How many prosperous married couples with children have any idea that they are effectively paying higher tax rate as this tax favor is whittled down to nothing? And why did Rep. Kevin Brady, the Texas Republican who chairs the Ways and Means Committee, hide these facts?
In contrast, Brady’s announcement discussed the clawbacks of credits for college tuition and related expenses. Married couples start losing their nearly $2,000 tax credit if they make more than $96,000; individuals returning to college get their tax credit clawed back when income exceeds $48,000.
Presents for corporate donors
Now let’s look at presents given to the political donor class.
The biggest gift is a rule that lets companies keep their political spending secret. Given the Supreme Court’s Citizens United decision allowing unlimited corporate spending to influence elections, this is a self-serving gift to those members of Congress who have effectively pledged their allegiance to corporate America rather than we the people.
Many lawmakers described this bill as the beginning of tax reform. It’s not. It’s just more calculated gift exchanges between lawmakers who need donations to stay in office and those who finance them.
One of the most valuable tax gifts went to big companies that do research and development of new products. Those companies will save $113.2 billion in corporate income taxes over the next decade. That’s the equivalent of raising taxes on the average family of four by $12 a month for the next 10 years.
Over the past 34 years, Congress has let the research and development credit come and go 16 times, rendering it ineffective as a policy tool. Perhaps making it permanent will foster innovation and thus help grow the economy. The biggest problem with this gift, however, is that it goes to companies whether they develop lifesaving new drugs or even more lethal semiautomatic guns favored by mass murderers.
But wait, there’s more. Congress handed out a $78 billion provision that encourages multinational companies to siphon profits from the United States to tax havens. Tax rules let companies earn profits in the U.S. but report them as expenses paid to offshore subsidiaries. In effect, these companies get zero-interest loans equal to the amount of tax deferred for years or even decades. For that average family of four, this gift to multinational companies is the equivalent of an $8 per month income tax hike over the next decade.
These tax deferrals are much costlier than the official estimate by the Congressional Joint Committee on Taxation, which does not take into account the federal interest paid to companies that invest their zero-interest loans in Treasuries. Even that does not cover all the hidden costs of converting the burden of taxes into a multinational corporate profit center.
Congress also delivered a present to makers of medical devices, whose sales are growing, thanks to the Affordable Care Act championed by President Barack Obama, making medical insurance available to millions of people. More people insured means more sales of medical devices, and ‘Obamacare’ included a small tax to capture some of the government-induced extra profits. Congress and the president, enacting the new law, gave medical device makers a $3.9 billion gift by delaying the tax on their extra profits for two years. That will cost the average family of four about $2 per month next year and in 2017.
Calculated gift exchanges
That’s not the bill’s only sleight of hand regarding health insurance and taxation. The 17 million Americans who were added to health insurance rolls because of the Affordable Care Act are now in jeopardy because of another tax delay provision, involving what critics call the Cadillac tax on the most expensive health insurance policies. That levy, designed to help subsidize those who had been without insurance, is delayed until 2020. That’s a nice present for people like me with excellent health insurance but awful for people who could not get insurance because of existing conditions, since it make the economics of the Affordable Care Act fail.
And then there’s the latest gift to the oil industry, long among the most generous and cunning givers in the political donor class. Congress is giving a short-term tax break to oil refinery owners worth $1.9 billion. Looked at as a return on political investment, that’s a great present, since lobbying and campaign donations overall come to less than pennies on the dollar of tax breaks given in return.
There’s even a provision for larger small businesses and farms. Those big enough to spend up to $2.5 million on new equipment or certain buildings, notably barns, greenhouses and petroleum storage can instantly write off up to $500,000 of capital investment annually instead of depreciating such property over years.
Think of these year-end tax favors in terms of what we want our tax system to do: finance the government we created to fulfill the six noble purposes in the Constitution’s preamble.
Many lawmakers described this bill as the beginning of tax reform. It’s not. It’s just more calculated gift exchanges between lawmakers who need donations to stay in office and those who finance them. For most Americans and for the economy, this bill offers just another lump of coal.