Senate plan serves up lower tax bills. But fairness, not so easy.

As Congress returns from a Thanksgiving break, Republicans in the Senate are prepping for what they hope will be a rapid final push on tax reform.

A vote on the Senate bill could come later this week. The House has already approved a similar bill with some $1.5 trillion in tax cuts over the next 10 years, spread across households and businesses.

The sales pitch to Americans is that pretty much “everybody” will see their tax burden go down, and the economy will grow faster as a result – again an outcome that promises benefits to pretty much every American.

That message has a certain appeal. In an October CBS News poll, for example, 40 percent of Americans say they feel they’re paying more than their fair share of federal taxes, versus only 4 percent who felt their tax burden was unfairly light.

But the road to a Senate “yes” later this week looks anything but smooth, and one key reason is that the Republican tax-cut plans are raising many questions about fairness that appear unanswered – either doubted by the voting public or unsettled among Republican lawmakers themselves.

Among the simmering questions:

• A report by the nonpartisan Congressional Budget Office (CBO) over the weekend concluded that the Senate bill’s benefits flow predominantly to the rich, while many low-income Americans would effectively face higher rather than lower taxes. This adds to an already hot debate about the overall distribution of the tax cuts.
• A Senate-bill provision would end the allowance for households to deduct state and local taxes from their income. That’s seen as especially hard on people in high-tax states – who are often represented by Democrats in Congress. But some Republicans hope to make the Senate bill at least more like the House one, by allowing up to $10,000 in property taxes to be deducted.
• Some Senate Republicans have voiced concerns that the Senate bill favors big corporations over small businesses, and are seeking last-minute changes to the bill.

“The other big thing,” says tax expert Caroline Bruckner at American University, is that “this is tax cuts funded by deficit spending.”

For many that creates questions of generational fairness, since tax cuts today would implicitly be paid for by taxpayers tomorrow, in an era when there’s already a steadily shrinking number of current workers to help support retirees through Medicare and Social Security.

The “growth” side of the Republican sales pitch is hardly a slam dunk, since a rising debt is seen by many economists as a drag on gross domestic product.

Meanwhile, questions of fairness – inevitably part of any tax-bill debate – have only been growing since Republicans announced their plans, starting with the House of Representatives early in November.

Conservatives’ rationale

Supporters of the Republican proposals argue that the concerns about fairness are overhyped. A key virtue of the proposals, they say, is that everyone gets an enlarged standard deduction, often resulting in both lower taxes and simplified filing.

Ditto for corporate taxes, where streamlining could help create jobs in America that benefit workers as well as shareholders, they add.

Yes, the Senate plan makes the tax cuts for business permanent while letting the individual tax cuts expire after 2025, but many backers say the ultimate goal is to make those individual tax cuts permanent, too – as has occurred with most tax cuts passed under President George W. Bush.

Small businesses are still getting tax cuts, even if they’re not always as large as those for corporations. And the state-and-local deduction tends to help the rich more than others, so repealing it is arguably a boost for fairness – even if the costs and benefits vary a lot depending on where taxpayers live.

Then there’s the Senate provision ending Obamacare’s “individual mandate” to buy health insurance or owe a possible tax penalty. The CBO reckons that lifting the mandate will mean 13 million fewer Americans – many of them low-income – will have health insurance as of 2027.

The forecast that fewer people would buy insurance, typically losing Obamacare subsidies in the process, is one the CBO sees the Senate tax plan taking money away from low-income Americans, as a group.

Conservatives, however, argue against reading this as an attack on the working class. They say Obamacare subsidies and Medicaid will still be as available as before; what’s changing is that Americans aren’t being hit with penalties if they don’t opt in.

Conservatives also say critics are unfairly pessimistic about the way tax cuts can spur economic growth – and hence draw in more revenue than expected. The Wall Street Journal editorial board, among others, argues that the “CBO has typically underestimated the growth and revenue feedback from tax cuts.”

Sticky questions remain

But even optimistic economists don’t say tax cuts will pay for themselves. That leaves the prospect of rising deficits – and the difficult questions of who should pay what – hanging in the balance as the Senate reconvenes this week.

Even the House plan, which doesn’t eliminate the Obamacare mandate or cause individual tax-rate cuts to sunset, remains very generous to wealthy Americans.

For Americans earning $1 million or more, the percentage change in taxes paid as of 2018 would be similar to what middle-income Americans get, but that means the dollar value of their savings is vastly greater.

And by 2027, those top earners would be paying an average tax rate of 30.6 percent, 1.5 percentage points lower than under today’s law, according to analysts at Congress’s Joint Committee on Taxation. By contrast, all US taxpayers on average would be paying about 20 percent of their income in federal taxes that year, down just 0.5 percent from today.

The debate over business provisions is also fraught with fairness questions.

Although Sen. Ron Johnson of Wisconsin is among the Republicans saying pass-through entities need a better deal, those firms aren’t synonymous with “small business.” Most small employers operate as pass-throughs, but so do some very large businesses that are owned by a few partners or owners.

All this leaves a lot of tug-and-pull left to go, as Senate Republicans race to pass a bill by their slim majority before Dec. 12 – when a special election in Alabama could make that majority even slimmer.