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Why Trump's tax cuts won’t be repealed

The best option is probably to leave the corporate rate fairly low.

With the GOP tax bill both heading toward passage and very unpopular, several readers have naturally asked about the prospect of Democrats simply repealing this thing if they do well in 2018 and 2020.

In general, it's rare to see major legislation seesaw like that. (Even back when Republicans were committed to repealing Obamacare, they were actually keeping tons of the law's consumer protections for employment-based care on the books, along with many other provisions.) I don't think the Tax Cuts and Jobs Act will be an exception to that rule.

For starters, even though the bill is a large net tax cut, it does contain a bunch of offsetting revenue-raising provisions — the State and Local Tax (SALT) deduction being the big exception here. I think Democrats would want to keep most of them since even the much-debated curtailing of the SALT deduction is distributionally progressive in isolation.

In the other direction, the bill contains a few goodies for the middle class that are mostly set to expire. But I think Democrats will probably want to extend them — including the bigger standard deduction and the more generous Child Tax Credit.

Republican leaders' stated intention is to extend that stuff too, but they'd like to do it with either bigger deficits or else cuts in social safety net programs. Democrats will probably want to pay for extending some middle-class elements of the Trump Tax Cut by sunsetting some of its permanent tax cuts for the rich.

But this still leaves the big question of how far Democrats will try to raise the corporate tax rate back up — from 21 percent to something closer to the old 35 percent rate or the 28 percent Obama tax reform proposal rate.

The best option, I think, is actually to leave the rate fairly low. That's because, in effect, we tax corporate profits across two rounds in the United States. When money is earned, it's taxed as corporate income tax. And then when profits are distributed to individuals as dividends or share buy-backs (i.e., capital gains), they are taxed on the individual's balance sheet. So both the corporate income tax and the dividend (or capital gains) tax are ways of taxing corporate shareholders. But there are two important differences between them:

  • To the extent that nonrich people own stock at all, they typically own it in 401(k)s, IRAs, and other tax advantaged accounts that shield them from the impact of capital gains and dividend tax (but not corporate income tax).
  • Taxes on individuals' investment income only hits American shareholders, while corporate income tax hits all shareholders in American companies, many of which are foreign.

My guess is that given the ongoing march of inequality in the United States, Democrats will find the first consideration here to be most important. Eschewing or minimizing corporate tax hikes in favor of hikes on dividend and capital gains income is the most egalitarian way to approach the issue.

Similarly, while Democrats might scrap Republicans' special new tax breaks for people who own pass-through businesses, I think a more likely approach might be to simply cap the size of businesses that can be structured as pass-throughs. Republicans like to characterize these entities as "small businesses" but many of them are actually very big. You could have a rule that they have to actually be small.

Last but not least, one tax cut Republicans talked about a lot was "full expensing" — i.e., allowing businesses to deduct the full cost of new investments from their taxes immediately rather than spreading them out over a long depreciation period. That's a cut in the taxation of new capital that Republicans ultimately decided to abjure in favor of the lowest possible corporate rate — a cut that's shared between old capital and new capital alike. Here it would make sense for Democrats to make the reverse calculation, create the investment tax break, and raise corporate rates enough to make up the most revenue.

This is an abbreviated web version of The Weeds newsletter, a limited-run policy newsletter from Vox’s Matt Yglesias. Sign up to get the full Weeds newsletter in your inbox, plus more charts, tweets, and email-only content.