Why Tax Cuts 2.0 Would Cost Much More Than Advertised

Plus, where billions in repatriated earnings are going By Yuval Rosenberg and Michael Rainey The Real Price Tag for Tax Cuts 2.0 House Republican leaders said Wednesday that they plan on releasing legislation for a second round of tax cuts next week and voting on it this month. House Ways and Means Committee Chair Kevin Brady (R-TX) has said that the Tax Cuts 2.0 legislation will likely be broken into a few separate bills centered around making permanent the individual tax changes in last year’s overhaul. Those provisions were made temporary in order to comply with Senate rules that allowed the tax cuts to pass with a simple majority rather than 60 votes. The cost of making permanent those individual tax cuts, including a 20 percent deduction for passthrough business income, would be an additional [$627 billion]( over the 10-year budget window, according to estimates from Congress’ Joint Committee on Taxation. Extending the individual income tax cuts set to expire after 2025 would cost $522 billion over that time. But analysts noted that the real long-term costs would be [much higher]( since the JCT estimates only factor in the cost of the tax cuts for three extra years beyond when they were set to expire. The liberal [Center on Budget and Policy Priorities]( (CBPP) estimated that the individual tax cuts would cost about $2.8 trillion over the first ten years of being permanent (that is, 2026-2035), or about $3.3 trillion over the next 10-year budget window (2029-2038). An [analysis]( published in April by the Penn-Wharton Budget Model found that “extending the individual-side (non-business) tax cuts increases government debt by over $5 trillion by 2040 and actually reduces GDP during the first 10 years and beyond.” Republicans don’t seem phased by the price tag. Brady told [Tax Notes]( that the JCT estimate, requested and released by Democrats, is consistent with the committee’s planning and called it a “very modest and smart investment in the economy.” House Ways and Means Committee member Carlos Curbelo (R-FL) similarly downplayed the resulting deficit increases. “I don't dismiss this as irrelevant,” he said, according to Tax Notes, “but at the same time I don't think that this bill is going to have a decisive impact on our debt situation.” The CBPP report, though, blasted the tax package, saying it “fails the fiscal responsibility test” while “once again delivering substantially more to high-income households than to those with low and moderate incomes.” Authors Chuck Marr and Brendan Duke warn again that low- and middle-income households could wind up worse off over the long run if the tax cuts are made permanent. “The roughly $250 billion permanent annual cost of doing so will have to be paid for at some point, through program cuts and/or tax increases that likely would reduce many low- and middle-income families’ incomes more than the tax cuts increase them.” [Share this story →]( SALT in Some GOP Reps’ Wounds The House GOP’s decision to push ahead with Tax Cuts 2.0 comes after a Bloomberg report published Tuesday that said they were “hitting the pause button” to consider the political risks of the package, including a permanent extension of the $10,000 cap on state and local tax deductions (SALT). “We’re not resting on our laurels,” [said]( House Majority Whip Steve Scalise (R-LA). “We’re seeing this great economic growth and so we’re starting to put together Tax Cuts 2.0.” A provision to extend the SALT deduction cap would force Republican lawmakers from high-tax states such as New York and New Jersey to make a politically difficult choice: Vote for legislation that’s unpopular with their constituents or break from their party and vote against additional tax cuts. Some lawmakers from New York and New Jersey have suggested eliminating the SALT extension from the new legislation, allowing the cap to expire. But party leaders have provided no indication that they’d be open to such a change, which could prompt other lawmakers to ask for tweaks of their own. Extending the $10,000 cap on the deduction would raise about $318 billion over a decade, according to estimates from the Joint Committee on Taxation. Internal GOP divisions over the tax package could come to a head after Brady and Scalise brief lawmakers about it, The Hill’s Naomi Jagoda [says](. But, as Bloomberg [notes]( House Republicans have enough votes to pass the new tax package even without the backing of the 11 Republicans from high-tax states who voted against the 2017 law. Why it matters: The new tax package has little chance of passing the Senate, where it would require Democratic support, so for now this is mostly about political messaging ahead of the midterm elections. [Share this story →]( Are you ready for some football? The NFL season kicks off tonight when the defending Super Bowl champion Philadelphia Eagles host the Atlanta Falcons. We could use a little diversion, so tell us: Who's going to win it all this year? Email your picks, and your feedback, to yrosenberg@thefiscaltimes.com. Or connect with us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. Also, don't forget to tell your friends they can [sign up here]( to get their own copy of this newsletter. US Companies Repatriating Billions in Foreign Earnings There was a huge spike in the return of foreign profits to the U.S. during the first quarter of 2018, according to an [analysis]( from the Federal Reserve released Tuesday. The tax legislation that went into effect this year requires companies to bring foreign profits back to the U.S., with a tax rate of 15.5 percent on cash and cash-equivalent assets (which do not include [live chickens]( as it turns out) and 8 percent on profits invested in hard assets such as real estate. This one-time mandatory repatriation of foreign profits provides an enormous discount from the 35 percent tax rate companies faced before the passage of the GOP tax cuts in December. How much cash? U.S. firms were holding roughly $1 trillion in cash offshore at the end of 2017, the Fed said, most of which was invested in fixed-income securities. (Other [estimates]( put the total closer to $3 trillion.) According to balance of payments data, U.S. multinationals repatriated a bit more than $300 billion in the first three months of the year. By comparison, the temporary tax holiday passed in 2004 resulted in the repatriation of $312 billion during all of 2005. Where did the money go? The Fed report pointed out that the movement of funds is largely a technical matter, noting that “repatriation reflects the transfer of funds to the United States in purely accounting terms: The funds previously held by a foreign affiliate are now held by the U.S. parent.” But what are essentially changes in accounting are having a powerful effect on investors in the form of stock buybacks. “The analysis detailed here suggests that funds repatriated in 2018:Q1 have been associated with a dramatic increase in share buybacks,” the report said. What about the domestic investments that were supposed to soar as a direct result of the windfall? “[E]vidence of an increase in investment is less clear at this stage, as it is likely too early to detect given that the effects may take time to materialize,” the report said. A closer look at the biggest firms: The Fed analyzed buyback, dividend and investment data for the 15 non-financial firms with the largest cash holdings overseas, which together account for about 80 percent of the total. For that group, buybacks more than doubled (from $23 billion to $55 billion) between the fourth quarter of 2017 and the first quarter of 2018. Dividends, however, were little changed, and there was no obvious spike in investment, although it’s probably too early to reach any conclusions on the latter point. The results confirm earlier studies of the 2004 tax holiday, the Fed said, which found that repatriated profits tend to be used to fund stock buybacks. Another notable effect: According to a chart published by The Wall Street Journal earlier this week, based in part on data from Goldman Sachs, the repatriation of profits appears to have had a significant effect on debt issuance by U.S. multinationals with the largest overseas cash holdings. So far this year (the chart is dated August 24), the 10 multinationals with the largest piles of overseas profits have issued no new debt, a significant change from previous years. While this doesn’t tell us anything about how these companies are using their repatriated funds, it does suggest that the tax holiday has sharply reduced their need to borrow money in the financial markets. [Share this story →]( Freedom Caucus Divided on Shutdown Members of the hardline conservative Freedom Caucus in the House are debating the desirability of a government shutdown ahead of the midterm elections, [Politico]( reported Thursday. Caucus chair Mark Meadows (R-NC) is concerned that a shutdown in October could hurt Republicans’ chances of keeping control of the House and wants to postpone any confrontations over border wall funding and other immigration issues until after the election. “I don’t see a deliberate plan on how we secure our border happening by the end of September, and so having that debate over the next three months is probably more prudent than trying to have it in the next week and a half,” Meadows said Wednesday. But former chair Jim Jordan (R-OH) is reportedly itching for a fight, sooner rather than later, and is pressing for a confrontation before the fiscal year ends in just over three weeks. Jordan said that immigration “was one of the central issues in the campaign and I think it helps our voters understand that we’re fighting for what we said we would do.” Both groups within the caucus want a showdown, Politico says, but disagree on the timing. The Freedom Caucus has not taken a position on the matter due the split, and without a strong and consistent voice pushing for showdown, other Republican lawmakers believe they have a better chance of pulling the party back from the shutdown brink. 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