Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, said Senate Republicans are committed to approving tax reform this year even though their plan isn’t likely to be released this week, as public statements have suggested.
“The timing for this in the Senate may be a week or two behind,” Kudlow said in an interview on business news channel CNBC after meeting earlier today with Senate Republicans. “They want to get the tax cuts done this year. That was the overall sentiment in that room. They want a tax-cut, economic narrative for the 2018 elections and the economy.”
The plan from Republican Senators will differ significantly from the House legislation introduced last week, Politico reported on Monday.
“One of the big tests will be how far Senate tax writers can go on the corporate tax rate,” according to the website. “It would permanently plunge to 20 percent from 35 percent in the House plan, but the Senate is hemmed in by budget constraints that the House isn’t.”
The Senate is restricted by the Byrd rule, named for West Virginia Senator Robert Byrd who was its principal sponsor, to curtail increases to the federal budget deficit. In the tax bill debate, the Byrd rule prohibits the inclusion of any law change that would raise the federal deficit in fiscal 2028 or any later fiscal year. The Byrd rule was codified as part of the Congressional Budget Act in 1990
The tax bill unveiled by House Republicans on November 2 complies with the $1.5 trillion instructions contained in the budget resolution, but doesn’t comply with the out-year prohibitions contained in the Byrd rule.
Kudlow said Senate Republicans are committed to corporate tax cuts as a way of encouraging investment in the U.S., whose capital stock has declined for years.
“The Republicans are totally committed to this. They’re totally committed to the growth aspect which is on the business side: the rate reduction and repatriation, the equipment expensing,” Kudlow said. “They’re thinking about the right way to message this so people understand corporate tax cuts, more investment will help the workers, the wage earners.”
He said the House and Senate also need to work out changes to personal income taxes, including the House GOP’s “bubble rate” of 45.6 percent that would hit some high earners. The Wall Street Journal editorial page blasted the “stealth-tax” plan for discouraging hard work and investment that creates jobs and lifts incomes.
“The Reagan reform of 1986 lowered the top rate to 28% from 50%, but that has steadily crept back up, including the 3.8% ObamaCare investment tax the party failed to repeal earlier this year, according to the newspaper. “With its new bubble bracket, the GOP is repudiating Reagan’s reform and bringing the top income-tax rate back to 50%. Voters might as well have elected Hillary Clinton.”
Kudlow agreed that the “bubble tax” is bad policy.
“It’s really dumb. Republicans are not supposed to engage in class warfare,” he said. “We’re not suppose to punish the successful. The top end are very valuable players. They make investments, for example.”
The tax debate will also focus on the tax rate for “pass-through” businesses, which comprise 95 percent of American businesses such as sole proprietorships, partnerships and S corporations.
Pass-throughs get taxed as high as 39.6 percent because they are classified as personal income. Corporations get taxed twice in the form of corporate tax and when profits are paid out in the form of a dividend.
The House plan would tax 30 percent of pass-through income at a lower rate, and the remaining 70 percent at an ordinary rate. Some pass-through businesses wouldn’t qualify for the lower rate.
“No one’s happy with how the pass-through’s came out of the chairman’s mark in the House,” Kudlow said.
Republican Senators are also concerned that Trump’s protectionist trade agenda will lead to damaging tariff wars among countries, he said. Trump ran on an America-first agenda that criticized trade deals like the North American Free Trade Agreement for giving U.S. businesses greater incentive to move jobs to Mexico.
“They’re very worried about trade protectionism and trade wars,” Kudlow said. “They’re particularly worried about NAFTA.”
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