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Financial Planning > Tax Planning > Tax Reform

Why Republicans Cherish Their Unloved Tax Cut

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Congressional Republicans are about to pass, and President Donald Trump is about to sign, a tax bill that violates Trump’s campaign promises, does little for the middle class, ignores decades of party orthodoxy on tax cuts, and is unpopular with voters.

Still, Republicans are celebrating one of their few achievements. They may be right to do so; as a political matter, the alternatives are worse.

In the unlikely event that they can’t resolve differences between House and Senate tax legislation, Republicans would head toward midterm elections after a year in control of all the levers of power with just one major achievement: the confirmation of Supreme Court Justice Neil Gorsuch. That would deprive Republican incumbents in 2018 of any positive argument for re-election.

“We can’t afford to fail,” said Sen. Lindsey Graham, the South Carolina Republican, articulating party leaders’ conviction that passing a bill matters more than what’s in it. They’ve exaggerated any substantive benefits to the economy because failure would have disappointed Republican donors and committed Republican voters.

(Related: Tax Overhaul Off to Rocky Start as Senators Bicker Over Budget

Trump wanted a victory, whatever it took; he fumes at being justly dubbed one of the least successful first-year presidents. Key provisions of the tax bills would also enrich him personally, along with his family – it’s impossible to say by how much because he has refused to release his tax returns, but estimates have put the benefit to him at well over $20 million. The savings to his heirs from eliminating the estate tax could top $1 billion. (If you believe his claim that the bill will cost him “a fortune,” then you also probably believe that he won the popular vote last year and drew the biggest inaugural crowd ever.)

The bills violate some of Trump’s main campaign promises. He vowed that the rich would not get a tax cut, but they’ll get a big one. He said that tax cuts wouldn’t increase the deficit; congressional analysts have determined that it would, adding $1 trillion to the national debt even after accounting for increased economic growth. He promised not to touch Medicare, but the tax bill would force reductions. If Trump had a sense of humor he might emulate the colorful mid-century governor of Louisiana, Earl Long, who when asked what to tell voters about a broken campaign pledge replied, “Tell ‘em I lied.”

Tax policy isn’t what moves Trump’s most enthusiastic supporters one way or the other. The tax legislation won’t deliver much in the way of pocketbook benefits to the white working-class voters whose ballots in key Midwestern states sent him to the White House. But it won’t cost them significantly either, at least not on April 15. Hits to university scholarships, public transportation and other subtler effects are less easily traceable to a congressional vote for tax cuts, or at least that’s the calculation.

Both Trump and congressional Republicans want to believe their rhetoric about tax cuts generating an economic boom, though history suggests otherwise. But most economic forecasts already anticipated continuing growth through next year, which would give congressional Republicans seeking re-election the chance to claim a connection.

Since the collapse of global communism, tax cuts have been the glue that binds Republicans. That helps explain why Sen. Susan Collins of Maine followed party leaders on taxes after refusing to support them on Obamacare repeal. Sen. John McCain’s vote for the tax bill, on which there were minimal hearings and little analysis, made a mockery of his speech this summer calling on the Senate to follow its usual deliberative process, a set of procedures known loosely as “regular order.” It isn’t a profile of courage to vote to cut taxes.

There are some benefits that will be felt by average Americans, including an increase in the child tax credit.

But there is potential political damage in one critical area: largely suburban communities with upper-middle-income professionals who politically often are evenly divided. Taking away the deduction for state and local income taxes could be a killer for more than a dozen Republican House incumbents in high-tax states like New York, New Jersey, Pennsylvania, Illinois and California.

Many of these voters pay the top marginal tax rate, currently 39.6%, which won’t change much in the final product. Instead, the bulk of the cuts go to corporations and other businesses. That’s a big departure from the tax-cutting philosophy of 1980s-era Republicans like Rep. Jack Kemp and President Ronald Reagan, who focused on reducing top individual rates on the theory that this would drive economic growth. House Speaker Paul Ryan, who calls himself a Kemp disciple, abandoned that approach.

The 1981 tax cuts championed by Reagan enjoyed strong public support at a time when individual rates were much higher. The 1986 bipartisan tax overhaul, a real systemic reform that lowered taxes for most individuals and raised them for many businesses, enjoyed plurality support when enacted. By contrast, most polls show the public opposed to this year’s measure, which is seen as a sop to the rich.

Ask Republicans about that and their answer comes down to this: How many politicians have lost an election because they voted for a tax cut?

— For more columns from Bloomberg View, visit


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