Improving the Reconciliation Bill: Getting to “Yes!”

10/5/21

From the 30,000 foot level, I support the President’s agenda; and accordingly, I look forward to the passage of what has now become talked about as the Reconciliation Bill. While the specifics are still yet to be ironed out, in broad terms the legislation would do the following:

· Cover the cost of two years of community college.

· Provide childcare assistance to families with children under 5-years old.

· Introduce universal pre-K schooling for children 3- and 4-years old.

· Offer expanded coverage under Medicare.

· Extend the child tax credit beyond 2021.

· Cut prescription drug prices.

· Provide paid family leave in cases of sickness or hardship.

· Take significant steps to mitigate climate change.

All of these components would, if passed, improve the lives of a substantial number of Americans. Call me a socialist. Call me whatever you’d like, but this bill promises to transform America into a country that I look forward to seeing, where the less well-off would have an enhanced chance of moving into the middle class and building wealth. Still, the devil is in the details, many of which are still not yet finalized. With that uncertainty in mind, here are a hodgepodge of things that I’d like to see (or not see) before the dust settles and the final bill passes.

I’ll start by embracing the principle that virtually all safety net provisions should require more rigid means testing. This principle should apply across the board, but the drafters of the legislation could start with the child tax credit.

I’ve been a strong proponent of the refundable tax credit, which was expanded under the American Rescue Plan Act of 2021. This program is scheduled to end at the end of this year, but the Reconciliation Bill would keep it going. With that legislation, qualifying families receive monthly checks allowing for an annual grant of $3,600 for each child under 6 years old and $3,000 for each child between 6 and 17. Eligibility is restricted to married taxpayers filing jointly and widows and widowers with incomes below $150,000, heads of households making less than $112,500, and an upper bound of $75,000 for everyone else. Critically, this policy is misnamed, as it’s not designed as a tax credit at all. It’s a grant, plain and simple. “Refundability” is a new, substantial innovation because it extends the benefit to families that are too poor to bear any tax liability, where otherwise (i.e., without refundability) a tax credit would have no value for this family.

According to the US Treasury, the present grant is currently reaching 88% of all of the children in the US. I like the concept, but it’s being applied (dare I say) too liberally. As a point of reference, the median household income in the US is something shy of $70,000. This benchmark seems to me to be sufficiently generous. It would seem to be a reasonable threshold beyond which many, if not all, households should be expected to function without this benefit. If not eliminated altogether, however, the size of the grant should at least be scaled backfor households earning upwards of $70,000 per year. I’d like to see means testing applied to other aspects of the bill, as well, including the educational pieces, childcare elements, and even some of the climate initiatives.

With respect to the climate features, I have in mind, for example, the proposals to offer tax credits for those who buy electric vehicles. Again, these rules have yet to be finalized, but I’ve heard discussions suggesting that buyers acting within specific time frames would be able to qualify for tax credits of as much as $12,000 when purchasing an electric vehicle. Poor people aren’t the ones who stand to be able to benefit from this provision. I’m not a fan.

Unfortunately, designing policies that discourage the use of fossil fuels without imposing costs on poorer people is difficult; but instead of shaving the tax bills of upper income households, a better approach would be to tax carbon usage directly while coincidentally authorizing a separate, means tested energy support supplement payment for lower income households.

I like what’s being discussed with regard to building a network of car and truck charging stations throughout the country, but I wonder how this is going to work. Who’s going to own these facilities? I’m all for the government making this investment and putting these charging stations in place; but after that, it seems to me that these facilities should be sold off, where the Treasury should largely be able to recoup the investment. In this way, those expenditures should end up being inconsequential.

On the tax side of this legislation, I’m afraid we may be missing the low hanging fruit. The points being widely promoted are (a) a hike in corporate tax rates, going from 21 percent to 26 percent, and (b) a surcharge of 3 percent on income taxes for households earning in excess of $5 million per year. Not good enough.

A substantial problem in corporate tax regulations that gets little attention or recognition is the fact that many companies earn revenues that are simply exempt from US taxation, altogether. Specifically, if a US company with foreign subsidiaries or affiliates earns money abroad, the taxable income from that consolidated company is limited to income derived solely from subsidiaries for which the parent company claims 80 percent ownership, or more. Thus, if the US corporation with foreign-based income opts out of filing a consolidated tax return or if the income from the foreign source comes from an entity where the parent has less than 80 percent ownership, that particular income component would be explicitly exempted from US taxation. Correcting this feature would seem to be a no-brainer. (Income from a US-domiciled company with less than 80 percent ownership by the parent would still be subject to US tax, but under its own filing.)

While not connected to the Resolution Bill, per se, it turns out that we may be shooting ourselves in the foot with a related, new proposal that appears to be getting traction, calling for a minimum worldwide corporate tax rate of 15 percent. This idea — supported by Treasury Secretary Janet Yellen and many of her international counterparts — purportedly intends to mitigate the incentives for corporations to move their operations out of the US to lower-taxed countries. Hiking tax rates abroad, however, would likely have the perverse effect of reducing taxes collected by the US Treasury. Here’s why: Currently, if a US company is subject to tax abroad, it qualifies for a US tax credit of that amount, such that the company’s overall tax obligation to the US and the foreign country, combined, would be identical to the US obligation on its own. Raising the tax rate abroad just means that even fewer dollars would end up going to the US Treasury. The problem isn’t with low foreign tax rates abroad; the problem is with foreign income being exempt from US taxes, altogether. Champions of higher tax rates abroad should know better.

The real low hanging fruit, however, may be on the household and individual tax side of the ledger. While the Democrats appear to unite behind a consensus that rich people aren’t bearing their fair share of taxes, I’m not hearing what I’d like to hear by way of a remedy. Currently qualified dividend income and long term realized capital gains are taxed preferentially, with graduated tax rates that max out at 20 percent. Earnings from other types of income are subject to graduated tax rates that rise to 37 percent. While lower tax rates on some forms of income from investments may have some justification in connection with capital formation considerations, enough is enough. At some threshold level of earnings, those preferences need to be capped, and the income in excess of that threshold should be taxed identically to “regular” income.

While I have had some concerns that the fractious Democratic party might blow it and fail to coalesce around some passable legislation, I’m becoming more sanguine. The bill’s scope has ample avenues for improvement such that I think it most likely that the Democrats will ultimately figure out a way to come together and pass it, overriding the Republicans’ unified recalcitrance. At least I hope so.