It's a new year with a sweeping new tax regime, and most Alaskans have been struggling with what to make of the controversial Tax Reform and Jobs Act that was signed by the president just before Christmas.
On one side, we hear that it will have devastating consequences for our country. Armed with charts and reports, they say debt will rise. Social services will be cut and ultimately, the middle class will see a tax increase. Armed with different charts and reports, the other side tells us that economic growth will result from the significant tax cuts on business and industry, which will wipe out the debt. They tell us that there is nothing about social service cuts in the bill, and that nearly all levels of income will see a reduced tax bill.
Basically, where you fall on this comes down to trust, or even ideology. That's why most of us are conflicted. Some of us put more trust in our elected officials — including our congressional delegation — than others. We've also witnessed firsthand how a tax regime can both stifle and help grow the economy here in Alaska. Some believe that more money in the pockets of the people should be embraced. Others put more faith in data from third-party groups that oppose tax cuts, or for that matter, anything that has President Trump's fingerprints on it.
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So what do we know about this change? For starters, most Americans will see a tax cut in 2018, its extent depending on circumstances for each individual and family. Some analysts have said most income tax filers won't know for sure how they've done until they file early in 2019. But most of us will see a modest gain, especially in the first few years.
That's good, and we'll take it — with a grain of salt given the 2025 expiration and inflation-indexing provisions that may diminish the break over time.
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Small businesses stand to gain with a 20 percent tax deduction on their profits. Most small businesses are "pass-through" companies, meaning their profits are not taxed at corporate rates but passed through to the owner and taxed at individual rates. The tax bill is a shot in the arm for them — and a shot that they're likely to share with their communities.
What about the effect of the corporate tax cuts, from rates of 35 percent to 21 percent? Republicans have promised that these cuts will make American corporations more competitive, and you could probably get a measure of bipartisan agreement on that. Both the George W. Bush and Obama administrations proposed cutting U.S. corporate tax rates to align them with the rates of other developed economies.
Republicans have spoken of corporate tax savings unleashed to power a revived U.S. economy. But there's admittedly conflicting evidence to back that rosy scenario. During the work on the tax cut legislation, Gary Cohn, Trump's chief economic adviser, was disappointed when he asked for a show of hands about potential investment in the U.S. economy should the corporate tax cut pass. Few hands went up. No promises. No quid pro quo.
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There's no question the cuts could potentially rev up the U.S. economy, particularly with the lowering of the Repatriation Tax, which should encourage corporations to bring billions of dollars home to be put to work in our economy. But whether corporations already holding billions in after-tax dollars will invest remains an open question. And it's a question that deserves to be answered by our free market economy.
Some corporations have shared their windfall with their workers. Dozens have increased their base wages or handed out $1,000 checks to employees in the weeks since the cuts were enacted. Critics may call it a PR stunt, but don't tell that to the folks who enjoyed the unexpected Christmas bonus. More corporations, particularly our largest here in Alaska, should join them.
Despite the fact that there is a lot to like in this legislation, it has real flaws that deserve exposure. The first is that the cuts are tilted too heavily toward the larger corporations. Although the corporate cuts are a positive, trading a corporate rate in the mid-20s for an even larger cut in the personal income tax rate would have provided a better balance. It would have delivered a more immediate impact to the wage-earners in the country and won more popular support.
The second and most egregious is the process our leaders leveraged in order to deliver this bill on a political timeline, rather than one based on the thoughtful examination it deserved. Or should we say, the lack of a process. Evoking the passage of the Affordable Care Act a few years earlier, newly powerful Republicans exacted their revenge by cramming the tax cuts through Congress with no support from the other side. Bipartisanship and statesmanship are glaring in their omission from this "process" as they were unceremoniously cast aside, hopefully not for good.
Would prospects be brighter if the corporate tax cut had been less, and the "pass-through" and individual breaks been greater? Could such individual spending and small-business investment itself drive growth and demand enough to encourage the heavyweights to put some of their billions back in play in the USA?
Did anyone ask those questions in the closed-door sessions that gave us the Tax Cuts and Jobs Act? We don't know. The doors were closed.
And that is not the way to debate and decide public policy with such a long reach into Americans' lives.
BOTTOM LINE: The process and the product could both be better. But on balance, this sweeping and overdue reform is a positive step forward and will make 2018 a year like no other for our economy.