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Over the past week tax reform has dominated the political cycle in Washington D.C.

On Thursday, the House of Representatives took a necessary step toward tax reform when it approved $1.5 trillion in deficit spending for tax cuts on a near-party line vote. This has caused significant pushback from Democrats, who have resurrected the GOP's Obama-era language of fiscal responsibility to criticize the bill.

At the same time, the particulars of the plan remain unfinished. Although the House has approved the spending Republican leaders are still drafting the actual bill, with some reports suggesting that they plan to unveil it on November 1.

As the tax reform debate continues in Washington, here are a few of the most important developments over the past week.

The $9,000 Claim

The Council of Economic Advisors has recently predicted that cutting corporate taxes to 20% will cause household incomes to grow anywhere from $4,000 to $9,000 per year. Their argument is that allowing investors to keep a larger share of profits will lead to a surge of capital into the market. This will, advocates argue, lead to an increase in business investment and productivity, in turn creating a more competitive labor marketplace and a trickle-down increase in wages all around.

There is no reason to believe that this will happen.

In fiscal year 2017, the U.S. Treasury collected $297 billion in corporate income taxes. According to, raising the average household income by only $4,000 would cost more than $503 billion per year. This amount calculates only the money directly flowing to those households, not the net economic activity it would take to push that money down in the form of increased pay after accounting for corporate spending, profits and dividends.

To realize advocates' most conservative claim, this cut would have to generate new economic activity worth more than twice as much as the total pre-reform corporate income tax base. No tax cut in history has generated this kind of growth, and steadily increasing corporate profits over the past 30 years have tracked most closely with the expansion of executive pay and shareholder compensation rather than wage growth.

Increasing corporate liquidity, on its own, does not necessarily lead to wage growth, and few credible economists believe it will happen in this case either.

Foreign Shareholders

Foreign shareholders will take home approximately three times as much in tax relief as American households.

This is the conclusion of new, widely celebrated research by the Tax Policy Center's Steve Rosenthal. In his work, Rosenthal finds that foreign investors own over a third of U.S. corporate stock. With a 15-point corporate rate cut they will collect a short-term, highly predictable benefit of approximately $70 billion per year compared to the estimated $23 billion per year in tax relief planned for the middle class. As Paul Krugman points out, this amounts to $700 billion over the likely ten-year lifetime of this bill.

"The question of who wins from slashing corporate taxes has been obscured by a debate over what happens in the long run," said Rosenthal. "Some economists argue that in the long run a small benefit from the cutting of corporate taxes will go to the workers. Other economists argue that in the long run a large benefit from cutting corporate taxes will go to the workers."

But, he said, "That's quite a tenuous chain of events that need to occur, and those occur over many, many years. In the meantime what we do know in the short run is that the winners are stockholders both U.S. and foreign, and there are a surprisingly large number of foreign stockholders."

As Rosenthal explained, one of the biggest problems with trickle-down logic is that it operates over a long, speculative time frame. It will take years, if ever, for workers to see wage gains from corporate tax cuts. The benefits to shareholders will kick in almost immediately.

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The 401(k) Deduction

Congress and the White House have sent increasingly confusing signals on the fate of the 401(k) deduction.

In order to offset some of the costs of tax cuts Republican leadership has discussed capping the deduction for 401(k) contributions at $2,400 per year. According to Scott Tucker, a retirement planner and owner of Scott Tucker Solutions, the result would make saving for retirement harder, while pushing individuals away from traditional 401(k)s and into Roth retirement accounts.

"If you're just the average couple working today[and] if you have a 401(k), I think you need to be concerned with preserving the tax deduction for it," he said.

"The individual, it could make them pay more taxes on their income," he said. "It could make the 401(k) less attractive, and it may make folks looking at companies that offer a 401(k) program, for that to be less attractive."

This would also work chiefly to rearrange Treasury revenue instead of raise it. Where traditional 401(k)s tax income when workers withdraw it during retirement, workers invest in a Roth retirement vehicle with post-tax dollars and pay nothing on the gains. As a result, capping the 401(k) deduction would raise government revenue in the short term, only to lose it down the road when current taxpayers withdraw money from Roth-focused retirement accounts.

For individuals, however, it would mean a functional increase during their working years and disincentivize retirement savings and employer retirement benefits. This would all, as TheStreet's Robert Powell has reported, serve to worsen the already-extant U.S. retirement crisis.

SALT Deductions

Planners have also sent mixed signals on the fate of the State and Local Tax deduction, or SALT.

Individuals who pay state income taxes can deduct it from their federal income tax returns. As an additional offset, Republican leadership has discussed eliminating this deduction.

That would have no impact on taxpayers who live in zero-income tax states. It would mean a potentially substantial tax increase on people who live in high income tax states such as New York and California.

"You probably want to pay attention if you're in a high income tax state," said Tucker. "Folks who currently enjoy large deductions on 401(k)'s… and folks who live in high state income tax states. Those two things, if you live in New York and you have a high 401k you better look out because you don't know what you're going to get."

A few states like Texas and Florida don't charge any income tax. Those taxpayers will see no difference. Someone who lives in Montana, however, pays 6.9 percent to the state government. If lawmakers repeal the SALT deduction that taxpayer would see their eligible income increase by the same percent. This could be enough to move taxpayers into a new bracket, a particularly significant concern given reformers' plan for fewer brackets with larger gaps between them.

Simplification and Deductions

Americans spend roughly 8.9 billion man hours and over $400 billion per year on tax preparation. As a result advocates of the current Republican effort have pushed for two forms of simplification: reducing deductions and reducing the number of tax brackets.

Reducing the number of tax brackets will not make individual tax preparation easier. Reducing the number of tax deductions might.

The complexity of tax preparation comes from figuring out an individual taxpayer's eligible income. During this process, taxpayers and accountants have to parse deductions, carve-outs, business expenses and many other elements of the U.S. code. This requires time and expertise, the latter of which is often beyond citizens who have not made a study of the issue. Streamlining this system could, indeed, save taxpayers billions of dollars and hours in preparation each year.

Brackets apply after the taxpayer has completed this process, at which point there are no more calculations to do. The IRS publishes an annual chart on which taxpayers can look up their taxable income and find how much they owe. This process will remain the same regardless of the number of tax brackets, whether seven, three or 100.

Taxpayers should pay attention to the context of discussions surrounding simplification. Reducing the number of deductions might make tax season easier. Reducing the number of brackets, for the taxpayer, will not.


Closeted, rushed processes tend to lead to errors.

"What we have here is a deliberate effort to keep as much behind closed doors as possible and a high speed race through the Congress to allow few opportunities for outsiders to react," said Rosenthal, who called the current process both "disturbing" and "really unusual."

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"I'm really troubled as a process man," he said. "Apart from the content of the tax bill, that process itself is going to lead to very poor quality. That means you're going to have compliance issues for taxpayers, you're going to have problems for tax attorneys. You're going to have [unintentional] loopholes."

Historically, according to Rosenthal, a major tax effort takes at least a year and a half of public debate. That process allows legislators to research the issue, gather feedback from the public and private stakeholders, and put as many eyes on the project as possible. This allows everyone to weigh in on the implications of the new plan.

It also allows legislators to catch their own mistakes.

"We didn't mind if somebody complained that their taxes were going up if Congress intended that," Rosenthal said of his time working on similar legislation. "But if someone's taxes were going up or they were going to get hammered by accident, we wanted to know about that."

Congress uses the tax code to accomplish many things, far more than simply raising revenue for the government. Among just a few goals, taxes help focus the economy, create jobs, redistribute wealth, and incentivize education and skill-building. This has necessarily lead to a complicated set of laws with many moving and mutually interactive pieces. Changing that code, even in the name of simplification, can have unintended consequences.

As reform moves towards passage, taxpayers should watch carefully for oversights and issues that legislators might have missed. As Rosenthal emphasized, lawmakers are only human. They make mistakes too. The risk of that is heightened in a closed-door environment of urgency.

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