Ten Comments on The Big, Beautiful Bill

Abstract: The paper outlines problems with the current big, beautiful bill and the absolutely insane budget process.

Ten issues are addressed.

· The existence of higher taxes if no bill is enacted (the fiscal cliff),

· Future fiscal cliffs stemming from new temporary tax provisions,

· Temporary tax provisions which favor current consumption over saving,

· A lack of progress on Social Security and Medicare Trust funds,

· Failure to consider the economic impact of tariffs,

· Worse outcomes for student borrowers and taxpayers,

· An increase in the number of people lacking health insurance coverage,

· An ineffective approach to mitigating out-of-pocket healthcare costs,

· Ineffective and expensive environmental subsidies,

· Too many benefits for the rich and too many costs on the poor.

The paper does more than highlight the problems. It proposes solutions.

Ten Comments on The Big, Beautiful Bill

Most recent administrations have relied on a small number of omnibus tax and expenditure bills to impact fiscal trends and to achieve the president’s political and economic priorities. These large bills are especially important for two reasons.

First, failure to enact the bill would automatically lead to large tax increases because many provisions of the tax code periodically sunset and reset to higher levels.

Second, in the current deeply divided political environment large omnibus spending bills, which are not subject to the filibuster in the U.S. Senate, are the only important measures getting enacted into law.

The Big, Beautiful Bill is the Trump Administration’s vehicle to maintain or modify previously enacted tax changes and deliver on the president’s priorities discussed during the campaign. This memo contains my thoughts on the Administration’s bill and on the need to create a saner process of dealing with taxes and expenditures.

Comments

Comment One: The bill, like previous budget bills, was shaped by a need to avoid automatic tax increases, also called the fiscal cliff.

The budget process is now dominated by the need to deal with provisions, which are sunsetting. The summary of the big, beautiful, bill by the Tax Foundation reveals that many aspects of the new bill of the new bill involves making some previously enacted aspects of the tax code permanent.

These features include:

· A lower higher marginal tax rate for individuals

· A permanent standard deduction

· Permanent elimination of the personal. exemption

· Permanent limitation of deduction on interest for home equity loans

· Various changes to itemized deductions

· The child tax credit

· Parameters of the alternative tax

· Estate and gift tax exemptions

The decision to make existing aspects of tax law permanent is responsible for a large share of the cost of this bill.

There would be a large increase in actual tax rates without a new tax law because many of the tax parameters would revert to the parameters in existence prior to the tax law enacted in 2017.

The large number of tax and sunset items which are routinely scheduled to sunset complicate the process of moving towards fiscally sustainable spending and taxes.

The process of having to respond to previously enacted temporary tax cuts has defined the budget process or lack of budget process for some time. This article reveals that one purpose of the American Taxpayers Relief Act of 2012, enacted by President Obama, was to make 82 percent of the temporary tax cuts enacted by President Bush permanent.

Comment Two: The current tax bill includes several temporary tax provisions leading to future fiscal cliffs.

The enactment of new temporary tax provisions continues a process where future congresses must either extend an existing tax provision or facilitate an automatic increase in taxes. Temporary tax provisions in the new bill, which are scheduled to retire in 2028 include:

· Deductible tip income,

· Deductible interest on auto loans,

· Deductible overtime payments,

· Temporary increase in bonus depreciation and more favorable expensing rules for businesses,

· Temporary eligibility for $1,000 in Trump accounts for newborns.

Comment Three: The new temporary tax preferences are motivated by political, not economic considerations, and will increase immediate consumption rather than stimulate additional savings for retirement or health care.

The creation of deductible tip and overtime income will reduce AGI, taxable income and marginal tax rates for affected taxpayer. The reduction in taxpayer marginal tax rates will reduce the incentive for the taxpayer to contribute to either a retirement account or a health savings account. A more effective approach to stimulate increased saving for retirement and health care would involve increased refundable tax credits for taxpayers in lower income brackets.

Tax deductibility of interest encourages people to borrow more and is inconsistent with the trend supported by most economists and most conservative toward restrictions on deductible interest. (Note in my paper on student debt, I endorse elimination of the deductibility on student interest coupled with a zero-interest provision at the beginning of the repayment period.)

Tax incentives designed to increase savings at an early age to take advantage of compounded gains are beneficial. However, the $1,000 gift to newborns sunsets in 2028 and benefits a very specific cohort. (Why is the person born right after the enactment of this provision more deserving of a gift than a person born right before the enactment of the provision?) The goal of saving at an early age could be done more efficiently and equitably by modifying rules and annual tax credits for IRAs and other savings accounts. Moreover, these incentives to increase savings by young people should be part of a comprehensive approach to Social Security reform.

Comment Four: This bill does not address problems with the Social Security and Medicare Trust funds.

The current tax bill largely ignores projected shortfalls in both the Social Security and Medicare trust funds, which if unaddressed will lead to automatic benefit cuts projected at 22 percent for Social Security in 2033 and 11 percent for Medicare in 2036.

It is not clear whether current CBO projections of the debt to GDP ratio are based on an accurate forecast of future entitlement spending under current law. This topic was considered by the Google AI tool and the answer was inconsistent gibberish.

The Byrd rule, governing the reconciliation process in the Senate, does not appear to allow for the cut of future Social Security benefits through the reconciliation process but does appear to allow for increases in the cap on payroll taxes. In reality both decisions would be up to the parliamentarian.

The big, beautiful bill does not include the Trump campaign proposal to eliminate all taxes on Social Security. The exclusion of this proposal from the bill is a positive development especially because a portion of the tax revenue is returned to the trust fund.

The big, beautiful bill does include a temporary increase in the tax deduction for seniors. The current desire for immediate tax cuts and the desire to put off the Social Security debate suggests that the cost of Social Security imbalances will be paid by younger people just now entering the workforce.

Presumably, seniors will not be subject to an abrupt change in Social Security or Medicare benefits because abrupt cuts to benefits for people in or near retirement are unfair. However, it is also unfair to impose higher taxes and lower economic growth on the next generation because this generation has ignored its fiscal problems.

The budget process will be absolute chaos once automatic benefit cuts to entitlement are coupled with automatic increases in taxes from the fiscal cliff, current projected to start happening in 2033.

It is likely that all generations will find the outcome of this process unfair. (is process the wrong word?)

Comment Five: Current economic and financial turmoil could be reduced by including proposed tariffs in the tax bill and reducing the tariffs.

The reconciliation tax and expenditure bills were the major fiscal policy levers utilized by previous administrations. Trump (47) is using a second major lever, tariffs.

Tariffs, like other taxes and spending, determine whether fiscal policy is stringent or lax. It is very difficult to determine whether Trump (47) fiscal policy is stringent or lax because revenues from tariffs could offset part of the loss of revenue from the tax cut.

The net effect of tariffs is difficult to quantify because Trump changes tariffs frequently and the final tariff could be determined by outcome of negotiation.

Many economists argue that static estimates of revenue effects from tax cuts are too large because they ignore the impact of economic growth. The same economists maintain that static revenue estimates from tariffs are too large because they ignore effects of economic growth picked up in dynamic models.

The inclusion of tariffs inside the big, beautiful bill would reduce the impact of the bill on long term debt and mollify fiscal conservatives concerned about the growth of debt.

The roll back of excessive tariffs, to a reasonable rate of around 3.75 percent on all countries coupled with restrictions on the presidential authority to impose excessive tariffs without Congressional oversight would stabilize financial markets and lead to higher economic growth.

Comment Six: This bill worsens outcomes for both student borrowers and taxpayers

The big, beautiful bill makes major changes to student loans in an attempt to reduce the cost of these programs to taxpayers. Provisions related to student debt in the bill include:

· Limits on the amount of federal student debt obtainable by graduate students,

· Elimination of subsidized loans, which allow students to avoid interest payments while in school or on forbearance,

· Replace existing Income Driven Replacement Loans with Repayment Assistance Plan (RAP). RAP has a 30-year repayment period. Go here for a discussion of RAP.

· Loss of ability to have loan payments paused during periods of economic hardship,

· Caps on borrowing for professional programs at $150,000 way below the cost of medical school,

· Makes student loan payments by medical residents, ineligible for PSLF program

· Limits the ability of future administrations to modify student loan programs,

· Repeals gainful employment rule that helps student avoid incurring debt from programs, which do not increase employment opportunities.

The cumulative impact of these provisions could be very large for a student borrower that loses access to interest subsidies, must take out more private loans from the limit on loans to graduate students, and cannot take advantage of either PSLF or loan forbearances while in a medical residency or medical fellowship. The New York Times has pointed out that student loan provisions of the bill could substantially impact doctors.

The approach in this bill to student debt does not rectify a key problem – student borrowers with low income at the beginning of their careers are forced into an IDR loan program because conventional loan payments are unaffordable at that point in their career.

The approach in the tax bill exacerbates student loan burdens for the existing generation of student borrowers. It will increase the share of people taking unpaid student loan balances into retirement. It makes it more difficult to reach the consensus needed to reform and preserve Social Security.

My thoughts on how to fix the student debt problem are outlined in detail here.

Go here for a better way to simultaneously reduce the cost of student loans subsidies to taxpayers and the burden imposed by higher levels of student borrowing.

Comment Seven: The bill substantially increasing the number of people lacking health insurance.

Several provisions of the bill will reduce the number of people with health insurance coverage. These include:

· Work requirements for people on Medicaid,

· The end of enhanced premium tax credits for state exchange health insurance,

· New verification requirements and paperwork for enrollment,

· Shorter enrollment periods,

· Ending access to the premium tax credit for immigrants

Some people go on Medicaid for a brief period of time when they become unemployed, lose their employer-based health insurance, and find they cannot afford to purchase COBRA subsidies. The Medicare work requirement may make it difficult for people who are temporarily unemployed to obtain health insurance coverage. An alternative approach to the problem of people losing health insurance coverage due to brief spells of unemployment involves increased use of state exchange health insurance and low-cost state exchange health insurance for the unemployed.

The enhanced premium tax credits, enacted during the Biden Administration, are slated to expire at the end of 2025. The Biden Administration should have prioritized these premium tax credits by making them permanent when they were enacted, even if the only political feasible way to have locked in a permanent change in the premium tax credit was to accept lower spending elsewhere.

Go here for a discussion on the way forward on health care issues.

Comment Eight: The benefits included in the bill will not reduce out-of-pocket health care burdens for most households.

The House bill substantially increases allowable annual contributions to health insurance accounts. The allowable annual contribution is doubled for people with single coverage and income less than $75,000 and for family coverage with income less than $150,000 with complete phase outs at $100,000 (single coverage) and $200,000 (family coverage.)

Relatively few people will be able to take advantage of the increase in the allowable contribution to health savings accounts because many households cannot increase savings because their expenses equal or exceed their income and theyhave very little in pre-existing savings which can be transferred to a health savings account.

Currently, many people who contribute to health savings accounts will reduce their contributions to 401(k) plans or IRAs. This proposal exacerbates this tradeoff.

Other more effective ways to help people save for out-of-pocket expenses, which were not included in the tax bill include:

· A refundable tax credit designed to assist taxpayers with low marginal tax rates,

· The elimination of the use-or-lose feature on flexible savings accounts,

· Expanded use of flexible savings accounts for people with state-exchange health insurance (Current law restricts these accounts to holders of employer-based insurance.)

Go here for a discussion on the way forward on health care issues.

Comment Nine: The elimination of environmental subsidies could be offset by new state taxes on less efficient vehicles.

I am more concerned about the impact of the bill on the poor than on the environment.

The case could be made that the EV tax credit is not needed because states could incentivize the purchase of EVs by imposing sales taxes and annual registration fees on some or all gasoline powered vehicles. Go herefor a discussion of state policy levers on an environmental issue.

The creation of environmental subsidies for purchases by rich people is wasteful when the subsidy reduces resources for the poor and when the same environmental goal can be achieved by imposing taxes and annual fees on affluent people.

Taxes and fees, which incentivize people to purchase an EV instead of a traditional car increase resources for the poor. A tax credit for rich people to purchase an EV reduces resources for the poor.

Comment Ten: Low-income people bear too much of the cost of the adjustments in this bill.

The current bill severely impacts the most vulnerable Americans by reducing access to Medicaid, by reducing subsidies for state exchange health insurance and by reducing access to food stamps, and by restricting some refundable tax credits.

Most of the tax changes, including lower permanent personal marginal tax rates and gift and estate taxes, and the proposed changes to the SALT cap favor the wealthy.

Potential changes to the bill to make it more equitable include:

· Eliminate section 1031 exchanges, a loophole that helps people avoid capital gains taxes,

· Changes in the tax treatment of unrealized capital gains and basis of gain on inherited assets, including rules governing houses, financial assets.

· Changes in the tax treatment of inherited retirement accounts

· Reforms to the capital gains tax laws designed to increase and speed up the sale of assets. (Note that the higher capital gains taxes proposed by progressive Democrats could reduce the tendency for people to sell assets and realize gains.)

Some of these proposed tax changes are outlined here.

The previous Biden Administration and future Democratic administrations need to focus on how to make important poverty and health care programs permanent even if that entails less spending on infrastructure and other pet projects. It would have been far difficult for the Republicans to eliminate the premium tax credit on state exchange health insurance, had the Biden team fought to make this aspect of the tax code permanent when it was enacted.