Congress may just pass a surprisingly sensible tax deal

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TIt’s a “CONGRESS SECRET” theory holds that bills that attract public attention are born to partisan gerrymandering, suffer a life of pain and usually die a miserable death. For a recent example, just look at the highly contested bipartisan deal that sought to fix America’s broken immigration system and direct much-needed funds to Ukraine. It took months of work to settle the arrangement; when it was released on February 4th it barely lasted one business day before it was left for dead. But the theory also holds that successful negotiations happen all the time as long as no one disturbs it.

It is with some trepidation, then, that we refer to the bilateral tax treaty that the House of Representatives passed by an overwhelming margin of 357-70 on January 31st. (This article will be short so as not to attract too much additional attention.) The $78bn package trades something Democrats want – more generous tax credits for families with children – for something Republicans want: credits more generous tax for businesses. They plan to pay for this entirely by eliminating the unloved tax credit, a covid-era relief program for companies that kept workers abused by fraudsters (95% of the time, according to one whistleblower).

If the bill were a real law there would be plenty to shout about. Capital and labor would share the spoils almost equally. Businesses would be able to immediately deduct their research and development costs. (Under current law, these must be valued over five years.) They would also be able to deduct some capital and, less justified, interest charges. A review of child tax credit would ensure families at the bottom of the income distribution receive larger amounts. (Because benefit rates are lower at low income levels, middle-income families are currently more likely to receive the maximum credit limit of $2,000 per child than poor families.)

This proposal would not be as generous (or as expensive) as the short policy experiment carried out in 2021, when the child tax credit was changed to a de facto monthly child allowance, which had the effect of reducing child poverty as large to 40. %. But it would still be important. The Center on Budget and Policy Priorities, a left-wing think tank, estimates that the changes would benefit 16m children in poor families and that 400,000 of them would be pulled above the official poverty line in the first year.

Some complaints are already being voiced above a whisper. A handful of Republican senators have complained that the more generous child tax credits do not come with enough work requirements on parents. There are technical reasons for thinking that their complaints could be mitigated. The proposed overhaul still preserves the “graded-in” structure where poor taxpayers earn more of the credit as their income rises, which ‘ creating motivation for work. A study by the Joint Committee on Taxation, the nonpartisan research group in Congress, indicated that “the proposed expansion of the child tax credit on the Internet increases the supply of labor.”

What could be wiping out the deal is even more attention to it. The White House called it a “welcome step forward” and urged it to go ahead. But often one side supports a bill at the risk of more opposition from the other side. “Passing a tax bill that makes the president look good – mailing checks before the election – means he could be re-elected,” said Chuck Grassley, the senator. A neoclassical Republican from Iowa, a little too real for reporters. If the deal is to go through, negotiations may have to take place in the future sotto voice.

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