Republicans have passed one of the most unpopular pieces of major legislation since the invention of modern polling. But GOP leaders appear thoroughly unconcerned, and they’re all pointing to a particular date on the calendar for when things will turn around.
“Americans will see lower taxes beginning in February,” President Trump tweeted shortly before final passage. The plan’s popularity will change in February, concurred White House Economic Director Gary Cohn. “On February 1, [Americans] are going to see bigger paychecks,” said House Speaker Paul Ryan.
February is when tax-withholding tables would change to reflect the new code. Once that formula for estimating what comes out of paychecks gets tweaked, Americans will feel richer, spend their windfall, rocket-launch the economy, and fall to their knees thanking Republicans for the good times ahead. And GOP leaders are weirdly confident about this. Why?
Maybe it’s because the person ultimately responsible for those withholding tables is a Trump political appointee serving as the “acting” commissioner of the Internal Revenue Service. And while this official, former Ernst & Young executive David Kautter, isn’t sitting in a room alone working on the withholding tables, critics fear the possibility for abuse exists—that Trump’s team could artificially goose US paychecks in 2018 to make the tax cut look bigger for the working class in advance of midterm elections.
The tax plan represents a serious implementation challenge even without politicization. Applying the once-in-a-generation overhaul to withholding, along with all the other guidelines and regulations the IRS needs to write, will prove so complicated that Congress, on page 540 of the bill, gave the Treasury Department the option to make withholding rules the same for 2018, which would mean no change to paychecks whatsoever. However, last week the IRS said in a statement that it is “taking the initial steps to prepare guidance on withholding for 2018,” which would be completed by February.
The secret sauce tax officials use to estimate withholding is “part formulaic and part art,” said Mark Mazur, a former assistant secretary for tax policy at the Treasury Department and is now director of the Tax Policy Center. Attorneys and processors of individual returns work with payment processing companies and large employers to arrive at the formula, and usually they err on the side of over-assessing, as most people end up getting a refund.
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Adding to the uncertainty, Congress took away the main withholding tool that distinguished employee households. When you sign your W-4, you used to tally up allowances by the number of people in your household; the more in the house, the more personal exemptions and the less money withheld. But Congress doubled the standard deduction and eliminated the personal exemption, which tracked the allowances. “The art part is going to be to figure out how, given the structure of the bill, to make the withholding system work.” Mazur said. Workers might have to change their status to comply with the new formula, meaning hundreds of millions of W-4 forms filled out in January.
In addition, IRS staff has been decimated by budget cuts. Staff has fallen by 23 percent since 2010, and the agency was given no money to implement the new tax code. “Nobody in Congress gets elected by giving more money to the IRS,” said Mazur. The IRS must integrate all these new rules and complete withholding tables in the middle of filing season, its busiest time.
The man in charge of this mess is Kautter, who’s working two jobs. He was confirmed as the assistant secretary for tax policy, in an unusual committee vote in a private room off the Senate floor. In October, Trump named Kautter acting IRS commissioner. His experience for the job? He oversaw national tax practices at Ernst & Young while the company assisted firms in avoiding federal taxes. Ernst & Young ended up paying $123 million in fines for the tax-evasion scheme, known as Viper, and four employees went to jail. (Two sentences later were overturned.)
So a Trump loyalist with a history of at least turning a blind eye to tax avoidance is running the IRS. The assistant secretary for tax policy, Kautter’s day job, historically works with Congress on passing tax legislation. So he’s likely invested in the bill’s success. And now, at his moonlighting job, Kautter has to decide how to implement that policy. “That means rather than focusing on serving the IRS’s mission on behalf of all taxpayers, the IRS is likely going to be implementing this deeply unpopular bill with an eye toward preventing a total Republican bloodbath in the 2018 midterms,” alleged Jeff Hauser, executive director of the Revolving Door Project.
To be clear, this is the only way most Americans will experience the tax legislation between now and the midterms. The law only becomes effective for the 2018 tax year; tax returns this spring will be based on the 2017 code. There are big incentives in the bill to pull business investment forward, such that the expected effective corporate tax rate in 2018 is a skinny 9 percent. But the impact of that is highly debatable: Will the capital equipment be manufactured in the United States? Will companies give workers real wage increases or leak out benefits to shareholders through dividends and stock buybacks? The Tax Policy Center estimates an 0.8 percent boost to GDP in 2018 from the tax bill, but the distribution isn’t clear. For working Americans, withholding will be the most direct effect.
Individual tax cuts are very skewed to the top 5 percent. But if the withholding tables are tweaked to give the middle class more in their paycheck, it can look more like a broad-based cut. Sure, workers may have to give a lot of that back to the government the next tax year, but that won’t be until April 2019, well after the midterms.
Mazur stressed that estimating withholding is a professional process carried out by career staff, without direct involvement from Kautter. But Kautter does allocate resources to IRS tasks. Given the extreme confusion expected from the high-speed implementation, Mazur did acknowledge that “anything’s possible.”
That’s particularly true in the Trump administration, which has shown a dismissive attitude toward traditional norms of conduct. “For generations the IRS has actually been shielded from politicization,” said Jeff Hauser. “Sadly, that has changed under Trump.” Just yesterday, Senator Ron Wyden (D-OR), ranking member of the Senate Finance Committee, wrote to Kautter that his dual role raises conflict-of-interest concerns. “I believe it is inappropriate for the acting commissioner of the IRS to also serve as one of the highest political appointees in the Treasury Department,” Wyden wrote, stressing that this is the agency auditing President Trump’s tax return.
It’s an open question that, even if successful, a gaming of the withholding tables would even matter. Famously, in 2009, President Obama ran a stimulus tax break called Making Work Pay through the withholding system, and polling later showed that almost nobody knew they got a tax cut. Plus, given that employers withhold state taxes and health-insurance payments too, the net effect in paychecks could be negligible or even negative.
But the Trump team may see an opportunity that others dismiss. At the very least, the political appointee in a traditionally nonpartisan position presiding over the major legislative achievement of the Trump era should raise questions. Trump could alleviate those simply by nominating a permanent IRS commissioner and allowing the Senate to vet the nominee. But I suspect that won’t happen, and we won’t know the full meaning of that choice until paychecks come out in February.
