Frederica Freyberg:

A first look tonight at the Republican U.S. Senate tax plan and where it goes from here. Wisconsin Senator Ron Johnson is now onboard after getting an additional break for business. But the latest analysis of the plan by Congress’s Joint Committee on Taxation shows the Senate GOP plan would add $1 trillion to the deficit over ten years. Still, the bill is hurdling toward passage with Johnson’s imprimatur. We’re joined tonight by a tax expert and professor in the UW-Madison La Follette School of Public Affairs. Rourke O'Brien also served as senior policy adviser at the U.S. Treasury Department. So thanks very much for being here to talk about this.

Rourke O'Brien:

Thanks for having me.

Frederica Freyberg:

So the tax plan is somewhat overshadowed today by other major breaking news out of Washington, but what do you think of that new scoring of which we just spoke with its trillion dollar deficit? What does that do to this bill for the politics of it?

Rourke O'Brien:

Sure, when we started this whole process, Paul Ryan and Mitch McConnell were both promising to go after a tax reform package that was deficit neutral. And then the goalposts changed and they said they’re willing to accept up one and a half trillion dollars of on budget deficit increases with the promise that the economic growth that would follow from the tax reform package would actually offset all of those costs. That it would be actually revenue neutral at the end of the day. But this is the first score that we’ve seen that’s allowed for this kind of dynamic scoring. This idea that we’ll kind of count the potential feedback mechanism through which the tax cuts might lead to more growth which might offset some of the costs of the bill, but it looks like that’s only going to reduce the price tag by a little bit. So we’re still going to have, even under the best case scenario, a trillion dollars added to the deficit.

Frederica Freyberg:

Now, the last time we spoke you envisioned that the House tax plan would require a lot of rewriting once the Senate was involved. What are the important changes that were made in your mind that are now teed up for this Senate vote?

Rourke O'Brien:

I think the big difference between the House bill and the Senate bill is the inclusion of the repeal of the individual mandate under the ACA. This was a provision that was added to the bill that will save the government some money because more people will no longer be insured and covered under the ACA. That means fewer subsidies through the marketplaces. That means lower cost to the government, which created more room for tax cuts in the Senate bill. Of course on the other side of that, we’re going to have potentially up to 13 million more Americans uninsured and premiums are expected to go up an additional 10% a year under this provision. So here we have–the House plan was just mainly looking at just taxes. Here we have a tax and health care bill all in one.

Frederica Freyberg:

A lot of people have been talking about the process. What do you think of it? Does it seem to have been hurried?

Rourke O'Brien:

It does. I mean these are really complicated bills. There are a lot of really smart experts all around the country who have models where they’re trying to understand the different implications of these various provisions. Here we have a vote that’s happening where we’re just now getting the latest numbers from JCT. And it still seems that that might not even be the final score as the bill seems to be changing out from underneath us.

Frederica Freyberg:

President Trump remarked this week, I heard him say it, that the tax plan would hurt him and other wealthy people. Could that possibly be true?

Rourke O'Brien:

It's hard to imagine how Trump personally won’t benefit from this bill. The estate tax reform alone is–it stands to benefit wealthy families, such as the Trumps. In addition, this provision to reduce taxes on pass-through corporations, of which many Trump organization companies are pass-through entities, that stands to benefit the president and other wealthy business owners.

Frederica Freyberg:

Now, our own Senator Ron Johnson, as you know, sought and received deeper business tax cuts to include so-called pass-through companies. He and others described these as kind of main street businesses. Is that fully accurate?

Rourke O'Brien:

Many small business are incorporated as pass-through entities. So many mom and pop shops are. It’s the idea that the company is so small, they only have a few owners and they rely on that business income as their personal income. So it’s a way to simplify the tax code so they don’t have to get taxed twice, once through corporate tax process, then through the individual income tax process. But the rules on how you can organize as a pass-through company are pretty loose. So you can have hedge fund managers and law firms and other kind of much wealthier entities incorporating as pass-through companies. By some estimates, 70% of all pass-through revenue goes to the top 1%. So this is ultimately going to be a big tax cut again for the wealthy.

Frederica Freyberg:

Going back to our previous interview, you said that whether corporate tax savings will be passed on to the average worker in higher wages or whether it will just be captured by shareholders through dividends is an important part of the story that remains to be told. When will that be able to be told?

Rourke O'Brien:

Yeah. It’s still an open question. How much can we expect these corporate tax cuts to be passed on to the worker? Even by the most generous estimate, we’d only expect, in some economic modeling, about 25% of those tax cuts to be passed on to the worker in the form of higher wages. But it’s important to remember that right now in most industries, corporate profits are at all-time highs and wages have stagnated. It’s hard to how we can expect this one-to-one transfer that we’ve been promised that these corporate tax cuts will be passed on to the worker.

Frederica Freyberg:

What is your reaction as a tax expert to the part of the plan that sunsets the individual tax cuts but keeps corporate tax cuts permanent?

Rourke O'Brien:

It creates quite a fiscal cliff for families. So in the next ten years, while some families in years one and two might receive a modest tax cut under this bill, those tax cuts sunset. By 2027, the majority of middle class families are going to actually see a tax increase. So the idea is that part of the bill will be so popular that five or ten years from now, there will be another bill that will vote to extend those provisions. But then that will only make the deficit picture worse. At some point, we have to figure out a tax bill that is permanent. A tax reform that works for everyone and that ultimately will be paid for somehow.

Frederica Freyberg:

Speaking of being paid for, as part of the PAYGO sequester rules, would there have to be automatic cuts to programs like Medicare because of this tax bill?

Rourke O'Brien:

It does look likely that the tax bill as written would run afoul of PAYGO rules which would automatically trigger cuts to a number of programs including Medicare. In the past, the Congress has gone ahead and put in waivers and said that this specific piece of legislation won’t count against those rules. It looks like that’s what they’re going to do here but that’s going to be an important thing to watch.

Frederica Freyberg:

All right. Rourke O'Brien, thanks very much for your expertise.

Rourke O'Brien:

Thanks for having me.