Democrats look to capitalise on unpopular tax reform

As congressional Republicans prepared to vote through their landmark tax reform package on Wednesday, Democrats were hammering it as a monstrosity that will reward plutocrats and, in the words of House minority leader Nancy Pelosi, ransack the middle class.

How effective those arguments will prove at Congressional midterm elections next year is far from clear. The bill itself is deeply unpopular, according to opinion polls, and recent Virginia and Alabama elections have shown a surge of support for the Democrats. 

But the Republicans are counting on a resurgent US economy that has recorded a brace of growth readings above 3 per cent to come to their aid. The party is planning to adopt a recovery that has now been under way for eight years, claiming strong doses of economic data and a soaring stock market are all attributable to their tax cuts. 

“The Republicans have put a huge wager on this tax bill — the House rides on it, the Senate may ride on it,” said Matt Mackowiak, a Republican consultant and president of Potomac Strategy Group. “What is going to matter is whether the bill is successful in raising wages and serving as a catalyst for growth.” 

The Democrats’ central charge — that the tax overhaul is strongly skewed in favour of big business and the ultra-rich — is backed by external analysis. The top 1 per cent will enjoy a 3.4 per cent income boost from the cuts in 2018, more than twice as much as the middle quintile, according to the Tax Policy Center (TPC). Taxpayers in the top 1 per cent will see a $51,140 drop in their federal tax payments that year, compared with a $930 drop for the middle class. 

While the cut in the corporate tax rate to 21 per cent from 35 per cent is permanent, individual taxpayers will see their cuts expire after 2025. This lopsided nature of the package has not been lost on voters. Two-thirds of Americans think the plan does more to help the wealthy than the middle class, according to a CNN poll this week. Some 55 per cent of voters opposed the plan, up 10 points from early November, while 33 per cent favoured it. 

With polling like that, the Republican party has reason to be anxious about midterm elections in November — with 23 House Republicans occupying seats in districts won by Hillary Clinton in particular focus. The record-breaking unpopularity of President Trump recently helped Democrats win the gubernatorial race in Virginia. In Alabama the president supported a Senate candidate who, facing serious sexual misconduct allegations, lost one of the most solidly Republican states in the union. 

Frank Luntz, a pollster, says the crucial seat to watch in the Senate is that of Dean Heller, a vulnerable Republican lawmaker in Nevada. “The ability to communicate the tax cuts effectively will determine the outcome of that state,” he said. To date, he argued, the Republicans had done a terrible job of selling the tax cuts because they had spent too much time talking about growth benefits and corporate tax cuts. “I have never in my adult life seen legislation designed to give people back their money be so unpopular with so many people.” 

Nevertheless, the party believes it has a strong hand to play on the economy and that tax cuts will harden its arguments. Paul Ryan, the House leader, this week dismissed unfavourable polling, arguing taxpayers will learn to like the bill once they see more money in their paychecks. The TPC analysis shows that 80 per cent of taxpayers will get a tax cut averaging about $2,100 in 2018. That shrinks to just 25 per cent of taxpayers by 2027. 

The tax package is likely to have a modest growth impact. The joint committee on taxation expects it to lift the average level of GDP over 10 years by just 0.7 per cent. Morgan Stanley expects the push to growth from looser fiscal policy to fade as soon as the second half of 2019. But in the very short term that still leaves a bullish growth outlook that should play into Republican hands in November, say some analysts. 

Federal Reserve Bank of Atlanta forecasts suggest annualised fourth-quarter growth will be 3.3 per cent. If that prediction plays out it will mark the first string of three straight quarters of growth at or above 3 per cent since 2004-05. At the same time, below-target inflation means the Federal Reserve is not planning to stand in the way of the tax cuts by accelerating its increases in interest rates. 

Doug Holtz-Eakin, president of the American Action Forum, said it will be difficult for Republicans to divorce themselves from the president’s own low popularity ratings. But “if life on the ground is good, they will be OK”, he predicted. “What matters is whether the economy performs well.”