Pennsylvania Senator Pat Toomey joined me this morning to talk about the tax bill:
HH: Joined now by Pennsylvania Senator Pat Toomey, he of the Senate Finance Committee. He’ll be one of the leaders of the movement to push this bill to a conclusion tonight or tomorrow. Senator Toomey, welcome. Are we going to get a tax bill?
PT: Yeah, we’re going to get something done here, Hugh, and it’s going to be really, really good for the people that I represent and the people you talk to every day. I’m really excited about it. It probably happens tomorrow in the Senate, and of course, we still have a significant process to go through in reconciling the differences between our bill and the House version. But I am really quite confident that we’re going to get this done.
HH: Now let me ask you a few specific criticisms of the bill.
HH: One of the ones that has resonated with me is the deductibility of interest by businesses is going away. A lot of businesses borrow in order to expand and employ. And their interest is every bit a cost of doing business as buying a computer or hiring a new employee. Why get rid of business interest?
PT: So there’s several aspects to this. First of all, small businesses don’t lose any ability to deduct. And that’s in part because most small businesses do not have access to the equity capital markets. Their only way to grow is to borrow money, and so we don’t change that at all. Secondly, even big businesses still can deduct a portion, a certain amount of interest, but we put a limit on it. And part of the reason, Hugh, as you probably know, our tax code currently is biased in favor of debt financing. A business can deduct the cost of interest. A business cannot deduct the cost of equity, right? The cost of equity is the dividend that you pay. That is not deductible. The cost of debt is interest. That is deductible. That disparity, that inequality in the tax treatment, encourages debt over equity, and I think we should be neutral with respect to how people capitalize their business. And so I…
HH: I think you could be neutral, but a transition period away from that…
PT: So that’s a fair point, and we wrestled with that. And we thought about whether we should have, so what we ended up wrestling with is either a transition that would lead to probably little or no ability to deduct interest or a much simpler administrative approach, which is what we took, is no transition, but you can still deduct up to 30% of one of the common measures of your net income. So…
HH: If an amendment comes to you today, I’d urge you to look at that, because I have heard from particularly business owners that this is the killer for them. Not individuals, the killer for individuals is SALT, but the killer for business owners is no transition on the interest, so if an amendment arrives on your desk, I hope you’ll look at that. You’re going to be looking as well at raising the bottom corporate rate from 20 to 21% or 22%. What does Pat Toomey think about that?
PT: Pat Toomey is opposed to that. I think that’s not a good idea. I think it’s really, really important, and a big, big majority of the tremendous growth that I think is going to result from this bill is going to come from having a competitive corporate rate, lowering the rate dramatically. You know, the OECD average is 22.4%. We get our rate just a little bit below that. And that’s really important. So I don’t want to start giving ground on our corporate rate. I expect that I’ll be opposing any amendments to raise that.
HH: So you need to find revenue elsewhere in order to make some tweaks. My suggestion has been, and I have been arguing this with Senator Lankford and others, that you allow one-time withdrawals of a certain percentage of individual retirement savings at a flat tax of 10% as opposed to the penalty and regular rate in order to, you know, we’ve got $25 trillion dollars in protected assets right now, Senator Toomey. If you let people take out 25% of their retirement and tax it at 10%, and make them put it to reduction of mortgage debt or into residential real estate or something that is productive, but you would get an enormous amount of revenue, and relief for people who relied on the mortgage interest. Has anyone talked about that, yet?
PT: There has not been a lot of discussion about that. I will tell you much of our, I mean, we’ve got an interest in continuing to encourage savings. I do think that’s good policy. I think capital formation is what drives the economy, and savings is what helps relieve the burden on some of our big entitlement programs. But having said that, it’s a matter of degree, and I think your idea has some merit. It’s worth thinking about.
HH: If you’ve got to find money today…
HH: I’d just encourage you to look at that, because if you make people take their retirement out, but put that into residential mortgage reduction or residential purchase, you’re actually giving them a retirement asset at a preferred rate, and you’ll raise revenue.
PT: Well, and presumably, you wouldn’t force them to take it out. You’d just make it available…
PT: …at a lower tax so that they would, or that some would….
HH: And you wouldn’t let them take, you certainly in my world wouldn’t let them take more than 25% of their retirement out, and you would require them to…
PT: Take some of that out.
HH: Yeah, something to think about. Let’s go to the other hot buttons. School loan debt, my gosh, the kids out there are mad at me, because I’m telling them the standard deduction is going to be double. This is not a problem. Am I right?
PT: Yeah, you are right. I mean, you know, we really should be moving in the direction of not favoring certain activities and special, you know, favors for preferred industries. What we ought to be doing is having the lowest possible rate and the strongest possible economy, and then let people do what they like with their money. And some will choose to incur debt for education, and that can, for many, many people, is a very rational choice. But you know, we should get away from the business of ever more subsidies for these activities.
HH: And I do believe that the people who are currently paying interest on student loan debt will be saved by the doubling of the standard deduction. They’re not going to notice any increase in their tax bill if you double the standard deduction. However, graduate students being obliged to count as income their scholarships is really going to hit them hard, Senator. Is there any movement to try and find some accommodation there or another set of transition rules?
PT: Well, keep in mind a lot of graduate students who if they did have to take this as income, their income is quite a modest level, and there’s quite a lot of income that a person can earn and not pay any taxes. I mean, a married couple with no children can make $24,000 dollars and pay zero. That’s what they pay on the first $24,000 dollars just taking the standard deduction. And then it’s a very modest rate of income tax that begins to be applied above that, and there are further ways to reduce your bill from there. So the questions is should all forms of compensation be taxable? And I think it’s a little hard to argue that we ought to have various categories of ways in which people can be compensated, but not have to pay tax on it, because it’s not terribly fair. So I generally prefer moving in the direction of more fairness and more uniformity.
HH: I do, too. It’s just a question of, let me spell it out for my friends in the academic world. If their kids go to the college that they work at, and my kids are all graduated. This is not for me.
HH: And they have made a choice with their life to forgo applying for scholarships elsewhere, and now they’re going to get taxed on the scholarship they got because they’re undergraduates enrolled at their parents’ institution, and they did not go on the hunt for a better deal, they’re screwed. So I would think at least a four year transition is equitable.
PT: That’s a reasonable, that is a very reasonable thing to grandfather people who have already made a decision and are already enrolled somewhere. That’s a very reasonable thing.
HH: Now that gets down to the child tax credit. I know Senator Rubio and others want to increase it. I’m kind of in favor of that, too. That’s why I came up with my revenue idea, because you’ve got to find revenue to do this. How much horse trading is going to go on today?
PT: We’re going to see. I don’t agree with that. I mean, we’ve already dramatically increased the child tax credit. And you know, I understand. I hear their argument, and yes, there is a social value in raising children, and it’s expensive. But there is social value in all kinds of human activities. And I don’t recommend that we have a tax credit for all of them. I have three children. You know, I would benefit from a larger child tax credit. I don’t want it. I would rather have lower rates and stronger economic growth. Let families have more earnings. Let them be able to keep more of what they earn, and then they will decide how many children they want to have, and let that be their decision. But I, we have been very generous with a significant increase, including increasing the portion of the child tax credit that gets paid out as a check to people who don’t pay income tax, right? It’s called the refundable aspect of this, but you know that’s a check from the Treasury to someone who’s not paying income taxes.
HH: True, true.
PT: We do it already. We’re increasing it, and my good friends, Marco Rubio and Mike Lee, want to do even more of that. I’m not with them.
HH: All right, then let me use the little bit of leverage I got out of you, because you indicate sympathy for people who have relied upon previous promises in the short term. The people in high tax states just can’t walk away, Senator. They can’t get out of California like I did, because you can put a radio studio anywhere. They can’t run away. Do they get any relief in your world for the reliance damages that they have incurred by moving somewhere years ago?
PT: Well, they get lower tax rates. They get an increase in the amount of money that is taxed in the lower brackets. We have made those changes. Many of them have children. They will get the higher child tax credit that I mentioned, is in our bill. So they get many forms of relief. You know, it’s hard to have a transition for everything. I mean, you can make an argument that that, you know, that there might be some merit to that. But you know, sometimes you do the best that you can. I think the idea that the lower state and local tax jurisdictions should subsidize the folks who live on the Upper East Side of Manhattan is not defensible. Now yes, you’re right. People bought a home in Manhattan thinking they would be able to have this deduction, but look, this is part of life. The tax code does change. Everybody understands there is some risk to that. We do have other devices in the code that lowers taxes for individuals, by the way. A lot of the folks who live on the Upper East Side of Manhattan also own pass-through companies which will have a deduction. If they have assets like stocks and bonds, which you have seen what the markets have done in response, so they have benefitted already from the expectations.
HH: There are some deductions, though, that people never want to use, the major medical deduction, if their family member, if they have to take out retirement savings. Chuck Todd just brought that up to me. I brought up casualty loss, if someone’s house burns down. Nobody wants to take those deductions. In the conference, will there be much haggling about this? Or are we going to end up with the Senate bill being the Senate bill because the negotiations there are much harder than negotiations in the House, Senator Toomey?
PT: So my guess is that what passes will be mostly, what passes this week on the Senate floor, if we are fortunate enough to pass it, which I think we will, it will pass mostly in the form as you see it now. I don’t think there’ll be major changes. But where major changes may still occur will be in a conference between the House and the Senate.
HH: And can we wrap it up in the short term?
PT: That is…
HH: Specifically before the Alabama Senate election?
PT: Well, that is very, very much the goal, believe me. And you know, the architecture of these bills is the same. The big, most important features are the same. The goals are the same. But there are significant differences in detail. We are going to make an effort like you have never seen to get this done quickly, to resolve the differences, to negotiate what we must. I think the answer is yes that we can get this done before the end of the year. By the way, I don’t know how that race in Alabama turns out, but the incoming Senator probably doesn’t get sworn in until sometime in January. There’s a period of time to you know, formalize the election results and certify them and all of that. So we probably have through the end of the year before that happens, not clear whether or not we need that vote. Yesterday, we had every Republican voted in favor of the procedural motion to begin this process, which is a very good sign. It does not guarantee that we have everyone on final passage, but a very good sign.
HH: Urgency is important. One last question non-related. I’ve got friends like Rick Grenell and others who are nominated, hanging around. Germany is in a crisis, and we’re not confirming our ambassador. I approve of the Leader’s approach to always put a circuit judge up right away. But what about Rick Grenell? What about our other ambassadors, Pat Toomey? Is the Senate going to stay there until we clear the decks of appointees?
PT: We’re trying to mow these folks down, mow our way through this. We have, as you know, many, many hundreds of vacancies. The President has sent quite a number of nominees, and the Democrats use their ability to drag out the clock and force us to chew up. They can force us to chew up a whole week confirming two people.
HH: I hope you keep them there all Christmas until you get their consent to move, because we cannot have Germany in a crisis without an ambassador. I thank you, Senator Toomey. Good luck today, and give some thought to transition on business interest. I think that’s the one Achilles’ heel in this bill. We will see. Thank you, Senator.
PT: Thank you.
End of interview.