Tag Archives: Tax Cuts and Jobs Act

Government Malpractice Breeds Health Care Havoc

02 Sunday Nov 2025

Posted by in Health Care, Subsidies

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The impasse at the heart of the seemingly unending government shutdown revolves around health care subsidies.

First, there is disagreement about whether to extend the expanded Obamacare subsidies promulgated during the COVID pandemic. That expansion allowed individuals earning more than four times the federal poverty level (the original limit under the Affordable Care Act (ACA)) to receive tax credits for the purchase of health coverage on the exchange “marketplace”. Republicans find this highly objectionable. Many of them also object that the subsidies help pay for “essential health benefits” under the ACA that include so-called gender-affirming care.

Democrats and the insurance lobby would very much like to reinstate or retain the tax credits. The ten-year cost of extending them is more than $400 billion. Incredibly, it turns out that roughly 40% of individuals taking those tax credits did not file a medical claim in 2024. It was pure cash for insurers at the expense of taxpayers.

Second, the One Big Beautiful Bill Act (OBBB), among other things, restricts access to Medicaid by imposing work or job search requirements for overall eligibility. It also formally denies coverage to illegal aliens. This, of course, is opposed by Democrats, who insist that those requirements be rescinded.

Health Care Central Planning

These issues are part of a much larger debate over government dominance of the health care system. Almost every institutional arrangement in health care coverage and delivery is dictated by rules and practices imposed by government, and it would seem they are intentionally designed to escalate costs and compromise the delivery of care. The chart at the top of this post illustrates, in a high-level way, the futility of these efforts.

Medicare and Medicaid dominate government health care spending, as this report from the Peter G. Peterson Foundation shows. However, that strict budgetary view greatly understates the control government now exerts on the health care sector.

Medical Free Market Myth

Michael Cannon recently emphasized the irony of the persistent myth of a U.S. free market in health care:

“… government controls a larger share of health spending in the United States than in 27 out of 38 OECD-member nations, including the United Kingdom (83%) and Canada (73%), each of which has an explicitly socialized health-care system. When it comes to government control of health spending, the United States is closer to communist Cuba (89%) than the average OECD nation (75%).

“Nor does the United States have market prices for health care. Direct government price-setting, price floors, and price ceilings determine prices for more than half of U.S. health spending, including virtually all health-insurance premiums.“

ObamaSnare

Government “control” takes a variety of forms, including regulatory intrusions under the aegis of Obamacare. The Affordable Care Act (ACA), as its name implies, was sold as a way to keep health care and health insurance costs affordable. And it was billed as a way to extend individual health care coverage to the previously uninsured population. It failed badly on the first count and met with only limited success on the second.

One leg upon which the ACA stood was kicked away in 2017: the penalty for violating the Act’s individual mandate for health coverage was eliminated by the Tax Cuts and Jobs Act (TCJA). The penalty was arguably unconstitutional as a tax on non-commerce, or the non-purchase of insurance on the exchange. However, the Supreme Court had ruled narrowly in favor of the penalty in 2012, claiming that it was within the scope of Congress’ taxing power. Following passage of the TCJA, however, the toothlessness of the mandate caused the risk pool to deteriorate. This was aggravated by the ACA’s insistence on comprehensive coverage, which applies not just to policies sold on the Obamacare exchange, but to almost all private health insurance sold in the U.S.

A well-functioning marketplace would instead have promoted the availability of more moderately-priced coverage options. Ultimately, subsidies were all that prevented a broad exit from the marketplace. But they did nothing to slow the escalation in coverage costs and deteriorating quality of coverage and care:

“The result has been a race to the bottom in terms of the quality of insurance coverage for the sick. …individual-market provider networks [have] narrow[ed] significantly… They have eroded coverage through ‘poor coverage for the medications demanded by [the sick]’ … higher deductibles and copayments; mandatory drug substitutions and coverage exclusions for certain drugs; more frequent and tighter preauthorization requirements; highly variable coinsurance requirements; inaccurate provider directories; and exclusions of top specialists, high-quality hospitals, and leading cancer centers from their networks. ….

“The healthy suffer, too. … ‘currently healthy consumers cannot be adequately insured against the negative shock of transitioning to one of the poorly covered chronic disease states.’ A coalition of dozens of patient groups has complained that this dynamic ‘completely undermines the goal of the [Affordable Care Act].’”

Price Distortions

Cannon emphasizes another persistent myth: that government sets prices at levels that would prevail in a free market. Here is one baffling aspect of the many prices set by government for individual services under the Medicare and Medicaid programs.

“One of the more striking indications of widespread mispricing is that Medicare routinely sets different prices for identical items depending solely on who owns the facility.“

For example, ambulatory surgical centers are compensated much less for the same services as hospitals. The same is true of compensation for skilled nursing facilities vs. long-term care hospitals, and there appears to be no economic rationale for the differences. Furthermore, it’s an open secret that Medicare sets higher prices for lower-cost providers (and treatment of lower-cost patients). As Cannon notes, this explains the rapid growth of specialty hospitals owned by physicians.

Cannon provides much more detail on Medicare and Medicaid mis-pricing, including the blunting of patients’ price-sensitivity and the shifting of costs to private payers.

Divorcing Risk and Insurance

The price of insurance and insurer reimbursements are also prescribed by government. Cannon’s discussion includes the ACA’s abolition of risk-based insurance pricing, which is an astonishing case of economic malpractice. Depending on one’s health status, “community pricing” acts as either a price ceiling or a price floor. This creates perverse incentives for both the healthy and the unhealthy. Premiums fall short of the cost of caring for the sick.

The federal government attempts to compensate by subsidizing insurers based on the health status of individuals in their risk pool, but that falls short in terms of the quality of coverage for unhealthy individuals. Thus, both the healthy and taxpayers must shoulder an ever-increasing cost burden of insuring the unhealthy.

Circular Scam

As for Medicaid, certain arrangements drive up the cost of the program to taxpayers. For example, last March I wrote about this apparent scam allowing state governments to inflate their Medicaid costs, qualifying for hundreds of billions of federal matching funds:

“Here’s the gist of it: increases in state Medicaid reimbursements qualify for a federal match at a rate known as the Federal Medical Assistance Percentage (FMAPs). First, increases in Medicaid reimbursements must be funded at the state level. To do this, states tax Medicaid providers, but then the revenue is kicked back to providers in higher reimbursements. The deluge of matching federal dollars follows, and states are free to use those dollars in their general budgets.“

Unfortunately, FMAP reform is not directly addressed in the “clean” Continuing Resolution before Congress, though reduced funding levels might lead to reductions in FMAP percentages.

And Another Circular Scam

John Cochrane is largely in agreement with Cannon’s piece, but he focuses first on cross subsidies flowing to “eligible” hospitals dispensing prescription drugs to low-income patients. These hospitals get the drugs from pharmaceutical companies at a steep discount mandated by the so-called 340B program, but the hospitals then bill insurers (or Medicare and Medicaid), a significant markup over their acquisition cost. The Medicaid expansion under the ACA led to an increase in the number of hospitals eligible for the drug discounts.

But that’s not the end of the story. This arrangement creates an obvious incentive for the drug companies to raise their pre-discounted prices. Another unintended outcome cited by Cochrane is that eligible hospitals do not use the proceeds of their mark-ups to offer better care (or care at a lower cost) to low-income consumers. Instead, the funds tend to be directed to investment accounts. The program also creates another incentive for hospital consolidation.

Someone Else’s Money

Unfortunately, the dysfunction in health care goes deeper than Obamacare, Medicare, and Medicaid. The third-party payment system itself has been at the root of cost escalation. It largely relieves consumers of their sovereignty over purchasing decisions, rendering them much less sensitive to variations in price. This can be seen clearly in one of Cannon’s charts, reproduced below:

In addition, the disparate income tax treatment of employer-provided health coverage exacerbates cost escalation. Obviously, employees receiving this deduction can afford higher-quality and more comprehensive coverage. This exemption has acted to drive up the cost of all health care and insurance coverage over the almost nine decades of its existence..

What To Do?

The claim that the U.S. health care system operates within a free market ecosystem is obviously absurd. Together, the Cochrane and Cannon pieces represent something of a gripe session, but it is well deserved. Both authors devote sections to reforms, however. They don’t break new ground in the debate, but the overarching theme of the suggested reforms is to give consumers authority over their health care spending. That means keeping government out of health care in all the myriad ways it now intrudes. It also means that insurers should not have authority to dictate how health care is priced. The key is to allow competition to flourish among health care providers and insurers.

Ending FMAPs and the tax exemption for employer-provided coverage is one thing, but it’s another to contemplate dismantling Medicare, Medicaid, and the many rules and pricing arrangements enforced under Obamacare.

Cochrane takes an accommodating approach to the health care needs of seniors and those in need of a safety net. He calls for Medicare and Medicaid to be replaced with the issuance of vouchers (rather than cash) toward the purchase of affordable private health care plans. Then, health coverage can be provided in a lightly regulated, competitive market without all the distortions and sneaky opportunities for graft embedded in our current entitlements.

Conflicting Rights and Reality

And what of the argument that health care is a human right? That notion is, of course, very popular on the left. The idea subtly shifts a meaningful portion of the responsibility for one’s health onto others, including providers and taxpayers. But smokers, heavy drinkers, reckless drivers, hard drug users, and the avoidably obese should not be led to expect a free ride for risky behaviors.

Of course, it’s not a basic human right to demand, by force of government, involuntary service of health care workers, or that taxpayers give alms, but Cochrane answers with this:

“Yes! It is a basic human right that I should be free to offer my money to a willing physician or hospital, in a brutally competitive and innovative market.”

“Willing” is a key word, and to that we should add “able”, but those are qualifying conditions that markets help facilitate.

Jane Menton has discussed the notion of a human right to health care, wisely explaining that conditions are not always compatible with fulfilling such a right. Her primary concern is the future supply of medical personnel, and an acute shortage of nurses.

“In our current political environment, young people seem to think that claiming something as an entitlement means someone will inevitably show up to do the work.“

To codify a right to health care would be an ill-fared call for a nationalized solution. It would be a prescription for still higher costs and lower quality care. As in any other sector, centralized decision-making leads to misallocated resources, higher costs, and inferior outcomes for patients. Our current mess gives a strong hint of the kind of over-regulated dysfunction that nationalization would bring.

Insurance On Insurability

Pre-existing conditions motivate much of the discussion surrounding a presumed right to health care. Individual portability of group health coverage goes partway in addressing coverage for pre-existing conditions. Portability is mandated by the Health Insurance Portability and Accountability Act of 1996, but like community rating, it shifts costs to others. That is, the cost of covering pre-existing conditions becomes the responsibility of employers in general, group insurers, and ultimately healthy (and younger) workers.

Given time, the debate over a right to health care can be rendered moot via market processes. Cochrane has long supported the concept of health status insurance. Such policies would allow healthy consumers to guarantee their insurability against the risk of future health contingencies. Guaranteed renewability is a limited form of this type of coverage. General availability of health status insurance contracts, offered regardless of current coverage, could allow for a range of future insurability options at affordable prices. Then, pre-existing conditions would cease to be such a huge driver of cross subsidies.

Pros and Cons of the “Big Beautiful Bill”

16 Monday Jun 2025

Posted by in Federal Budget, Fiscal policy

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The GOP’s “Big Beautiful Bill” (BBB) has generated its share of controversy, not least between President Trump and his erstwhile ally Elon Musk. It is a budget reconciliation bill that was passed by a single vote in the House of Representatives. It’s now up to the Senate, which is sure to alter some of the bill’s provisions. That will require another vote in the House before it can head to Trump’s desk for a signature.

Slim But “Reconciled” Majority

As a reconciliation bill, the BBB is not subject to filibuster in the Senate, and only a simple majority is required for approval, not a 60% supermajority. Obviously, that’s why the GOP used the reconciliation process.

I hate big bills, primarily because they tend to provide cover for all sorts of legislative mischief and pork. However, the reconciliation process imposes limits on what kinds of budgetary changes can be included in a bill. A reconciliation bill can alter only mandatory spending programs like Medicaid and other entitlements, but not discretionary or non-mandatory spending. Social Security is an entitlement, but it would be off limits in a typical reconciliation bill (owing to an arcane rule). Reconciliation bills can also address changes in revenue and the debt limit.

The BBB includes provisions to reduce Medicaid outlays such as work requirements, denial of benefits to illegal aliens, and controls on fraud. These are projected to cut spending by nearly $700 billion. Of course, this is a controversial area, but efforts to impose better controls on entitlements are laudable.

Elon Musk criticized the bill’s failure to aggressively rein-in deficit spending, prompting what was probably his first public feud with Trump. At the time, it wasn’t clear whether Musk really understood the limits of reconciliation. If he had, he might at least have been mollified by the effort to tackle Medicaid waste and fraud. Entitlement programs like Medicaid are, after all, at the very root of our fiscal imbalances.

Extending Trump’s Tax Cuts

The Congressional Budget Office (CBO) says that BBB will reduce tax revenue by $3.8 trillion over the next ten years. The Trump tariffs are not addressed in the BBB, but those won’t come close to offsetting this projected revenue loss.

The CBO’s score compares spending and tax revenue to “current law”. Thus, the baseline assumes that the 2017 tax cuts under the Tax Cuts and Jobs Act (TCJA) expire in 2026. With spending cuts under the BBB, primary federal deficits (non-interest) are projected to rise $2.4 billion over that time. With interest costs on the higher federal debt, the increase in deficits rises to about $3 trillion. I’ll briefly address some of the major provisions below, including their budget impacts.

Spending Cuts

In addition to Medicaid, other significant cuts in spending in the BBB include reductions in benefits under the Supplemental Nutritional Assistance Program (food stamps, -$267b). This includes tighter work requirements, eligibility rules, and higher matching requirements for states. Also included in BBB are more stringent student loan repayment rules and changes in other education funding programs (-$350b).

Other spending categories would increase. The bill would authorize an additional $144 billion for Armed Services and $79 billion for Homeland Security, including $50 billion for the border wall. Senator Rand Paul has called the border security provisions excessive, though many of those favoring greater fiscal discipline also believe defense is underfunded, so they probably don’t oppose these particular items.

Voting Tax Incentives

In terms of revenue, the BBB would extend the provisions of the TCJA. The deduction for state and local taxes (SALT) would be extended and increased to $40,000 at incomes less than $500,000. This would have a combined revenue impact of -$787 billion. No wonder deficit hawks are upset! A larger SALT deduction creates an even greater subsidy for states imposing high tax burdens on their residents. There’s an expectation, however, that this provision will be dialed back to some extent in the Senate version of the BBB.

There are also provisions to eliminate taxes on overtime (-$124b) and tip income (-$40b), and to increase the standard deduction for seniors (-$66b). As I’ve written before, these are all terribly distortionary policies. They would treat different kinds of income differently, create incentives to reclassify income, and impose a highly complex administrative burden on the IRS. The senior deduction creates an incremental revenue hole as a function of Social Security benefit payments. This is the wrong way to address the needs of a system that is insolvent. These policies were selected primarily with vote buying in mind.

The timing of some of these provisions differs. Some would expire after 2028, while others would be permanent. Apparently, the Senate version of the bill is likely to include immediate and permanent expensing of business investment, which would encourage economic growth.

Another notable change would eliminate subsidies and tax credits for EVs (+$191b). Some claim this was at the heart of Musk’s diatribes against the BBB. However, Musk has supported elimination of both EV subsidies and mandates for many years. He stated as much to legislators on Capital Hill last December, so this theory regarding Musk’s opposition to BBB doesn’t wash.

Defining a Baseline

Advocates of extending the TCJA say the CBO’s baseline case is inappropriate, and that the proper baseline should incorporate the continued tax provisions of the TCJA. Again, the extension increases the ten-year deficit by $3.8 trillion, but that total includes the revenue effects of other provisions. Perhaps $3 trillion might be a more accurate upward adjustment to baseline deficits. In that case, the BBB would actually reduce ten-year deficits by $0.2 trillion.

Another criticism is that the CBO does not attempt to estimate dynamic changes in revenue induced by policy. Those in support of extending the TCJA believe that this static treatment unfairly discounts the revenue potential of pro-growth policies.

I don’t have a problem with the alternative baseline, but the fact is that deficits will still be problematic. Over the 2025-2034 time frame, a baseline incorporating an extension of TCJA would yield deficits in excess of $20 trillion. That includes mounting interest costs, which might overwhelm serious efforts at fiscal discipline in the unlucky event of an updraft in interest rates. Of course, these large, ongoing deficits raise the likelihood of inflationary pressure. The recent downgrade in the credit rating assigned to U.S. Treasuries by Moody’s is an acknowledgement that bondholder wealth could well be undermined by future attempts to “inflate away” the real value of the debt.

Debt Ceiling

In addition to its direct budgetary effects, the BBB calls for a $5 trillion increase of the federal debt limit. I admit to mixed feelings about this large increase in borrowing authority. Frequent debt limit negotiations tend to create lots of political theater and chew up scarce legislative time. Moreover, it’s easy to conclude that they usually accomplish little in terms of restraining deficit spending. Dominic Pino argues otherwise, citing historical examples in which the debt limit “was paired with” reforms and spending restraint. In other words, despite its apparent impotence, Pino asserts that deficits would have been much higher without it. I’m still skeptical, however, that frequent showdowns over the debt ceiling have much value given entitlements that are seemingly beyond legislative control. In the end, elected representatives must respect the judgement of credit markets and face consequences at the ballot box.

Final Thoughts on BBB

Superficially, the Big Beautiful Bill looks like an abomination to deficit hawks. The GOP decided to structure it as a reconciliation bill to strengthen its odds of passage. That decision sharply limited its potential for spending restraint. Other legislation will be required to make the kinds of rescissions necessary to eliminate wasteful spending identified by DOGE.

As for the bill itself, the effort to extend the 2017 Trump tax cuts was widely expected. That, in and of itself, is neutral with respect to a more reasonable baseline assumption. Elimination of EV tax subsidies is a big plus, as are the permanent incentives for business investment. Unfortunately, Trump and his congressional supporters also propose to create the additional fiscal burdens of no taxes on tips and overtime pay, as well as an increased standard deduction for seniors. The ill-advised increase in the SALT deduction was a compromise to ensure the support of certain blue-state republicans, but with any luck it will be curtailed by the Senate.

On the spending side, the big item is Medicaid. Reforms are long past due for a system so riddled with waste. In addition, there are new rules in the BBB that would reduce SNAP outlays and increase student loan repayments. Outlays for defense, Homeland Security, and border security would increase, but these were known to be Trump priorities. Too bad they’ve been paired with several wasteful tax policies.

But even with those flaws, the BBB would reduce deficits marginally relative to a baseline that incorporates extension of the TCJA. Yes, excessive ongoing deficits still have to be dealt with, but spending reductions on the discretionary side of the budget were out of the question this time due to reconciliation rules. They will have to come later, but that sort of legislation will face tough political headwinds, as will Social Security and Medicare reform. arever introduced.

Progressives: Paul Doesn’t Want Peter’s Money? What a Hypocrite!

08 Thursday Feb 2018

Posted by in Big Government, Federal Budget

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Red & Blue States

I’ve heard the following assertion over and over: blue states are “doners” of federal tax revenue and red states are donees. In other words, states dominated by Democrats contribute more than they take from the federal budget, while Republican states take more than they contribute. But the facts are somewhat ambiguous. And to the extent that it is true, policies that would improve the net position of blue states would be very unpopular with the progressive Left. Furthermore, progressives expose their confusion regarding the ethics of sound governance by calling the red state opposition to an expansive  federal government “hypocritical”.

The relative positions of red and blue states in terms of federal dollars is the topic of an excellent article by Megan McArdle, whom I haven’t featured on this blog for a while. Originally, the claim that blue states “gave” to red states via the federal budget was based on data from 2005, but a lot of fiscal water has passed under (and over) the bridge since then. Also, the original presentation used state totals of federal outlays minus revenues without accounting for differences in the size of state populations. Many blue states are relatively populous, so some the state rankings may shift when expressed on a per capita basis. McArdle reproduces a chart from a report by the New York State Comptroller using 2013 data:

“… deep-blue New Jersey is the biggest donor state. But red-blooded Wyoming is the next biggest, and North Dakota makes the list too. There is certainly a preponderance of blue states at that end of the spectrum, but it’s not a clear ‘Donor states are blue’ story. And if we match the 2013 data to the closest election (2012) we find that New Mexico, the biggest net recipient, went for Obama in 2012, as did Virginia, Maryland, Maine and Hawaii. What’s driving the net subsidies isn’t anything as simple as political identification.“

Wyoming and North Dakota contributed lots of federal revenue from taxes arising from the fracking boom.

McArdle goes on to consider policies that would reduce the flow of budget dollars to donee states:

“Most of the transfers do not come from ‘red state welfare’ like agricultural subsidies. They derive from Social Security, Medicare, Medicaid, unemployment insurance, food stamps, welfare, the maintenance of the national highway system, the purchase of goods and services for the federal government, and the operation of federal facilities and lands.

If blue state liberals consider this out of whack, what do they want to change?

  • Do they want to move toward a flatter, less progressive federal tax code?
  • Do they want to cut Social Security, Medicare and Medicaid?
  • Do they want to return unemployment insurance and similar entitlement programs entirely to the states?
  • Do they want to hand over the national parks to the states, or privatize them?
  • Would they like to downsize the federal workforce?
  • Should we redistribute military bases from red states to blue? (Those relocations might meaningfully alter the state electorate, making it easier for Republicans to get elected. …)“

Of course not! But like McArdle, I’m of the opinion that many of the policy changes on that list, or at least reforms of existing policies, are in order. Perhaps the allure of steeply progressive federal taxes has faded for blue state Democrats with the new reality of the Tax Cuts and Jobs Act. The law restricts deductions for mortgage interest, a hit on those borrowing against high-end homes. It also limits deductions for state and local taxes, eliminating a federal tax subsidy to high-earners living in states with high taxes. State and local politicians who support high taxes will no longer receive a “discount”, courtesy of taxpayers in  other states, on the natural political liability of high taxes.

The categorization of blue states and red states as federal donors and donees is not quite as unambiguous as most Leftists imagine. Be that as it may, the flows of revenue and spending between the federal government and states is a consequence of demographics, regional business environments, and many other factors, but most of all the set of policies promulgated over the years in Washington DC. An objective assessment of the federal government’s largess indicates that most of those policies are in need of drastic reform, yet statists resist, demand more, and act as if “red states rubes” should be grateful for the dysfunction and the federal cash it brings. To progressives, it is hypocritical to oppose an expansive federal government on this basis. The absurdity of that claim is self-evident, but such is the confused state of progressive discourse. Perhaps a better adjective for red state opposition to federal profligacy would be “principled”.

 

Tax Cuts Yes, Simplification a Mixed Bag

18 Monday Dec 2017

Posted by in Taxes, Trump Administration

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President Trump signed the Tax Cuts and Jobs Act (TCJA) this morning, the GOP tax bill with an acronym that simply won’t roll off my tongue. A useful summary of the Act produced by the House -Senate conference, and the full text of the Act, appear at this link. The TCJA hews more toward the earlier Senate bill than the House version. I’ve written about both (the House bill here and both here). Here is a good summary of the Act from Peter Suderman at Reason.com.

In my earlier assessments, I relied upon the principle of tax reform and real simplification as a justification for a tax cut without revenue neutrality. There are a few reforms and partial reforms, and the bill may simplify taxes for a number of individual taxpayers. However, on the whole I’m disappointed with the progress made by the GOP in those areas.

Notwithstanding my disappointment with the overall reform effort, the TCJA cuts taxes for most Americans and is likely to have salutary effects on economic growth and the job market. In fact, one of the most remarkable things about  the Act is the claim made by its adversaries on the Democrat side of the aisle. They apparently believe that the benefits of the TCJA flow primarily or even exclusively to the rich. This is a huge mistake for them. High-income taxpayers will receive greater benefits in absolute dollars, but not proportionally. This is shown by the table above, prepared by Chris Edwards from data produced by the Joint Committee on Taxation (JCT). In fact, the TCJA will extend tax reductions to a larger share of the middle class than either of its predecessor bills would have done. You cannot meaningfully reduce the taxes generated by a steeply progressive tax system without reducing the absolute dollars paid by high-income taxpayers. And you can’t lay the groundwork for sustainable economic growth without improving the investment incentives faced by high-income taxpayers and producers.

Here are some additional additional thoughts on the bill:

Yeah, I like me some tax cuts: The Act reduces taxes for many individuals and families by doubling the standard deduction and reducing tax rates. More importantly, perhaps, it will also reduce taxes for C-corporations, providing some relief from double taxation of corporate income, as will the switch to a territorial tax system on U.S. corporations doing business abroad. The latter is a real reform, while I consider the former a partial reform. Investment incentives are improved via the corporate rate cut and elimination of the corporate Alternative Minimum Tax (AMT) — a real reform, as well as the ability to write-off spending on new equipment immediately. As I argued last month, lower corporate taxes are likely to benefit both workers and consumers. The actions of few companies (AT&T, Comcast, Wells Fargo, and Fifth-Third) seem to demonstrate that this is the case: they have announced bonuses and increases in their base wage rates in the immediate wake of the TCJA’s massage.

Pass-through tax cuts are iffy: One of the most difficult parts of the TCJA to evaluate involves the implications for pass-through business entities like sole proprietorships, partnerships and S-corporations. Some might not receive significant cuts. The Act includes a maximum 25% rate on business income, but that is dependent on the proportion of the owner’s income deemed to be business income under the new rules. It also allows a flat deduction of 20% against business income. These provisions will be of benefit to very successful and very capital-intensive pass-throughs. Owners of smaller or less profitable firms will get the benefit of lower individual tax rates and the higher standard deduction, but might not have income high enough to benefit from the 25% rate cap.

Simpler for some, but it is not simplification: The doubled standard deduction will mean fewer taxpayers claiming itemized deductions. That sounds like simplification, but many will find it reassuring to calculate their taxes both ways, so a compliance burden remains. The Act retains or partially retains a number of deductions and credits slated for elimination in earlier versions, failing a simple principle held by reformers: eliminate deductions in exchange for lower rates. Along the same lines, the individual AMT is retained, but the exemption amount is increased, so fewer taxpayers will pay the AMT. Again, simpler for some, but not real simplification.

Elimination of the corporate AMT is simplification, as are immediate expensing of equipment purchases and territorial tax treatment. However, most of the complexities of corporate taxes remain, as do certain tax breaks targeted at specific industries. What a shame. And unfortunately, taxes for pass-through entities are anything but simplified under the Act. Complex new rules would govern the division of income into business income and the owners’ wage income.

Reducing deductions and bad incentives: The mortgage interest deduction encourages over-investment in housing and subsidizes the wealthiest homebuyers. The TCJA leaves it intact for existing mortgages, but allows the deduction to be claimed on new mortgage loans of up to $750,000. So the bad incentive largely remains, though the very worst of it will be eliminated. There have been complaints that this change could reduce home prices in states with the highest real estate prices. Good — they have been inflated by the subsidy at the expense of other taxpayers.

The tax write-off for state and local taxes (SALT) will be limited to $10,000 a year under the TCJA, though it adds some flexibility by allowing that sum to be met by any combination of state or local income, sales or property taxes. This change will reduce the subsidies from federal taxpayers residents of high-tax states, and should make leaders in those states more circumspect about the size of government.

The TCJA preserves and even expands a number of individual deductions and credits, subsidizing families with children, medical expenses, student loans, graduate students, educational saving, retirement saving, and the working poor. The interests benefiting from these breaks will be relieved, but this is not simplification.

Yet another case of “simpler for some” is the estate tax: it remains, but the exemption amounts are doubled. The estate tax does not produce much revenue, but it is fundamentally unjust: it ensnares the families of deceased property owners, farmers and small businesses; planning for it is costly; and it often forces survivors to sell assets quickly, sustaining losses, in order to meet a tax liability. The TCJA will significantly reduce this burden, but the tax framework will remain in place and will be an ongoing temptation to ravenous sponsors of future tax legislation.

Individual cuts are temporary: The corporate tax changes in the TCJA are permanent. They won’t have to be revisited (though they might be), and permanence is a desirable feature for sustaining the impact of positive incentives. The individual cuts and reforms, however, all expire within eight to ten years. The sun-setting of these provisions is, as some have said, a gimmick to reduce the revenue impact of the Act, but sunsetting means another politically fractious battle down the road. It is also a device to ensure compliance with the Byrd Act, which limits the deficit effects of legislation under Senate reconciliation rules. Eight years is a fairly long “temporary” tax cut, as those things go; for now, the impermanence of the cuts might not weaken the influence on spending. However, that influence is likely to wane as the cuts approach expiration.

Deficit Effects: The TCJA’s impact on the deficit and federal borrowing is likely to be somewhere north of $500 billion, possibly as much as $1.4 trillion. Deficits must be funded by government debt, which competes with private debt for the available pool of savings and must be serviced, repaid via future taxes or inflated away. In the latter sense, government borrowing is not really different from current taxes, a proposition known as Ricardian equivalence.

Nonetheless, the incentives, complexities and compliance costs of our current tax code are damaging, and the TCJA at least accomplishes some measure of reform. Moreover, the incremental debt is small relative to the impact of prior estimates of government borrowing over the next decade, with or without extension of the individual tax cuts. The most fundamental problem that remains is excessive government spending and its competing demands for, and absorption of, resources, with no market guidance as to the value of those uses.