The GOP Is Ready for Tax Reform, but Tax Reform Is Hard

The GOP Is Ready for Tax Reform, but Tax Reform Is Hard

The GOP Is Ready for Tax Reform, but Tax Reform Is Hard

Trump’s tax plan will face roadblocks from special interests, internal congressional differences, and just plain old math.


By now it has become clear Republicans want to use their newfound power to slather tax breaks on corporations and the wealthy. Donald Trump is flirting with hiring a doctrinaire supply-sider as his top economic adviser, and he has made tax cuts his primary pitch to prevent companies from shipping jobs overseas. Chief of Staff Reince Priebus has indicated that tax reform will consume the congressional agenda for the first year of the Trump administration, and nothing from Mitch McConnell or Paul Ryan so far refutes that.

You could be seduced into thinking that this will give Trump a quick and easy victory. After all, every Republican believes in cutting taxes as a prerequisite for membership. And with budget reconciliation, they won’t need a single Democratic vote—that’s how George W. Bush got his tax cuts passed in 2001 and 2003, in fact. But tax packages aren’t easy to assemble, especially given all the moving parts—politicians clinging to pet ideas, warring factions in the House and Senate, and special interests seeking to maintain handouts. Reconciling all of that will take serious legislative skills—something in reduced supply at Trump Tower.

Trump has spent the past several months signaling he will defer to Congress on the details of any plan. His initial blueprint got modified into something that resembles the “Better Way” House GOP plan engineered by Paul Ryan, with its three individual brackets and a top marginal rate of 33 percent. On corporate taxes, Trump has asked for a 15 percent rate, while Ryan goes with 20; but the structure is virtually identical. Trump also moved to the House’s side on a controversial S-corporation tax rate (allowing businesses and partnerships to pass through earned income, with benefits for small-business owners and hedge-fund managers alike), initially set at 15 percent but since dropped.

Both Ryan and Trump have established various red lines that could prove difficult. For example, breaking the laws of mathematics, the House plan claims that “no income group will see an increase in its Federal tax burden,” that no new taxes will come into the system, and that it will be “revenue neutral.” Trump’s Treasury secretary nominee, Steven Mnuchin, similarly vowed that “any reductions we have in upper-income taxes will be offset by less deductions so that there will be no absolute tax cut for the upper class.” These promises contradict all independent analyses of the plans, which confirm major reductions for the wealthy.

Maybe you can approach revenue neutrality by perverting the budget-scoring process, promising massive advances in economic growth that will bring in enough new revenue to offset cuts. But the only way to enact something like these plans and avoid tearing a massive hole in the deficit (and Trump’s budget director, Mick Mulvaney, is a balanced-budget guy, so he’ll likely demand that) is through Mnuchin’s concept: rolling back deductions. And every politician promising to eliminate deductions quickly finds out that someone, somewhere benefits from them, and wants to keep it that way.

Barack Obama got this message. In 2015, he proposed taxing college-savings accounts like 529 and Coverdell plans when funds were withdrawn. The idea was that 529s were used mostly by people making $200,000 a year and above, and funneling tax revenue from them could fund a tuition tax credit that more precisely targeted the middle class. Virtually everyone rebelled: users of the savings accounts, the Wall Street firms that manage them, state governments that administer them, Republicans, and even Democrats. Pundits who use the 529 program for their own kids savaged the idea. Obama gave up and withdrew the proposal within a week.

There are about three decades’ worth of these type of stories, dating back to the last tax-reform package in 1986 (which also lowered rates and eliminate deductions, only to watch as most of the deductions gradually came back). Next year’s version of the 529 debacle is called “border adjustments,” and it’s already shaping up to rip Republicans to shreds.

The idea calls for placing a 20 percent tax on imported goods and materials, while removing a current tax on exports. This would get added to a reduced 20 percent corporate tax rate on earnings (which would only be on US sales, rather than including income earned by US companies abroad), and would raise $1 trillion over 10 years to make up revenue lost from the reduction. Theoretically, border adjustments discourage imports and promote exports, increasing domestic jobs. In reality, it’s unlikely to surmount exchange rates, the real drivers in global trade. Economists anticipate that the dollar would almost rise in response to border adjustments, for example, negating the incentive for domestic production.

Personally, I don’t have many thoughts about this plan, other than that we shouldn’t be going for revenue neutrality when the effective rate on corporate taxes is below the international average. But what I can say for sure is that companies that rely on imports don’t want to suddenly pay a bunch more in tax.

That includes Koch Industries, which has called border adjustments “devastating” and claimed they would lead to higher consumer prices. The National Retail Federation, which includes Walmart (a huge loser under this deal), strongly opposes border adjustments as well. Virtually no clothing is made in America anymore; retailers are planting media stories about massive tax spikes. Also heavy oil users might be concerned about a potential 30-cent-a-gallon increase in prices.

Even with no opposition, managing border adjustments amid expected inflation or appreciation of the dollar or other factors could prove maddening. For instance, financial flows may or may not count as an import or export, and the accounting of when a “sale” happens that counts under the tax could be subject to creative CPAs. But here you have a significant chunk of the GOP business lobby threatening all-out war over this provision. And without it, the revenue numbers no longer work. There’s also the small matter that the World Trade Organization could rule border adjustments in violation of international trade laws, because it’s assessed as a direct tax.

Nonetheless, Kevin Brady, chair of the House Ways and Means Committee, has vowed to move forward with the package. The Senate hasn’t said a word about it. In fact, GOP Senate leaders have downplayed how quickly they could get a major tax bill through. And as lawmakers that are traditionally closer to business, they would lend a sympathetic ear to the importer freak-out over border adjustments.

That’s just one of many hurdles confronting any tax package. The House and Senate differ on whether to join individual and corporate tax reforms together in one bill. They differ on whether to overhaul the entire code or to stick to areas of agreement. And probably every Republican in Washington has at least one contributor with a gift tucked into the tax code they would rather not see vanish. Real-estate and private-equity firms don’t want limits on their deductions of interest payments. Wealthy folks in high-tax states want to keep their state and local tax deductions. It becomes a jigsaw puzzle that you can’t actually put together.

That’s why the much easier road for Republicans on taxes is to simply repeal Obamacare. All the taxes that pay for the law fall either on people earning over $200,000 a year or health-care corporations. Repealing them for 2017 would give the top 1 percent a $33,000 tax cut on average, according to the Tax Policy Center. The money wouldn’t have to be offset, because removing health insurance from 20 million “pays” for it. And the media and the public will likely be so distracted by what will replace Obamacare, that they’ll never recognize the pretext to let the rich keep more of their money.

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