The Republican Party’s efforts to pass a huge tax cut are currently tied up in knots over whether the plan will include a border adjustment tax that would make imports more expensive relative to exports. Paul Ryan is attached to the idea. Business is deeply split. Nobody knows what Donald Trump thinks, or even if “thinks” is the applicable term to describe his position on the matter. Several weeks ago, Trump came out against the tax. (“Anytime I hear border adjustment, I don’t love it.”) Yesterday, he made favorable noises about it. (“It could lead to a lot more jobs in the United States.”) This morning, his chief economic adviser, Gary Cohn, told reporters Trump does not favor the tax, and then this afternoon the White House disavowed Cohn’s comments. (“There is no daylight between Gary Cohn and the President. His comment was taken out of context as it was part of a broader conversation about the proposals that are connected to border adjustability. At no point during this conversation did Gary make a statement of support or opposition to the House border adjustability plan.”) The border adjustment tax is an incredibly complex idea that even well-informed economists have trouble wrapping their heads around, so the idea that Donald Trump has a “position” on it is a weird fiction that his fellow partisans are being forced to humor.
In the meantime, even if the spinning wheel of Trump’s position on the border adjustment tax lands on “yes,” the odds that such a plan can be passed into law are low. Republicans require near-unanimity to pass their tax plan, since they have only 52 Republican senators. A plan that deeply threatens certain businesses — like Walmart, among others — is either not going to pass or it will pass only if it’s filled with loopholes. If it’s filled with loopholes, it’s useless, since the reason Republicans like Ryan want it is to raise revenue that can be used to offset the lost revenue from cutting taxes for the rich. (I explain the dynamic here.)
Ryan’s plan is to design a tax cut that can be scored as revenue-neutral after ten years, which would allow Republicans to make it permanent, rather than having it expire after a decade, like the Bush tax cuts did. But Ryan’s strategy is collapsing. It requires repealing Obamacare first — to lower the baseline of tax revenue, and create a lower target to hit — and then to include a border adjustment fee. Obamacare repeal is on life support, and the border adjustment fee is hardly in better shape.
Stephen Moore and James Wallner from the Heritage Foundation propose an audacious strategy to get around this problem. They advise Republicans give up on the border tax and also give up on a “revenue neutral” plan. “Revenue neutrality is a trap,” they write. “It requires that one man’s tax cut be offset dollar-for-dollar by another’s tax increase.”
This is correct. Moore and Wallner then propose, fancifully, that Republicans get around the ten-year-sunset problem by enticing Democrats to support a gigantic tax cut for the rich. “Our reading is that many Democrats understand the imperative of business tax cuts,” they write. “If the entire business community is unified behind this measure, this would be a very tough no vote for Senate Democrats, especially in Trump-carried states.” In reality, the prospects of finding at least eight Senate Democrats to vote for a gigantic tax cut for the rich are essentially zero. Moore and Wallner concede that it might not work, in which case, Republicans could then just pass their big tax cut with 50 Senate votes and let it sunset after a decade.
This is very likely where the party is going to land. In the meantime, they’re chewing up a lot of precious time and effort on a Plan A that stands little chance.