Tax policy is complicated. And our nation’s legislative process has become a labyrinth of arbitrary rules, shrouded in subterfuge. Given these realities, it might feel like you’d need an advanced degree in parliamentary procedure, certification as a tax planner, and fluency in the latest psychiatric literature on pathological lying to fully comprehend the coming battle over tax “reform” on Capitol Hill.
But if you take a step back, and look at the big picture, the challenge facing congressional Republicans actually looks pretty simple. To get the “largest tax cut in history” to President Trump’s desk, Paul Ryan & Co. will need to do three things:
1) Keep the bill’s tax cuts large enough to pacify its right flank.
2) Keep its deficit impact small enough to appease moderates (and sincere debt hawks).
3) Keep the “pay-fors” painless enough to prevent powerful interest groups from killing the bill.
These three tasks are pretty straightforward — and nearly impossible to do simultaneously. To illustrate why this is the case, let’s take a more granular look at what satisfying each of these objectives would involve:
House conservatives demand tax cuts at least as large as those in Trump’s opening offer (and the tax cuts in Trump’s opening offer are ridiculously large).
The framework for tax “reform” that the White House and congressional leadership unveiled this week includes roughly $5.8 trillion worth of tax cuts. And conservatives in the House and Senate are already suggesting that they won’t settle for a penny less. “If the corporate rate is above 20 percent and if the small business rate is above 24 percent I would vote against it,” Mark Meadows, chairman of the far-right House Freedom Caucus said Tuesday. At present, Trump’s plan calls for a 20 percent corporate rate, and a 25 percent rate on “pass-through” businesses (a category that includes archetypal, mom-and-pop small businesses, but also hedge funds and the Trump Organization). The top rate for corporations right now is 35 percent (though almost no company with competent tax lawyers pays anywhere near that) and the rate for small businesses is 39.6 percent.
Meadows clarified that he wasn’t speaking for his entire caucus. But Virginia Republican Dave Brat told the Washington Examiner that he wouldn’t vote for a bill that put the corporate rate any higher than 20 percent.
Meanwhile, in the Senate, Rand Paul has called for the bill to cut taxes by “at least 15 percent for every taxpayer,” a standard that the current bill — which would ostensibly raise taxes on some upper-middle-class families — doesn’t come close to meeting.
These demands could prove fatal, given that:
Moderate Republicans (and sincere debt hawks) say that the plan can’t explode the deficit.
On Thursday, Republican congressman Mark Walker told the New York Times that the national debt was “a great talking point when you have an administration that’s Democrat-led,” but that “it’s a little different now that Republicans have both houses and the administration.”
Liberals giddily disseminated this quote as proof of the GOP deficit hawks’ bad faith (and/or as another sign that we’ve entered the Era of Conservatives Saying the Quiet Part Loud). But Walker was not proudly espousing the virtues of nihilism. Rather, he was criticizing his party for failing to take deficits seriously.
For the vast majority of congressional Republicans, deficit hawkery is primarily a tool for making large cuts to popular programs less politically toxic. (Saying “we need to cut Social Security to preserve the program without creating a fiscal crisis” is more politically palatable than, “while there are no signs that America’s debt load is impairing its economy, as interest rates and inflation remain stubbornly low, we should still privatize Social Security so that Wall Street has more money to play with.”) But there appear to be at least a few genuine, old-school fiscal conservatives scattered among the House and Senate GOP. And given the party’s slim majorities, a few could be all that’s required to kill the bill.
For the White House, the most concerning deficit hawk may be Bob Corker. The Tennessee senator is ostensibly immune from political pressure, as he will be retiring at the end of next year. In announcing his retirement plans earlier this week, Corker suggested that by forgoing a reelection campaign, he would be able to legislate “independently” — and, in so doing, perform his “most important public service” in “the next 15 months.”
The senator proceeded to declare his absolute opposition to any tax bill that adds to the deficit — which is to say, to any bill that has a prayer of passing without Democratic votes.
“With realistic growth projections, it cannot produce a deficit,” Corker told Bloomberg Wednesday. The senator went on to say that if the bill doesn’t include roughly $4 trillion in revenue raisers, to offset the cost of rate cuts, “there is no way in hell I’m voting for it.”
Currently, Trump’s plan includes $3.6 trillion in revenue raisers, according to the Committee for a Responsible Federal Budget. That’s a hefty sum, but still not enough to prevent the overall plan from adding $2.2 trillion to the deficit. That kind of deficit increase wouldn’t just cross Corker’s red line — and jeopardize the support of the Senate GOP’s more moderate members — it would also violate the reconciliation instructions in the Senate. Under the budget resolution negotiated by Corker and Pennsylvania senator Pat Toomey, the final tax bill cannot add more than $1.5 trillion to the deficit over the next ten years. This means that Republicans will be unable to pass a tax plan that adds more than that to the deficit using reconciliation; which means they will not be able to pass it with less than 60 Senate votes; which means they will not be able to pass it.
This is a big problem, since the bill’s offsetting revenue raisers are likely to get smaller as this process moves forward, because:
Maintaining the bill’s current pay-fors will require overcoming the opposition of blue states, upper-middle-class voters, the real-estate industry, and Wall Street banks.
Right now, the plan’s single biggest pay-for is the elimination of the state and local tax deduction — a measure that would increase federal revenue by an estimated $1.3 trillion over the next decade. For Republicans, the allure of ending this particular deduction is twofold:
1) It hurts people in high-tax states way more than it hurts those in low-tax ones — and thus, hurts blue states more than red states.
2) By dramatically increasing the burden of state taxes for upper-middle-class families in California, New York, and Maryland, eliminating the deduction will impede — or even roll back — progressive gains at the state level. (The backlash to funding paid family leave, or free public college through progressive taxation will be much greater if the upper-middle-class can’t deduct the downsides of state-level social democracy.)
But Republicans didn’t build their congressional majorities in red states, alone. And even in red states, there are plenty of mayors and county commissioners who don’t like the idea of their constituents suddenly feeling the full brunt of local taxes. Plus, the real-estate industry hates the idea of homeowners in high-end, blue-state markets losing the ability to deduct their property taxes, as such a change could put downward pressure on home values.
Twenty House Republicans from blue states have already declared their opposition to ending the deduction. And given the clout of those who stand to lose from its elimination, it seems likely that the ranks of the dissenters will grow in the coming months.
The other major pay-for in the GOP plan — good for $1.6 trillion worth of revenue — is the repeal of the personal and dependent tax exemptions. As Josh Barro notes, the effect of this change is to radically reduce the benefits of the Republican plan for upper-middle-class families in any state. The one, genuine “middle class tax cut” in the GOP framework is its doubling of the standard deduction. But when you subtract out what middle-class families will lose from the abolition of the personal and dependent exemptions, that “doubling” of the standard deduction looks more like a roughly 15 percent increase. For households that wish to continue taking advantage of itemized deductions — like those for mortgage interest and charitable giving — this is not a happy trade-off. As Barro explains:
Currently, you get to take the personal exemption even if you also itemize deductions, but you get to take the standard deduction only if you forego itemized deductions. Combining these provisions into a single, standard deduction would mean itemizers lose their personal exemption and get nothing back — meaning they’ll typically pay tax on an extra $4,050 of income if they’re single, or $8,100 if they’re married.
Upper-middle-class families with mortgages are more likely to vote — and more likely to vote Republican — than your average citizen. Right now, nearly all of the revenue raisers in the GOP plan come from eliminating deductions that benefit this cohort.
Meanwhile, one of the only other sources of significant revenue in the GOP plan — a limit on the deductibility of corporate interest — is already attracting the opposition of real estate companies, private equity firms, and major banks.
All of which is to say: It’s going to be nearly impossible to maintain all of the bill’s current pay-fors, let alone add enough new ones to bring the bill’s total cost down to $1.5 trillion.
Put all this together, and you’ve got an unwinnable game of rock-paper-scissors: Rolling back the proposed tax cuts will invite revolt from the right; increasing pay-fors will mobilize public opposition; failing to roll back tax cuts or increase pay-fors will leave the bill unacceptable to moderates, fiscal hawks, and the Senate parliamentarian.
And then, of course, all of these challenges are exacerbated by the fact that the bill’s fundamental priorities — cutting taxes on corporations and rich people — are opposed by the vast majority of Americans, including most Republican voters.
The most plausible solution to this conundrum would be for the party to trim its sails, and pass a small corporate tax cut that wouldn’t require ballooning the deficit or soaking the middle class. Sure, conservatives have bigger ambitions. But at the end of the day, a small tax cut is better than none at all, right? When have far-right Republicans ever let the perfect (a.k.a. perfectly reactionary) be the enemy of the good (a.k.a. badly regressive)?