the national interest

Paul Ryan’s Dream of Tax Cuts for the Rich Will Not Be Denied

Paul Ryan. Photo: Aaron P. Bernstein/Getty Images

The Republican Party has been organized around the goal of reducing taxes for the affluent for more than a quarter-century. The last time Republicans had full control of government, they poured their energy into passing huge, regressive tax cuts, first in 2001 and again in 2003. The return of Republican government makes it virtually certain that regressive tax cuts will pass again — the new majority can imagine no more compelling use of their power. But the task of enacting the tax cuts into law is proving to be more difficult than it was the last time around.

The basic House Republican plan is to cut taxes by about $3 trillion over a decade. Basically the entire proceeds of their plan would go to the rich — once it’s fully phased in, the highest-earning one percent would get 99.6 percent of the benefit, according to the Tax Policy Center’s analysis of the plan last fall. Republicans will surely tweak that plan, but it contains all the elements of the ideas they have been longing to enact: reducing the top tax rate, eliminating the tax on inheritances worth more than $10 million, reducing taxes on capital, and so on. The drive to cut these taxes reflects the party’s deep beliefs that overtaxation of the rich is the most serious form of oppression in modern political life, and they are prepared to spend enormous political capital to rectify this evil.

There is essentially no dissent within the Washington Republican Party — including both Congress or the White House — on this overarching goal. The difficulty lies in the practical implementation. Republicans are struggling because they want to avoid replicating what turned out to be the fatal weakness of the Bush tax cuts. Republicans know that they won’t get Democratic support for a big tax cut for the rich, and since Democrats have 48 Senate votes, well more than the 41 needed to sustain a filibuster, Republicans need to pass their tax cuts in a bill that can evade a filibuster. The only kind of bill that can do this is a budget-reconciliation bill. But budget-reconciliation bills have certain restrictions on their design, called “the Byrd Rule.” One of those restrictions is that they cannot increase the budget deficit outside of the ten-year period after which they are passed. A reconciliation bill can increase deficits in the short run, but if it has any costs after a decade, it can be filibustered, and is therefore useless for Republican purposes.

In 2001, Republicans dealt with this problem by simply ending their tax cuts after ten years. The Bush tax cuts had no budget costs after the ten-year window because the tax cuts disappeared. They hoped the tax cuts would attract enough political support that they would automatically be extended, but this never happened. The Bush tax cuts produced an anemic recovery, not the robust growth Republicans promised, and the Democratic Party coalesced around plans to eliminate the portion of the tax cuts that benefited only the highest earners (while keeping intact the tax cuts that also benefited the middle class). Since the tax cuts expired automatically, Democrats did not need to hold a vote to phase them out.

Republicans hope to avoid such a fate for the Trump tax cuts. Their hope is to design tax cuts that technically do not lose any revenue, which would allow them to be permanent, and force Democrats to gain control of the House, Senate, and presidency in order to overturn them.

How do you design a huge tax cut for rich people without losing a lot of revenue? Republicans are looking at three pots of money to offset the cost: Dynamic scoring, Obamacare taxes, and a border-adjustment tax.

Dynamic scoring means taking into account the effect on economic growth caused by cutting taxes. If tax cuts encourage permanently higher growth, it would increase revenue collections, offsetting some of the losses. Republicans believe, as a matter of theology, that the effect is huge. This belief caused them to predict the Clinton tax hikes on the rich would fail to increase revenue, that the Bush tax cuts would lose very little revenue, and that expiring the Bush tax cuts on the rich would cause growth to slow down. That none of these things happened has not diminished the fervor of the Republican faith in the transformative economic power of cutting taxes on the rich. Mainstream economic models find that tax-cut plans like those proposed by Republicans do little or nothing to stimulate growth — the stimulative effects of lower rates are small, and canceled out over the long run by the offsetting depressive impact of higher deficits.

Historically, “dynamic scoring” has always been a talking point: Republicans have insisted that official forecasts are wrong because they fail to use dynamic scoring. In 2015, the GOP Congress ordered the Joint Committee on Taxation, the federal agency that measures the impact of tax changes, to incorporate dynamic scoring. But it seems unlikely that JCT will assume the kinds of “yuge” dynamic effects that conservative ideologues prefer.

The next source of money is repealing Obamacare. The connection between the two issues might seem obscure, but it matters technically. The Republican plan to repeal Obamacare would eliminate all the taxes that were raised to help pay for the benefits — about $1.2 trillion over the next decade. This would lower the baseline of tax revenue, meaning that Republicans would need to design a tax code that raises $1.2 trillion less in revenue in order to be “revenue-neutral.” That makes it crucial for them to repeal Obamacare before they cut taxes.

Obamacare repeal was expected to be a rapid step, already wrapping up by now. Instead it is a quagmire with no end in sight. Of the many reasons the repeal crusade is failing, one of them is that the revenue trick is a little too clever. Some Republicans realize that if they repeal all of Obamacare’s taxes first, they’ll have no way to pay for a replacement plan later. So, as Obamacare bogs down, it has also bogged down what was supposed to be a rapid-fire progression to tax reform. (Budget expert Stan Collender has pointed out that the Republicans have designed an intricate legislative sequence to enact their plans that might collapse altogether.)

The third and final source of money was supposed to be a border-adjustment tax. This is a complicated idea that would essentially tax imported goods. The concept has a lot of support among tax experts, at least in theory. The idea has several attractions for the GOP. First, by increasing costs of imported goods and decreasing costs on exports, it would seem to fulfill Trump’s promise of an “America First” trade policy. Second, if designed properly, it would raise another trillion dollars a decade or so. And, because it would function as a kind of sales tax, it would be paid mostly by the middle class and the poor. Essentially, it would free up another trillion dollars for lower taxes to be paid by the rich.

This explains why Paul Ryan has evangelized so fervently on behalf of this idea of a border-adjustment tax. It holds the key to his dream of enacting a large, permanent tax cut for the rich.

There are, alas, enormous barriers to making Ryan’s dream a reality. Among American businesses, the border-adjustment tax creates winners and losers. Among the latter are big-box retailers like Walmart. The divide among business lobbyists has produced a divide among Republicans, many of whom loathe the border-adjustment tax. (Leading the opposition is Senator Tom Cotton, who represents Walmart’s home state of Arkansas.) Divisive policies often pass Congress. But in this case, Republicans need near-total unanimity, since they’re not going to attract any Democratic votes for a huge tax cut for the rich.

Even if they can somehow corral their dissenters, it’s far from clear the border-adjustment tax would work as promised. It’s very unclear that a concept as complex and novel can actually be written into law in the time frame Republicans want. Of course, from the GOP’s perspective, the issue isn’t whether the tax works but whether it is scored as having worked for the purposes of their budget. But two tax experts I spoke with expressed doubt that Congress can actually write a workable border-adjustment plan that raises the revenue they hope for, even if it wants to.

So where does that leave them? Probably in the same place they were in 2001. They could scale back on the tax cuts for the rich, but that would run counter to every impulse within the Republican Party. You will pry the tax cuts for the rich from Paul Ryan’s cold, dead hands. If Ryan’s plan fails, the next best thing to passing enormous, permanent tax cuts to the rich is to pass enormous, temporary tax cuts for the rich. If Obamacare repeal and the border-adjustment tax flounder, Congress will probably just go back to what worked (or, if you prefer, “worked”) 16 years ago. Republicans have control of Congress, and even if nothing else comes out of it and everything else falls part, the richest one percent are going to get paid.

Paul Ryan’s Dream of Tax Cuts for Rich Will Not Be Denied