If they can overcome fallout from the health-care debacle, and the looming prospect of a self-inflicted government shutdown, Republicans would very much like to focus on passing tax legislation. Enacting tax cuts, after all, is traditionally viewed by Republicans as the dessert they earn by eating their vegetables on difficult issues like health care. Trump and congressional Republicans, moreover, have been toying with the idea of going beyond the usual tax cuts for corporations and the wealthy leavened by middle-class sweeteners and undertaking the kind of massive restructuring of the tax code that has not be done since 1986. But, given the abject failure of the same crew on the American Health Care Act, it’s worth asking whether that scenario is plausible. Here are some of the many questions that must be addressed before tax legislation is enacted:
(1) Who will be in charge of making it happen? The same question turned out to be a big deal on health care because there was continuing confusion about the degree of commitment the president had to Paul Ryan’s handiwork. Ultimately, the White House and congressional leaders conducted separate negotiations with conservative opponents of the American Health Care Act until very late in the process. We all know how that turned out.
The two committees in Congress with jurisdiction over tax legislation are Ways and Means in the House and Finance in the Senate. So inevitably Ways and Means chairman Kevin Brady of Texas and Finance chairman Orrin Hatch of Utah will be major players in the process, which will begin in the House. Brady has signaled that he intends for his committee’s tax plan to be the blueprint for everyone else. Brady, of course, has to know a certain former Ways and Means chairman named Paul Ryan will be looking over his shoulder. Ryan, in turn, must be aware that his involvement could easily taint the project for restive conservatives who would love to chain the Speaker to a slab of concrete and drop him into the Potomac. Hatch, anticipating trouble in the Senate for at least one Brady proposal — the highly controversial border-adjustment tax — has made it clear his chamber will not just defer to the House.
And given all the talk about how “presidential leadership” might have saved the day on health care, you can expect some heavy kibitzing from the administration. Trouble is, it is not at all clear whether Treasury Secretary Steven Mnuchin or National Economic Council Director Gary Cohn is the point person on tax policy (both have apparently been working on tax-policy ideas separately since assuming their offices). Mnuchin is the big economic dog in the cabinet, but Cohn seems to have Trump’s personal confidence along with the great asset of being close to America’s leading power couple, Jared Kushner and Ivanka Trump.
So the raw material is there for turf fights within the administration, between the administration and Congress, and between the two congressional chambers. The ability to get all these people to stick together as tax legislation is circled by ravenous packs of special-interest lobbyists and malicious opponents of the whole exercise could be critical.
(2) How about Democrats? Will they be consulted? As with health-care legislation, tax-reform legislation will be pursued through special budget procedures so that it can be enacted by simple majorities in both houses without the possibility of a Senate filibuster. That means congressional Democrats will be pure bystanders unless something big goes wrong, at which point the whole exercise may be scaled back if not abandoned. The flip side of that situation is that Democrats will be free to take pot shots at the legislation as simply representing a bonanza for the rich and powerful and an implicit betrayal of the working-class people who voted for Trump.
(3) Some Republicans are very worried about budget deficits. How seriously will those concerns be taken? It won’t be easy to make a bill intended to cut high-end taxes — with politically expedient sops to the middle class — anything other than a major budget buster. The pain involved in keeping a tax bill budget-neutral can be reduced in several ways. One is simply to say you don’t care, a throwback to Dick Cheney’s famous “Reagan proved deficits don’t matter” comment in 2004. Tea-party types may blanch, but most have always had a double standard favoring tax-cut-driven deficits. It was significant that House Freedom Caucus chairman Mark Meadows said “offsets” — i.e. spending cuts or increases in other taxes to balance out the lost revenue — were not strictly necessary for tax cuts. That’s a sign that the party might be able to take the Cheney approach.
Another convenient approach is to assume away adverse budget implications via “dynamic scoring,” which stipulates that tax cuts at least partially pay for themselves via the magical and mysterious economic growth that is always projected to follow (but in real life often does not). There will definitely be some of that pixie dust in this case, since “dynamic scoring” has become a central Republican article of faith.
(4) Will the tax bill redo the entire tax code or simply cut selected taxes? And will it raise any taxes? Without question, Republicans will continue to call what they are working on “tax reform,” which sounds less controversial than “tax cuts.” But all the party as a whole is really committed to are reductions in high-end individual and corporate income-tax rates along with the consummation of their long-standing effort to kill inheritance taxes. (Donald Trump is, of course, a man whose children would have a lot to gain from the abolition of the estate tax.)
There are, however, also indications that some taxes would go up. Trump and some of his closer congressional allies are also committed to tax-policy changes that strongly discourage corporate outsourcing of jobs and operations, and some tax breaks benefiting Wall Street. The wider the scope of this bill becomes, the more logical it is to line up two columns of roughly equal tax cuts and tax increases — with the latter being disguised as “loophole closing” exercises or attacks on “special interest” tax benefits.
(5) How about the much-discussed border-adjustment tax? Will that make it into the bill? Ryan and Brady originally proposed the border-adjustment tax as a system both for taxing corporations and encouraging American companies to export more and import less. There would be a new 20 percent corporate rate, but exporters would be exempt while importers would pay the full rate. Retailers (e.g. Walmart) and energy companies that import much of what they sell are dead-set against the idea, and will probably have the power to block it in the Senate. And it’s not totally clear the administration is onboard with the BAT. Though Team Trump likes the idea of encouraging multinational corporations to relocate both profits and operations to the U.S., there are simpler ways, like old-fashioned tariffs, to do that while making sure a major part of the pain is borne by foreigners, including the perfidious Mexicans.
Since lowering corporate-tax rates is a central feature of every Republican tax plan, there will always be an opportunity to slide in a preference for importers or for former “outsourcers” who want to “repatriate” profits, even if no corporation pays more than before. As for hard-core Trumpites who want to force Mexico to pay for “the wall,” there could be other opportunities to hit importers down the road, perhaps in some giant immigration bill. Or at least that’s what Trump supporters will be told.
(6) Will the GOP be willing to slaughter sacred cows, like the mortgage deduction? A truly thoroughgoing “tax reform” bill would make some effort to restrict large and popular tax exemptions like the mortgage interest and charitable-contributions deductions. These are defended, however, by two of the country’s most powerful lobbies, the real-estate industry and charitable nonprofit organizations. It’s substantively difficult to do “tax reform” while leaving these sacred cows grazing, considering the revenue implications of each — but politically it is much easier to leave them alone. Republicans are pursuing the tax bill via budget reconciliation; it’s an inherently partisan exercise. That means they can only lose two Republican senators, and it also means Democrats won’t offer any partisan “cover.” So a slaughter of sacred cows is very unlikely.
(7) To what extent will the middle class get cut into the tax-cut bonanza? Republicans will argue, of course, that the whole country will benefit from the economic growth unleashed by top-end individual, corporate, and estate-tax cuts. But if past tax-cutting exercises are any indication, they’ll also try to include some direct middle-class tax cuts to give the bulk of voters a reason to support such legislation. The amount and revenue impact of such cuts will be enormously important. One obvious middle-class benefit would be the “simplification” of tax brackets (from seven to three is a popular idea among Republicans) to lower marginal rates on millions of middle-class taxpayers, who would, of course, share these benefits with their wealthier counterparts who get a bigger cut from the same changes.
The other big sweetener for normal non-corporate taxpayers would be a large boost in the standard deduction (it is doubled in the Brady plan) accompanied by the elimination of some relatively small current deductions. This would enable the bill’s sponsors to claim they have eliminated the pain and audit risk of itemizing deductions for millions of middle-class taxpayers, whether or not they wind up with lower net taxes. You can also expect some provisions brushing back overzealous IRS enforcement actions. The idea is to let middle-class (and especially upper-middle-class) taxpayers chow down on the pleasure of a stress-free April 15 even as wealthier taxpayers get hard cash. We will hear a lot about that, unsurprisingly, this coming April 15.
The middle-class tax cut “tail” wagging the big upper-end-tax-cut dog may have to be larger than would normally be the case thanks to low public support for tax cuts for the wealthy and Donald Trump’s populist rhetoric. And so, more than likely, there will be a constant, perilous balancing act for Republicans between what they really want (a less progressive tax code) and the price they must pay in things voters want. And as the cost of tax cuts rises, they may have to consider another politically perilous option.
(8) Will Republicans use spending cuts to offset tax cuts? One useful thing about using the budget process to enact a tax bill is that it enables and even encourages offsetting cuts in federal spending. So as the negative revenue impact of the tax cuts inevitably grows and grows, you can expect Republicans, and especially the conservatives who want to slash discretionary spending anyway, to start talking about going after the federal budget with a vengeance.
Some spending cuts, of course, can be pursued through the appropriations process. But the ancient conservative fantasy of entitlement reform pretty much requires the expedient of a budget-reconciliation bill. And given the failure to enact a “block grant” of Medicaid through the American Health Care Act, there will be a strong temptation to take a second bite at that apple in the budget bill used to enact tax reform. There may, indeed, even be talk about justifying the dessert of tax cuts with the vegetables of Paul Ryan’s long-standing proposals for partially privatizing Medicare or even Social Security.
But that gets back to the biggest question of all:
(9) Can the people who so badly botched Obamacare repeal-and-replace successfully manage the equally complex process and politics of “tax reform”?
Your guess is as good as mine.