the national interest

Tax Reform Is Hard. Tax Cuts Are Easy.

Donald Trump is going to cut the hell out of taxes. Photo: Jim Lo Scalzo/Getty Images

Now that repealing and replacing Obamacare has failed, Republicans in Congress say they are moving on to something different: tax reform. They are actually moving on to the same thing all over again. The American Health Care Act was a plan to give high-income Americans a big tax cut that would be financed with cuts to health-care subsidies for low- and middle-income people. Tax reform, at least as Paul Ryan and his allies envision it, is a plan to give high-income Americans an even bigger tax cut, financed by tax increases on lower- and middle-income Americans. Both plans are deeply unpopular (a poll found Americans opposing tax cuts for the wealthy by a three-to-one margin) and also have drawn opposition from powerful lobbies (in the case of tax reform, retailers violently oppose the border-adjustment tax that would offset much of the lost revenue).

Republican debates about tax policy are shrouded in a mist of obfuscation, since the party’s central goal, reducing taxes for the rich, is too unpopular to be described frankly. Instead, the intra-party strategy has been hashed out euphemistically, which has made the media coverage difficult to decipher. The terms “tax reform” and “tax cuts” have been thrown around almost interchangeably to describe the Republican plans. They’re very different. Tax reform is what Ryan and many of his allies say they’ll do, and possibly want to do. Tax cuts are what they will do.

Tax reform means a revenue-neutral adjustment of the tax code, which cleans out tax deductions and other preferences, and uses the revenue gained by this to reduce tax rates. The attraction of tax reform is that it avoids a drawback in Senate rules. The only kind of legislation that can pass the Senate by a majority vote, without being filibustered, is a budget-reconciliation bill. But these budget-reconciliation bills can’t increase the budget deficit after ten years. That requirement forced the Bush tax cuts to phase out after a decade. Republicans hope to avoid this fate by writing a bill that does not increase the long-run deficit. Hence their stated desire to pass tax reform rather than tax cuts.

If you’re trying to finance your rate cuts by closing tax deductions, though, you’re in a zero-sum exercise where every winner is offset by a loser. That is the dynamic that has forced Ryan and his allies to support the border-adjustment tax. The lure of this proposal is that it would, in theory, raise a trillion dollars over a decade, and the cost would be borne by the poor and middle class, who would pay more for imported goods. That would free up a trillion dollars in revenue that Ryan could use to cut taxes for the rich — the project that is the cause of his life and the central policy objective of the modern GOP.

The Republican Party is currently split over whether it is worth trying to make their plan revenue-neutral, by including the border-adjustment tax, or to give up on tax reform and simply cut taxes for the rich. Ryan has been forcefully going for tax reform, which would allow his tax cuts not to have the ten-year expiration. “We’re planning revenue-neutral tax reform,” he told Judy Woodruff, “which means you have to take away loopholes and special-interest deductions if you’re going to lower tax rates.” Trump has taken both sides. At times he has expressed his desire to “cut the hell out of taxes.” He is typically unconcerned about the long run or about deficits, having called himself “the king of debt,” as the New York Times recently noted. Yet Trump has also at times endorsed the border-adjustment tax. “I’m the king of that,” he told the Times. (It’s good to be the king.)

Advocates of Ryan’s strategy keep talking about the 1986 tax reform. That is an episode in legislative history that has attained a hallowed place in Washington lore, like the 1969 Mets. Success was improbable, yet miraculously occurred, and the miracle has been pointed to many times since. But that law was the result of completely different political parties with completely different objectives. The 1986 tax reform was progressive. Despite lowering the top rate, it shifted a greater share of the tax burden onto the rich, because it reduced so many tax preferences they enjoy — in particular, it wiped out the tax preference for income from capital gains.

Why was a deal like that possible? Because in 1986, moderates still had influence in the Republican Party. Key advisers in the Reagan administration felt embarrassment that Reagan’s 1981 tax cuts had enabled rich people to pay extremely little in taxes and were eager, or at least willing, to change that. The 1986 Tax Reform Act drew conservative opposition because it raised the effective tax burden on the rich (even while lowering nominal rates). Conservatives may continue to genuflect at the altar of Reagan, but they abandoned the substance of that bill. The Tax Reform Act was “a major setback for conservatives,” wrote National Review’s Ramesh Ponnuru in 2005. “For most of the subsequent two decades, conservatives have been trying to undo the policy damages.”

The Republican Party that struck the 1986 Tax Reform Act is long gone. The party that has replaced it is singularly motivated by the goal of reducing taxes paid by the rich. And its goal of rejiggering the tax code in a way that shifts the burden from the rich to the non-rich is politically radioactive.

Why would Ryan attempt to shepherd into law a bill so dangerous, creating many times more losers than winners? Because Ryan does not want to settle for ten years of lower taxes that will expire automatically when he could have a permanent decrease. (Leave aside the fact that a “permanent” tax reform could be rewritten the next time Democrats win full control of government.) Ryan has repeatedly described the current government as “a once-in-a-generation opportunity.” Remember, the 1986 Tax Reform Act passed with bipartisan support. If Ryan wanted a 1986-type bill, the current all-Republican government wouldn’t be such a unique chance. Opportunities to pass bipartisan legislation arise all the time. In 2014, Dave Camp, the retiring chairman of the Ways and Means Committee, produced a plan that reformed the tax code without lessening the burden on rich people. The Republican Party pretended it never happened. That’s because tax reform is not their goal. Tax redistribution is.

But just as throwing millions of people off their insurance proved too difficult, the pain threshold to pass a plan that raises taxes on Middle America will be far too high for Republicans to pass. One can already see Republicans who wanted to give Ryan’s grandiose strategy a chance nervously eyeing the exits, and looking instead at a tax cut that would expire. “For ten glorious years, we could actually pass a tax bill with what we want in it,” says Grover Norquist. “I want to make them permanent. But if my choice became, ten-year-temporary or nothing? I’ll take ten-year temporary,” says Representative Chris Collins.

Tax cuts for the rich financed by borrowing are not popular, but they’re much less explosively unpopular than tax cuts for the rich financed by tax hikes on Walmart shoppers. Cutting taxes for the rich enjoys near-unanimous institutional support within the conservative movement, the Republican Party, and its lobbyists and donors. Ten glorious years of low, low taxes for the rich will be the fruit of Republican control of government.

Tax Reform Is Hard. Tax Cuts Are Easy.