Tax Reform Will Be a Nightmare

Donald Trump observed that health care policy is “so complicated.” The next item on his agenda, tax policy, will be just as knotty.

Carlos Barria / Reuters

“Health care is a very, very complicated issue,” Treasury Secretary Steve Mnuchin said last week in an interview with Mike Allen at Axios. “[Tax reform’s] a lot simpler.”


America’s health-care industry is roughly one-sixth of the economy, or about $3 trillion. U.S. federal tax revenue is roughly one-sixth of the economy, or about $3 trillion. Health care is a complex national cross-subsidy, where, for example, the healthy support the sick. Taxes are a national cross-subsidy, where, for example, workers support retirees. With health care, Americans interact with with an amorphous institution, with a maze of entrenched interests, in which they ultimately just want access to an excellent bundle of services at an affordable price. With the federal government, Americans interact with ... okay, I think you get the point.

Still, it’s possible to sympathize with the White House’s enthusiasm for tax reform. After a stinging defeat with the American Health Care Act, President Trump and Republicans are looking for an easy win. But they may soon discover that tax reform is the opposite of easy, and impossible to win.

So, why even try comprehensive tax reform rather than simply cut taxes to please GOP voters, and call it a week?

There are several reasons why tax-policy experts have been eager for Washington to revamp the tax code, which is not only bloated with benefits, but also so complicated that the typical family spends many hours or hundreds of dollars on a filing that the IRS could probably do itself.

But the practical reasons for tax reform in 2017 are procedural. This gets complicated quickly, but basically, since Democrats probably won’t vote for a large tax cut, the GOP needs a bill that can pass with simple majority—51 votes. Sounds easy enough. But under so-called reconciliation rules, the new law cannot raise the deficit in the long run. As a result, the GOP has to make a choice: either follow George W. Bush and pass a tax cut that expires after ten years, or follow Ronald Reagan and pass a more comprehensive overhaul whose changes have no expiration date.

But writing a tax policy that doesn’t increase the deficit requires the Republican Party to resurrect an ancient and long-forgotten budgetary maneuver known formally as “offsets” and more colloquially as “actually raising revenue in order to pay for stuff.”

There are several ways for Republicans to save money, but the first and easiest solution has disappeared. Repealing Obamacare would have cut hundreds of billions of dollars of taxes on the rich, none of which would have to be offset in the new tax law. Second, Paul Ryan and some Trump advisers have argued for a border-adjustment tax, which would essentially tax importers, and exclude exporters, to help domestic producers. The policy would raise hundreds of billions of dollars to pay for rate cuts. But retailers like Walmart that rely on cheap imports will fiercely oppose the law, and it’s unlikely that the idea will attract a simple majority of Republicans in the Senate.

Third, the most common formula for tax reform is to “lower the rates and broaden the base,” which means cutting marginal tax rates and partially paying for the lost revenue by eliminating tax benefits. Paul Ryan’s most recent tax reform would scrap most itemized deductions, except for those for mortgage interest and donations to charity. That means junking at least 70 tax benefits in the corporate and individual income-tax codes, according to the Tax Policy Center. Removing even one of these is like sending the equivalent of a bat signal into the Washington sky, all but ensuring that lobbyists for that particular cause swarm Capitol Hill or at least send several pointedly worded emails to concerned parties.

The corporate income-tax overhaul, for example, would probably cut the overall rate but also eliminate several benefits for energy companies, such as those for coal production and mining. One can already hear the cries about Trump’s shattered Appalachian promises harmonizing with the agonized moaning of the oil lobby. But the screaming over changes to the individual tax code could be far worse. The Ryan plan removes benefits for injured veterans, people living in low-income housing, foster homes, and families of public-safety officers killed in the line of duty. Pissing off powerful energy conglomerates, infuriating veterans, or endangering orphans, individually, is one thing. To achieve all three in the same bill is an almost impressive feat of anti-populism.

Tax reform has never been simple. The last time Washington passed a comprehensive tax overhaul, in 1986, the plan took almost two years to go from first draft to presidential signature. Ronald Reagan saw the first copy just three weeks after his reelection win, on November 26, 1984. The plan faced stiff opposition on K Street and almost fell apart immediately. Within weeks, one of its chief architects, Treasury Secretary Donald Regan, was the subject of so much bureaucratic sniping and vicious media leaks that he begged the president to allow him to resign.

While  the president threw the resignation letter in the fire, Secretary Regan still switched jobs with chief of staff Jim Baker to make way for a more seasoned political hand to steer the plan through Washington. The legislation was finally introduced in the House in December 1985, but it wasn’t signed into law until 300 days later, in October 1986, after months of concerned lobbyists besieging Washington.

There’s little mystery why it’s been 30 years since the last comprehensive tax-reform law: Tax reform is a nightmare.

It takes extraordinary political focus, the capacity to withstand months of bureaucratic infighting, the fortitude to ignore relentless lobbying from organizations losing their favorite tax benefits, and devoted White House stewards who are prepared to guide the bill through this maelstrom for months, or even years. Trump and Republicans in Congress gave up on health-care reform after 17 days. The White House has already blamed the bill’s failure on the same representatives it will need to pass tax reform. According to Goldman Sachs research, stock prices for high-tax corporations have already given up their gains since Trump’s victory, suggesting a growing pessimism that the administration will succeed in revamping corporate or individual taxes.

The Reagan White House saved tax reform for his second term, when the president would never again face reelection. Trump’s position couldn’t be more opposite: He is both historically unpopular for a president this early in his term and generally desperate for popular approval. He has demonstrated an allergy to policy details, an aversion to political negotiation, and a general dislike of schleps. Tax reform is nothing but details. It is the canonical definition of a political schlep.