Why the GOP’s Dream of Tax Reform Is (Probably) Doomed

Republicans are screwing up their big tax cut. They can still salvage it. But they have to think small.

Carlos Barria / Reuters

The Republican Party has long billed itself as being for family values, for the dignity of work, for lower taxes, and (at least, as the minority party) for balanced budgets.

The House GOP tax bill cuts against all of these positions.

It would raise taxes on about one-third of the middle class by 2027. By eliminating the estate tax, it would benefit heirs of large estates, even if they don’t work a day in their life. Meanwhile, by eliminating some tax breaks often claimed by higher earners, the plan would raise taxes on many upper-middle-class households. As a result, the bill would ironically privilege the “idle rich” over the “working rich.” And by slashing corporate taxes by several trillion dollars, it would raise deficits by trillions of dollars, even according to the most pro-Republican analyses. That might be the biggest problem of all, because when the House bill is taken up in the Senate, it will not be workable under rules that prohibit new laws from adding to the debt after 10 years.

In short, the Republican Party, whose chief legislative talent is the ability to cut taxes anywhere, anytime, is in danger of ending its first year of majority rule with a tax bill that is unpopular, unpassable, and unpopulist.

It is not hard to imagine a tax plan that would be more in line with Republicans’ stated values. But rather than design a modest plan oriented around tax cuts for ordinary American families, their tax plan is oriented almost entirely around another idea: that the gravest problem for the U.S. economy is the marginal tax rate on large corporations, which, they believe, is making America’s firms uncompetitive and driving business activity away from the U.S. As a result, the centerpiece of the House bill is to nearly halve the the corporate tax rate, from 35 percent to 20 percent, at a 10-year cost of about $2 trillion.

Is that the same as a middle-class tax cut? It’s difficult to say that middle-class workers wouldn’t benefit at all from a tax cut that raises corporate profits by hundreds of billions of dollars. But economic analyses by the likes of Lawrence Summers, Len Burman, Gene Steuerle, and Kimberly Clausing have determined that corporate tax cuts enrich corporate shareholders far more than corporate employees. The administration disagrees. In an interview with CNBC, Gary Cohn, the chief economic adviser of the White House, argued that a corporate tax cut could “create wage inflation, which means the workers get paid more; the workers have more disposable income, the workers spend more. And we see the whole trickle-down through the economy.” In other words, one side of this debate is filled with economists, and the other side is a rehash of a long-discredited “trickle-down” theory.

The GOP’s devotion to a 20 percent corporate tax rate might not be about national economics so much as about party economics. “The financial contributions will stop” if tax reform fails, Senator Lindsey Graham, of South Carolina, said on Thursday. About 0.5 percent of the U.S. population makes up 68 percent of contributions to political candidates, parties, or PACs, according to Open Secrets, a nonprofit that studies political donations. These contributions are concentrated among the richest households, whose portfolios would benefit immensely from a large tax cut on corporate profits.

The emphasis on corporate tax cuts is a political consideration that risks making the rest of the plan a political embarrassment. In order to make up trillions in lost revenue on corporate taxes, the plan has to raise taxes on large middle-class families and remove popular tax benefits, such as those on adoption and student loans. What sort of governing party punishes adopting parents to give Apple a tax break? Or designs a tax cut that gets bigger over time for the 0.1 percent, while the tax cut for families gets smaller?

Observers experiencing déjà vu may be forgiven. With “repeal and replace,” a procession of reports from the Congressional Budget Office dramatized the effect of kicking 20 million people off health care, contributing to the bill’s ultimate failure. With “tax reform,” another procession of analyses from the University of Pennsylvania, the Tax Policy Center, and the Joint Committee on Taxation strongly suggest that the House plan would ultimately raise taxes on middle-class families with children, while cutting taxes dramatically for rich, layabout heirs.

But while repeal and replace was doomed from the start, a better GOP tax plan—that actually adheres to the party’s values—would actually be simple to achieve. Cut the corporate rate from 35 percent to 30 percent, not all the way to 20 percent. Forget about slashing taxes on pass-through income for small businesses. Keep or modify the estate tax. Increase the child tax credit and make the family benefit permanent. Voila: That plan would combine a modest corporate tax cut with a larger middle-class tax break, without breaking the bank with trillions of dollars in deficits after this decade.