Cutting Taxes Will Be Harder Than Trump Thinks
Failure is always an option—especially in Congress.
On most Tuesdays, known around Capitol Hill as “fly-in day,” House Ways and Means chairman Kevin Brady holds a quickie media gaggle outside his office, providing reporters the chance to grill him about the coming week’s hot issues.
Increasingly, that means one thing: tax reform.
With the failure to repeal Obamacare, an overhaul of the tax code has assumed do-or-die urgency for Republicans. “Failure,” conference members are endlessly insisting, “is not an option.”
This is nonsense, of course. Failure is always an option—especially in Congress. And with every tick of the clock, Republicans grow more anxious about the debate. It helps no one’s nerves that there still isn’t a plan on the table, the president is making unrealistic demands (a 15 percent corporate rate?!), the White House economics team is short on tax-policy knowledge, and some House conservatives are refusing to pass a budget (a prerequisite for moving a tax bill via the filibuster-proof process of reconciliation) until they have examined an actual tax plan.
Brady, whose committee holds sway over all things taxing, is well aware of the stakes—and the mounting tensions. At Tuesday’s gaggle, a reporter noted that many Republicans were itching for details and asked what sort of “comfort” he would provide them at the all-conference meetings on Wednesday.
Brady started to answer, then dissolved into chuckles. “Comfort?” repeated the craggy Texan, who resembles a cross between a high-school football coach and a bulldog. “I’m gonna give ‘em a hug—all of them, every one that shows up!”
The assembled reporters cracked up. It was a good line—and a light-hearted admission that Brady and the rest of the “Big 6” reformers (Paul Ryan, Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Steven Mnuchin, and Trump’s chief economics adviser Gary Cohn) have vanishingly little to offer fellow Republicans in the way of specifics. As House Freedom Caucuser Jim Jordan told me after the Wednesday confab (with a nod to the goofy, Reagan-era Wendy’s ad): “Where’s the beef? Well, where’s the bill—or at least where are more particulars and details?”
Republican leaders keep stressing that they want to get the whole team—House, Senate, and White House—on “the same page” before rolling out their new baby. “We do not want a situation similar to health care, where we did ours, then the Senate tried something different, and the administration didn’t have a plan of its own,” said veteran Representative Tom Cole. But the midterms loom, and the legislative window is closing. Wednesday, Brady promised colleagues some sort of framework to peruse on September 25. At that point, look for things to get really hairy.
The big issue on everyone’s mind: As noted whenever the words “tax reform” are uttered, under reconciliation, a bill cannot add to the long-term deficit—that is, it can’t blow a hole in the budget that extends beyond 10 years. This means that the cost of any cut—such as, say, dropping the corporate tax rate from 35 percent to 15 percent or 20 percent—must be offset.
The reform blueprint Paul Ryan was peddling last year balanced the numbers using a Border Adjustment Tax. By placing a levy on imports while making export revenues tax deductible, a BAT would have increased tax revenues by $1 trillion or so over the next decade. The provision was not, however, beloved by import-reliant businesses (including retail giants like Wal-Mart), who linked arms and groused, loudly, until the BAT was officially declared dead in July.
This has left reform architects in the vexing position of scurrying to fill that $1 trillion-plus hole.
During the BAT battle, House leadership argued that, if the provision died, there was absolutely, positively no way to make up the difference. Poppycock. There are scads of loopholes and rates that could be tinkered with to achieve deficit-neutral reform. Unfortunately for Republicans, most are likely to provoke as much (or more) political blowback as the BAT. It is thus totally unsurprising that, even as September 25 looms, the Big 6 are reportedly nowhere close to agreeing on how to fill that big ol’ hole.
Among the red-hot options under debate: eliminating the provision (on the books since World War I) that lets businesses deduct the interest paid on debt. Some Republicans, particularly in the restive House, want to axe it; others would merely trim it; still others want it left unmolested. (Notably, the finance sector is skeptical of elimination, and the Trump White House is heavy on folks from that sector.) Meanwhile, firms benefitting from the current system are gearing up to cause a ruckus.
Also being discussed: the rate at which businesses can deduct the cost of capital investments. (Some lawmakers favor immediate deduction of the full cost; others want to spread out at least part of the deduction over several years.) Then there’s the question of whether/how much to dial back the federal deductions allowed for state income-tax payments.
Outside analysts offer still more possibilities. Kyle Pomerleau, with the nonpartisan Tax Foundation, estimates that nearly half of the $1 trillion hole could be “clawed back” if Republicans would abandon the plan to cut the tax rate on “pass through” businesses (so-named because their revenues currently “pass-through” to the owners and are taxed at an individual-income rate instead of the corporate rate.) “There’s very little economic justification for it, and a lot of administrative concerns,” says Pomerleau. But don’t hold your breath, he advises. “A big part of the Republican coalition are pass-through businesses.”
The most obvious move, said Pomerleau, is to dial back some of the proposed rate cuts on the table. Forget Trump’s nonsensical 15 percent corporate rate. (Not even his own advisers think that’s doable.) Try a more modest 25 percent or 22.5 percent. Go for smaller reductions in capital gains and dividends taxes. Make (at most) a tiny nip in the top individual rate. This way, said Pomerleau, “you’re not taking money from middle- or lower-income tax-payers and giving it to corporations or higher income individuals. You’re just moving around how higher-income individuals are paying taxes.”
Alternatively, of course, Republicans could ditch reconciliation and and work with Democrats on a bipartisan bill. (Stop laughing!) Or they could borrow a page from Bush 43 and set their tax cuts to expire in 10 years, thus avoiding a long-term budget disruption.
But temporary cuts—especially on the corporate side—risk undermining growth. Pomerleau points out that all those economic models that predict how corporations will behave when their incentives change don’t work so well when the incentives are set to vanish. “The results are disappointing.”
“For Ryan, the crown jewel is permanence,” Tom Cole told me. The Speaker, said Cole, really believes that the impermanence of the Bush tax cuts limited the growth and “investment punch” they’d have had otherwise.
Which raises the possibility that Congress will try to split the baby: making corporate reforms permanent while allowing some on the individual side to phase out.
Stressing that all he knows “are the rumors,” Cole predicted, “The things that encourage investment will tend to be the permanent things.” Such slicing and dicing would, Cole acknowledged, be an excruciatingly complicated process.
The Freedom Caucus’s Jordan sees no problem with having some provisions expire. “You could make tax cuts on the personal side temporary,” he said, reasoning that, practically speaking, a tax cut for families that lasts 10 years is as good as a permanent one.
Jordan, for the record, rejects the whole concept of “revenue neutral” reform. “‘Revenue neutral’ just means you’re shifting around who pays what,” he argued. “The tax burden stays the same.” Instead of all this fiddling around, Jordan favors taking a chainsaw to tax rates right now—even if the cuts expire—and worrying about the budget implications later. He declined to say whether he could back a revenue neutral plan. As always, the details will make the difference.
“This stuff is hard. There are always tradeoffs,” said Pomerleau. “You can’t just have the dessert without the vegetables.”
But when it comes to taxes, everybody wants to grab a hot fudge sundae while sticking the other guy with the boiled beets. Which is why many, many political observers think the odds of Congress passing real reform any time soon are about the same as Vladimir Putin’s becoming an LGBT-rights crusader.
Failure may not be an option. But it is an impressively likely non-option.