Stung by the collapse of the Republican plan to reshape the U.S. health-care system, President Donald Trump’s White House says that it’s taking charge of the next big GOP initiative: tax reform.
What it wants and who will manage the effort isn’t clear, but here are some legislative approaches the administration could pursue:
-A sweeping tax-reform plan with huge cuts in tax rates balanced by elimination of special-interest tax advantages, plus a massive infrastructure-spending bill. This approach would be aimed at winning bipartisan support in Congress.
-A scaled-back but still sizable package done through a special Congressional budget reconciliation process that would limit the scope of changes to taxing and spending programs. Because measures passed through reconciliation aren’t subject to the Senate filibuster, this route wouldn’t require any cooperation from Democrats.
-A major tax cut unbalanced by revenue-raising measures like base broadening or loophole closing. This approach would avoid messy fights with the powerful lobbies for virtually all special tax advantages, but it could greatly increase the federal deficit. It could either aim to attract Democratic allies or could be accomplished through reconciliation.
-Cuts limited to the corporate tax rate, which would probably have less deficit impact and where there’s already a rough consensus for action based on proposals made by former President Barack Obama.
Each of these options has big downsides.
The easiest to discard is the last idea: cuts in business taxes but not rates paid by individuals. Mainstream Republicans like Senator Rob Portman of Ohio acknowledge that’s a political non-starter. Also, Trump likes to blast Obama, not build on his ideas.
It’s also too limited to fulfill longstanding Republican ambitions. White House economic aide Gary Cohn and House Ways and Means Committee Chairman Kevin Brady have separately told Democrats that they planned to go “big” on a taxing-and-spending package. Brady said the tax component would be revenue-neutral, meaning that it wouldn’t widen or shrink the deficit. But that pledge is undermined by a vow to measure the effects based on “dynamic scoring,” Washingtonspeak for the dubious assumption that tax cuts would generate enough economic growth to provide higher revenue at lower rates. In theory, it all would be completed by August.
Republicans are hoping that some Democrats who like loophole closing and infrastructure spending will buy into this approach. But assembling a bipartisan coalition will be “very difficult,” said Representative Richard Neal of Massachusetts, the ranking Democrat on the Ways and Means Committee. He said that Democrats will demand tax cuts that don’t favor the wealthy, a goal made much more difficult by Republican insistence on eliminating the estate tax - an action that benefit only the rich without generating economic growth. Cohn and Brady vowed that lots of deductions for high-end taxpayers would be eliminated; Democrats are skeptical.
They’re even more skeptical about striking a deal with Trump, whom they don’t trust and who is deeply unpopular in most of their districts.
Trump is boasting about a $1 trillion, job-creating infrastructure plan, which he says Democrats will have to support. Capitol Hill Republicans say it could be financed through a tax on overseas profits that U.S. companies have stashed abroad to avoid the 35-percent federal corporate tax rate. The total is about $2.5 trillion, so a 10 percent tax, which is higher than Republicans advocate, would raise $250 billion, still just a fraction of what Trump wants to spend on roads, bridges and airports. Republican plans to finance the rest privately, through tax credits and other incentives, is a losing proposition for most infrastructure experts, who say it won’t produce much, and for Democrats who don’t like the politics.
The alternative, then, is to pass a partisan bill through the budget process known as reconciliation. The Republican congressional majority can’t do that before October because it already used the once-per-fiscal-year process in 2017 to move its failed Obamacare replacement plan forward. If Republicans can pass a fiscal 2018 budget reconciliation measure - a big if - then they could put together a tax bill that Senate Democrats couldn’t stop. But under this procedure, the measure can’t be a revenue loser after 10 years - meaning that the best Republicans could hope for would be temporary tax changes.
Republicans will find that while tax cuts are easy to enact, the reforms needed to balance their fiscal impact will prove almost impossible. (By definition there are winners and losers in tax reform and the losers make a lot more noise.) Brady claims the offsetting revenue will come from a Republican-sponsored proposal to tax most business sales except those from exports, but that idea is already dead politically.
The White House should look at the serious 2014 tax-reform proposal by former U.S. Rep. Dave Camp, the Michigan Republican who chaired the Ways and Means Committee at the time. He wanted to cut individual rates, including the top rate, condense seven tax brackets to three, and lower the maximum corporate rate to 25 percent.
But he also prescribed the medicine needed to pay for these cuts. He proposed an excise tax on big banks, a 10 percent levy on employer-provided health insurance, and curbs on write-offs for mortgage deductions, charitable giving and advertising. It was toxic to most House Republicans and went nowhere.
But White House and Congressional Republicans both need a win after the health-care disaster. So they’ll probably forge ahead to cut taxes for 10 years by $2 trillion to $3 trillion, but without reforming the system or disturbing the Trump family’s business interests.
Last week Trump told the Financial Times that there would be a “very massive and very strong tax reform.” The paper noted that he’s “holding his cards close.” That’s what you do when you hold a pair of threes.
Albert R. Hunt is a Bloomberg View columnist.