Can the GOP Actually Pass Tax Reform?

Probably not. But they can still do a huge, temporary, deficit-busting tax cut!

House Speaker Paul Ryan.
House Speaker Paul Ryan holds a news conference after Republicans pulled the American Health Care Act bill on Friday.

© Jonathan Ernst / Reuters

When President Trump sought to console himself during those dreary, final days of the American Health Care Act’s humiliating demise, he would look toward the sunnier vistas of tax reform.

“I hope that it’s going to all work out,” he told House Republicans last week, in the days before the bill officially came crumbling down on Friday. “Then we immediately start on the tax cuts, and they’re going to be really fantastic, and I am looking forward to that one. That one’s going to be fun.”

One might think that after the health care defeat, the president would choose to read up a bit more on future issues to stave off further disappointment. But our president, “The Ultimate Closer,” is a leader, not a reader. If he were to receive a briefing, those briefers would explain that Speaker Paul Ryan does not have simple “tax cuts” on the mind. He wants revenue-neutral corporate and individual tax reform, the legislating of which will be the antithesis of “fun.”

Health care reform was hard because it involved major trade-offs, and tax reform will be just the same—even harder, in fact, because of the AHCA’s failure.

The AHCA was supposed to lower the budget baseline to give leaders about $1 trillion to work with in the tax reform package. This would have gone a long way toward making tax reform revenue-neutral—i.e., not a long-run deficit increaser—which would be a requirement in order to pass the bill with a 51-vote majority under reconciliation if the changes are to be permanent. If the tax reform package isn’t revenue-neutral, its cuts will expire after 10 years like the Bush tax cuts did. Balancing rate cuts with a simplification of the code is what would define it as “reform,” and not just an enormous temporary tax cut.

Being unable to mug poor people out of $1 trillion in health care deeply complicates the already complicated tax reform math. Republicans want to slash rates for corporations and individuals (on income and investment) and eliminate the alternative minimum and estate taxes. This was always going to involve some tough decisions, and now those decisions are tougher.

What are the options for getting it done?

Dynamic scoring, in which the Congressional Budget Office incorporates macroeconomic feedback into its projections, has always been Republicans’ friend when it comes to tax cuts. It is not a bad idea in theory. The problem is that dynamic scoring all depends on the assumptions brought into it. Republican supply-siders tend to assume—completely sans evidence—that cuts to the top marginal tax and corporate tax rates juice the economy to grow at 4 or 5 percent, allowing tax cuts to pay for themselves.

After Republicans took control of both chambers of Congress in 2014, supply-siders urged Congress to ditch CBO Director Doug Elmendorf and replace him with a friendlier conservative economist who, using dynamic scoring, might give Republicans a friendlier assessment when it came time to pass both Obamacare repeal and tax reform. In a comical turn of events, the conservative replacement they settled on, current CBO Director Keith Hall, has repeatedly foiled the GOP on health care. Republicans should not expect him to save them from making hard choices on tax reform, either.

House Republican leaders, meanwhile, are hoping to raise another trillion dollars or so through a border adjustment tax, the tariff-like instrument that these leaders hope will satisfy Trump’s promise to his base to stick it to those foreign countries ripping us off. The problem is that this might increase costs for a small little subset of the economy called “importers”—everyone from oil refiners to big retailers like Walmart—and another called “consumers.” In a familiar dynamic, Senate Republicans aren’t sold on it, and neither is the House Freedom Caucus.

More simply, a border adjustment tax would create winners and losers. Everything in tax reform would create winners and losers, because everyone is a part of the tax system. This is why it’s so hard.

When Republicans talk about simplifying the corporate tax code, they talk about weeding out corporate “loopholes” while lowering marginal rates. The effective tax rate that corporations pay is far lower than the top statutory rate that Republicans so often complain is too high. But if you weed out “loopholes” in any way that would result in a large corporation ending up having to pay more in taxes, they will lobby against that with every fiber of their being until the bill is dead, forever.

As Mark Mazur, director of the Tax Policy Center, told me cheekily, what the public may see as a corporate loophole is what each relevant corporation sees as a “well-deserved tax incentive.” If a corporation is paying an effective tax rate of 10 percent now, they’re going to lobby hard against any bill “that makes it 11.”

“It’s way easier to give someone a targeted tax benefit than to take it away,” Mazur says.

Meanwhile, if Republicans try to squeeze out some money by trimming individual “loopholes,” they’ll find that the tax exemptions and deductions where all the money is won’t be trimmed easily.

Just as Republicans never liked to get specific about their plan to replace Obamacare before it existed (and then it quickly died because it was terrible), they never like to get specific about how they’d compensate for lower individual tax rates. They could raise serious amounts by, say, capping the tax exclusion for employer-sponsored health insurance, or cutting the mortgage interest deduction or charitable giving deduction. But these three tax expenditures—each with their own imperfections—are foundational to the American health care system, American housing prices, and American charities. (Republicans already tried capping employer-sponsored health insurance while drafting the AHCA; one quick glance at CBO’s private feedback on that convinced them never to speak of it again.) Paul Ryan’s tax plan as outlined in his “Better Way” agenda did not touch any of these items, which begs the question: Where does he think he’s going to get the money?

“Unfortunately I think there are very, very few revenue-raisers that no one really cares about,” Mazur says.

There is, however, one possibility that could make tax reform easier than health care: ignoring the “reform” bit, and the ugly business of revenue-neutrality altogether, and just cutting taxes for 10 years instead.

There is nothing preventing Republicans from cutting taxes to whatever levels they want under reconciliation, except that these cuts can’t be permanent. The 2001 and 2003 Bush tax cuts were passed under reconciliation this way. The bonus for Republicans is that, in 10 years time, there’s a better-than-decent chance political pressures will favor renewing most of these cuts. Most of the Bush tax cuts, except on top earners, were ultimately renewed in 2012.

This seems like the likeliest outcome: Republicans will simply choose to cut taxes for 10 years without having to worry about the uncomfortable trade-offs (beyond worsening the country’s fiscal outlook, which is probably not one of President Trump’s or the party’s priorities, despite whatever anti-debt protestations they make under Democratic presidents). For one, House Freedom Caucus chair Rep. Mark Meadows, speaking this weekend after a fresh kill of the AHCA, said he doesn’t think tax cuts need to be offset by spending cuts.

If Republicans end up in Meadows’ camp, which seems like all they’ll have the appetite for after the AHCA debacle, tax cuts really could be all the “fun” that Trump is expecting.