Taxes

Tax Reform? No. Tax Cuts? Probably. Maybe.

The GOP's secret ingredient: massive federal budget deficits.

A 10-year trim, nothing too drastic.

Photographer: E+ via Getty Images

Several excellent items, beginning with budget maven Stan Collender's column in Forbes, are arguing just how hard tax reform will be to accomplish. That is, everyone is expecting Donald Trump to reprise one of his greatest hits and claim that nobody knew taxes could be so complicated. 

Democratic economist Jared Bernstein, however, thinks a tax bill is much more likely than health care. The secret ingredient? Massive federal budget deficits. After all, he says, Republicans generally agree on cutting taxes, especially for the rich; the big disagreements are on the offsets. 

That sounds correct to me. Essentially, Republicans need to decide between an ambitious tax reform, and in which the entire system of either corporate or personal taxes (or both) is changed, or a simple tax cut, which leaves the current structure in place and just either lowers rates or carves out new special treatments or both. 

The big obstacle both share is found in congressional procedural rules. A normal bill is subject to a Senate filibuster, which would require all 52 Republicans to unite and find eight Democrats willing to vote with them to defeat the filibuster. That's not going to happen. 

So Republicans are going to have to use the special procedure called "reconciliation" which only requires a simple majority in both chambers. To do so, the rules require that they first need to pass a budget resolution through both the House and the Senate. That's not going to be easy. The Trump administration's budget submitted to Congress calls for deep spending cuts which will be very unpopular in some districts and states -- but likely have the enthusiastic support of the House Freedom Caucus and some other conservatives. Even getting a budget through the House will be hard; coming to an agreement with the Senate will be even more difficult. 

If they're able to get that far, however, the next step is likely possible, as long as Republicans keep their ambitions restrained and merely recreate the kind of tax cuts passed when George W. Bush was president. Yes, because of budget rules, tax cuts passed under reconciliation will be subject to a 10-year sunset, but they can always hope that Republicans have the votes to extend them at that point. 

Granted, if they just "settle" for large tax cuts, they'll be still breaking plenty of promises. They'll be violating the "Mnuchin rule" that there will be no net tax cut for rich folks. They'll be violating everything they say (but don't really mean) about federal budget deficit reduction. And to the extent that a streamlined tax system would be good for the economy? They would be giving up on that, too. 

The truth is, however, that Republican constituencies don't really care about those things, and are unlikely to be upset at their politicians if a large tax cut passes, even if most of the benefits go to those at the top of the income scale. 1 Trump will almost certainly embrace any package congressional Republicans will pass and declare it a fulfillment of exactly what he promised (although he could well turn against any bill that fails). While he did have a campaign tax plan (as opposed to his lack of any such thing for health care), it's very unlikely he'll care at all about whether any of "his" campaign ideas are included. It's not that he doesn't care about the details -- it's that he doesn't appear care about any of it, as long as he can claim a win. There's some reporting that Trump and the Treasury Department will fight Hill Republicans over the bill, but nothing we've seen on any issue so far hints that Trump will follow through on that. 

Again, as Wonkblog's Matt O'Brien explains, tax reform is inherently difficult because it creates winners and losers. What makes it harder? To the extent that what's gained from successful reform is overall economy efficiency, the winners are voters-in-general and the "win" is largely invisible, while the losers are specific, organized groups who know exactly how they will be hurt by any particular provision and are ready to lobby hard, whether it's ending the "carried interest" tax break or ending the mortgage interest tax deduction. Even worse: Some of the losers are localized geographically, which means their members of Congress will see a reform bill as politically toxic. And Republicans can only afford to lose two votes in the Senate unless they can somehow find some Democratic support, which doesn't seem especially likely (and will be impossible if the bill benefits wealthy taxpayers). 

So why tax reform? It seems to be a personal interest of Speaker Paul Ryan and perhaps a few other House Republicans. And, again, it is quite possible that a good reform bill could yield gains in overall economic performance. 2  

But all the logic in the world suggests that Republicans will soon forget about real reform, beyond perhaps a fig leaf of closing a loophole or two. What we're going to see attempted will probably be, as Bernstein and O'Brien conclude, a large tax cut that sunsets after 10 years. And while even that is a difficult haul for this dysfunctional party, there's a good chance they'll get this one over the finish line. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. Of course, the rich also pay most of the taxes, but it's likely a 2017 tax cut would be disproportionately aimed at the rich even taking that into account. And most Republicans, rich and not rich, are willing to accept the party's trickle-down arguments that tax breaks to "job creators" are good for everyone. 

  2. Although once transition costs are taken into account, it's no sure thing. 

To contact the author of this story:
Jonathan Bernstein at jbernstein62@bloomberg.net

To contact the editor responsible for this story:
Mike Nizza at mnizza3@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE
Comments