Politics

Five Questions for Republican Tax Reformers

The gist: Are you really prepared to challenge constituents or launch the deficit into the stratosphere?

It's complicated.

Photographer: Scott Olson/Getty Images

This was the month that Republicans were going to sell voters on tax reform.

Instead, President Donald Trump took a "working vacation" at his New Jersey golf resort, threatening to obliterate North Korea. His tax-reform point men, Treasury Secretary Steve Mnuchin and chief economic adviser Gary Cohn, were last spotted in Scotland and the Hamptons. Most congressional Republicans are spending their August recess trying to avoid voters still furious about their bungled health-care legislation. 

These desertions may be a metaphor for the tax mission.

"I am very skeptical there will be any real tax reform," said former Senator Bill Bradley, the driving force behind the last successful tax reform, in 1986. "It's extremely unlikely they are willing to make the necessary trade-offs."

The White House and congressional leadership insist that Bradley is wrong. They predict it will be easier to achieve consensus on taxes than on health care, and that Republicans will be motivated to compromise after their failure to repeal Obamacare.

OK, let them answer five questions.

  1. Will a tax overhaul be purely partisan? It appears so. Republicans plan to tackle it under a special process called reconciliation that would enable Senate approval without Democratic votes. Yet history shows that passing a major bill on a partisan basis courts policy and political failure. The conditions for any Democratic support -- no tax cuts for the rich or measures that add to the federal deficit -- are unacceptable to many Republicans. Republican strategists hope to pick off a handful of House and Senate Democrats to create the appearance of bipartisan accord. That proved futile on health care and the prospects seem little better on tax reform.

  2. Will the prerequisites to even considering tax reform -- increasing the federal debt ceiling and passing a fiscal 2018 budget -- make the task even tougher? On these must-pass measures, the Republican right insists on amendments slashing spending, even on entitlements like Medicaid, that other Republicans will resist. The House Budget Committee approved a budget, but there aren't the votes to pass it. How Republicans navigate these controversies will set a tone and shape the substance of any tax reform.

  3. Will the Trump administration's tax bill, expected in September, be revenue-neutral or deficit-neutral? This sounds wonky; actually, it's a big deal. Republicans have promised it'll be revenue-neutral like the 1986 act, meaning that revenue lost to tax cuts for individuals and corporations would be offset by increases derived by closing preferences or loopholes. Closing loopholes, however, means angering important constituencies -- think of the homeowners who'd be enraged at the loss of a mortgage-interest deduction, for example. Backing away from that kind of political fight would limit the size of tax cuts in a revenue-neutral plan. So Republicans are focusing instead on a deficit-neutral measure that would pay for most tax cuts by slashing social programs like Medicaid and food stamps. "This policy choice has huge consequences for low- and moderate-income families," says Chye-Ching Huang, a tax policy analyst for the liberal Center for Budget and Policy Priorities.

  4. What gimmicks will be employed? Here's the problem: Under reconciliation rules, a tax bill can increase the deficit for no more than 10 years. That's why some of the tax cuts enacted under President George W. Bush had to be rolled back, an exercise House Speaker Paul Ryan doesn't want repeated. One way to deal with that problem is to exaggerate the future economic benefits of tax cuts by stretching an economic forecasting technique called "dynamic scoring," calculating that job and income growth will generate big increases in tax revenue. Republicans might also try to lengthen the 10-year deficit window, though that wouldn't be easy. The most significant game will be to make some tax cuts temporary, inside the 10-year deficit window. These would be the politically popular ones like middle-class rate cuts and a higher standard deduction. The assumption is that politicians wouldn’t want to let these lapse. The more controversial measures, like abolishing the estate tax (a benefit only to wealthy heirs), cutting rates for the affluent and for corporations, and allowing some partnerships and wealthier individuals to qualify for a lower rate, would be permanent.

  5. How do Republicans strike a balance between a) Trump's promise of tax cuts concentrated on the middle class; b) proposals dear to Ryan and his congressional colleagues that would tilt heavily to the more affluent, and c) the hope to restrain deficit growth?

A little smoke and a few mirrors might help. Maybe there's some of that stuff left over from the health-care fight.

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

    To contact the author of this story:
    Albert R. Hunt at ahunt1@bloomberg.net

    To contact the editor responsible for this story:
    Jonathan Landman at jlandman4@bloomberg.net

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