Republicans Looking for Easiest Way Out on Taxes
Tuesday was a busy day for the upcoming tax bill, but Republicans are moving in different directions, so it's hard to say whether it moved forward or backward:
- Senate Budget Committee Republicans moved closer to agreeing to the tax provisions of a budget resolution. In order to use reconciliation procedures and therefore need only a simple majority in the Senate, Republicans will have to pass their months-overdue budget. Without it, 60 votes would be needed to defeat a filibuster. So movement on a budget resolution is progress towards a Republican-only bill, which presumably would be more of a tax cut than reform.
- But the Trump administration began expressing support for a bipartisan bill, signaling the White House may change course and oppose any cuts for wealthy taxpayers, including backing off from the elimination of the estate tax. A bipartisan bill wouldn't necessarily be tax reform -- it could just be a middle-class tax cut. But any real reform would almost have to be bipartisan.
- Meanwhile, some Republican fundraisers are reported to be making passage of tax and health care bills as conditions for big money funding of Republican 2018 campaigns. It isn't clear exactly what kind of tax bill would make donors happy, but it would be surprising if rich donors were happy without sharing in tax cuts.
The starting point for all of this is the same for every administration: tax reform is hard, tax cuts are easy.
Tax reform -- eliminating tax preferences in exchange for lower overall rates -- is extremely difficult because it balances very visible harm for a relatively small number of people with small, hard-to-see benefits spread out over everyone. The benefit of tax reform, at least in theory, is that a more efficient tax code will both save on the dead loss of tax preparation, and more generally will produce slightly better economic growth. That's a big deal, if true, but it's also almost invisible. On the other hand, the costs are concentrated and obvious. For example, eliminating the deduction for state and local taxes is a large, tangible blow to those in high-taxation states; eliminating the mortgage interest deduction is a large, tangible blow to homeowners, and so on. Not to mention the tax preparation industry, which of course has its own force of lobbyists!
If there's one thing that the American Madisonian political system is good at doing, it's protecting intense minorities -- especially those with political resources -- from indifferent majorities.
Tax cuts, on the other hand, are relatively easy because they produce visible benefits to people while any costs remain theoretical and hidden. Indeed, Republicans argue that there are no costs to tax cuts. Whether that is true or not, however, it remains the case that even when cuts don't poll well there will still be a relatively intense minority -- those getting substantial tax relief -- who will favor the cuts. Even if tax cuts poll badly, it's unlikely any majority against cuts would be fully engaged. People flood congressional phone lines when they are afraid of personally losing something (such as their own health care coverage, as has been the case during the Obamacare repeal saga), not when they fear that someone else will get something.
The complication here is that Democrats oppose tax cuts, since few of their constituents believe they would benefit. That forces the Republican majority to either pass cuts using reconciliation or commit to real tax reform. The latter, of course, is an unappealing option since it would mean a lot of work with little incentive to do so and a real chance of failure. So it's no surprise that Senate Budget Committee Republicans are heading toward large tax cuts. 1
And yet, easy as it is, we've seen these Republicans attempt to legislate before, and it wasn't pretty. Consider their ongoing fiasco with health care. Or, for that matter, their inability to pass a budget resolution back in the spring, when it was due. After all, this is so far a historically unproductive Congress given the partisan context of a newly unified government.
That's where the White House contribution is particularly unhelpful. If they're basically passing large tax cuts -- and that's certainly what the donors want -- then it's going to include at least something for the rich. Indeed, for most Republicans, that's the whole point! Whether because they just want to reward their supporters, or because they sincerely believe that tax relief for rich people (directly, or through corporate tax cuts) is best for everyone.
Congressional Republicans will probably treat the White House as a paper tiger, and just assume that Trump will sign whatever tax cut Republicans place on his desk. That's probably a fairly safe assumption. But whether they can actually get this done? That's anyone's guess.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
I should mention that it is possible to combine both cuts and reform; a bill could remove lots of tax breaks and streamline the tax code, while lowering the rates enough to achieve an overall large cut. My guess is that Republicans won't really do that; at best, they'll include a handful of streamlining provisions with large cuts and call it reform.
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