What Comes Next For Tax Reform?
WHY YOU SHOULD CARE
Because it’s one of the two unavoidable things, right?
The author is the founder and president of Americans for Tax Reform.
When the Roman Senators struck down Julius Caesar, they were quite convinced they were saving the Roman Republic. Their act ended it.
The 25 or so “Freedom Caucus” conservative Republicans in the U.S. House of Representatives who joined House Democrats in stopping the repeal of Obamacare were quite certain they were driving American economic policy to the right.
The defeat of the repeal of the Affordable Care Act (ACA) was not just a decision to leave Obamacare in place. It ripped the lungs out of an effort to reform the federal tax code that was scheduled to move immediately after the ACA was repealed.
Why and how did one stone kill two birds?
The “repeal and replace Obamacare” legislation and tax reform are each designed inside reconciliation budgets. This allows each to pass with a simple majority vote in the House and Senate. That is standard operating policy in the House, but in the Senate, it represents a unique opportunity to avoid a filibuster and enact legislation with 51 votes (not 60). A reconciliation budget comes with certain limitations. It can deal only with taxes and spending, and not policy changes. For instance, you cannot pass tort reform as part of reconciliation: There’s too much policy involved, and too little impact on budget numbers. You can — and Congress did — include the repeal of a trillion dollars of tax hikes that were part of Obamacare, and Congress can and did include $1.2 trillion in spending reduction. Both numbers over a decade.
So repealing Obamacare, which would have lowered the tax burden by $1 trillion over a decade, would have been a key step toward tax reform. Failing to repeal the Obamacare taxes puts tax reform “backward” one trillion dollars.
And the goal of tax reform for the White House and Congress is to turbocharge the economy in anticipation of the 2018 and 2020 elections. The Reagan tax cuts took full effect January 1983, and four million jobs were created that year. Indeed, had the Obama recovery been as robust as Reagan’s, more than 12 million additional Americans would have jobs today. Tax reform is designed to repeat the Reagan success.
Tax reform as outlined by the Ways and Means Committee in the House and the Trump Administration includes the following:
- Reductions in taxes for corporate income and small businesses
- Reductions in the cost of capital investment
- Lower personal income taxes, and fewer income brackets too
- Abolition of the alternative minimum tax
- The end of “death taxes,” aka inheritance taxes and estate taxes
But we are further away from this paradise of lower taxes and simpler, more pro-growth tax code than we anticipated. A trillion dollars further away, in fact. So we have four options:
1. Go back to square one
Get House Republicans to rethink their earlier circular-firing-squad strategy and pass something that looks very much like the legislation they balked at last Thursday and Friday. Then proceed as planned. This looked unlikely early last week, more likely now.
2. Acceptance and dilution
Accept that you have one trillion less to play with and pass a watered-down tax-reform package with a smaller reduction in the corporate income tax rate. Go to 28 percent, not 20 percent. That would allow all other changes to move forward.
3. A big tax cut that will evaporate
Go for the entire planned tax cut and reform but recognize that by hiking the deficit by $1 trillion in years 11 through 20, the entire tax package (like George W. Bush’s tax cut in 2001) will evaporate after 10 years. Ten glorious years of low rates, and then “poof,” Cinderella. Pumpkin. Mice, not coachmen.
4. Tax hikes?
President Trump tires of playing with the “Freedom Caucus” and turns to the Democrats and tax reform becomes a tax hike to pay for infrastructure as defined by the construction unions and Senator Charles Schumer.
My prediction? Five days ago it would have been option three — the robust but temporary tax cut. Less attractive to the business community that must think and act beyond the 2018 and 2020 elections, but very attractive to congressmen and presidents with shorter time horizons.
Today, I am leaning toward option one — the mulligan. Those congressmen who were too cool for school, too conservative to vote for the largest tax and spending cut in American history, are thinking more clearly now that they are standing at the abyss and not liking the lousy three options they left for themselves. And for us.