President Trump and the boys from Goldman Sachs have put together a dazzling tax reform plan. It has enough pro-growth incentives to energize the economy even after Congress eliminates some of them. But there’s a problem: paying for it.
Democrats aren’t worried about this. They’re against the whole bill, period. But Republicans should be concerned. They will have to choose between creating a permanent new tax system that benefits most Americans or an array of tax cuts likely to be temporary.
Unsurprisingly, a disagreement between Trump officials and Republican leaders in Congress has already surfaced. This has excited the media. Politico jumped in first with a story that House speaker Paul Ryan is “likely to get rolled on tax reform.”
I doubt he will, though word is being spread by the Trump administration that paying for tax reform won’t be necessary. Why? Because a surge in tax revenues from faster economic growth will solve the problem. That will make up for the lost taxes from deep tax cuts.
But it’s not that simple. For tax reform to pass Congress, it will have to sneak through the reconciliation process—you know, the same maze that repeal and replace of Obamacare must pass through. For this to happen, the tax bill will have to be “revenue neutral.” That means “paid for.” If this arcane process works, the result will be worth it: permanent tax reform with deep tax cuts.
Why is permanent so important? That’s another story. “Permanent policies have a greater bang for the buck than temporary ones,” Douglas Holtz-Eakin, the former head of the Congressional Budget Office, says. They will stimulate more private investment. If the policies are temporary, the business community will be uncertain how long the new tax incentives will last. And they will invest less.
President Bush’s tax cuts of 2001 and 2003 are an example. Growth was less than robust. The cuts were temporary and would have expired in 10 years had President Barack Obama and Senate majority leader Mitch McConnell failed to negotiate a compromise. They agreed to save the cuts for the middle class. And McConnell managed to preserve the cuts for millions of upper-middle-class taxpayers as well. Tax rates for the rich went up, pleasing Obama.
Where does this leave us? Trump and his advisers are mistaken in their belief there’s a way around reconciliation, which bars filibusters and would allow a 51-vote majority to enact tax reform. Republicans narrowly control the Senate, with 52 seats.
The chances that Trump’s I-won’t-pay plan will meet the rigors of reconciliation are nil. And absent reconciliation, it’s not likely he could attract eight Democrats to kill a filibuster either. The truth is tax reform will die, at least in the current Congress, unless reconciliation is used.
Ryan explained why on Fox Business in March. “The left does not believe in what we’re trying to do on tax reform,” he said. “They don’t want us to lower tax rates. They don’t want to go to a territorial system [on overseas profits]. They don’t believe in these things.” Democrats will oppose tax reform en masse.
But Republicans do believe in all those things. Peter Roskam, the chairman of the House Ways and Means subcommittee on tax policy, says we’ve reached a “national inflection point” in 2017, “a transformational moment.” Tax reform is a way of seizing that moment. “To squander it would be foolish,” according to Roskam, who represents a district in the suburbs west of Chicago.
“Nobody is defending the tax code,” he told me. “And nobody likes the IRS. If the IRS was a person choking on the side of the road, people would walk up and say, ‘I don’t think you’re going to make it.’ And walk away.”
Done right, tax reform would spur “real growth, simplify the tax code, end the erosion of the tax base, and create a permanent tax system,” Roskam says. Done wrong, the deficit will soar, and Republicans will be blamed for doing what they blamed Obama for doing: driving up the national debt.
There are ways to pay for tax reform without increasing the deficit, slashing spending, or raising taxes. The most famous was followed for tax reform in 1986. Tax loopholes and special interest preferences were eliminated, making room for lower tax rates and a broader tax base.
Getting rid of loopholes is very difficult. Every break has a constituency, often a wealthy one. Passage of the 1986 reform took two years. Thirty years later, new loopholes fill the tax code again. Their beneficiaries won’t surrender without a fight.
Last year, House Republicans campaigned on a plan featuring a 20 percent “border adjustment tax.” Imports would be taxed, exports wouldn’t. The tax would not be unfair to other countries. They have their own ruses to tax American imports, such as a value-added tax.
The border tax split the business community. Retailers, given all the stuff they import from China, were furious. They mounted an aggressive effort to vilify the tax. But Ryan hasn’t given up, since the tax makes sense. It would make it possible to cut the corporate tax rate from 35 percent to 20 percent while sticking to revenue neutrality. Trump wants 15 percent.
The fault line is between permanent and temporary tax cuts, Roskam says. It pits a border tax against growth-generated revenue from tax cuts. It puts Ryan and Trump on opposite sides.
“This needs to be melded into one bill,” Roskam says. Once it happens, “we can get the kind of economic growth we need, which will solve so many problems we have in this country,” Ryan told PBS. That’s worth praying for.
Fred Barnes is an executive editor at The Weekly Standard.
