House Speaker Paul Ryan will make the case for tax reform on Tuesday. Different factions of the House caucus disagree about what shape this should take, and the Senate has several different plans. The White House doesn’t have a plan yet.
But an army of lobbyists stands ready to defend every carveout that shields their clients profits from taxes, pushes unwilling consumers to buy what they’re selling, or simply complicates things so much that their clients will need an army of lobbyists and lawyers.
This is a daunting battlefield for Ryan and the GOP to fight on. But they must do so. Five months into a period of unified government, Republicans have no significant legislative accomplishments, and their other major goal, repealing and replacing Obamacare, is on an ugly path.
They must pass tax reform.
Ryan’s plan, written with Ways and Means Chairman Kevin Brady, has its strengths. Nearly doubling the standard deduction for individuals is a simple and elegant reform. It cuts taxes for almost all who pay income tax, simplifies filing, and reduces the distorting impact of tax carveouts such as the mortgage-interest deduction.
The House plan has its problems. There are serious reasons, for example, to object to its corporate-tax structure, which is anchored by the border adjusted tax, a system that favors exports over imports. Neutrality is a crucial principle, and it’s hard to see the adjustment tax as neutral; it picks winners and losers and arbitrarily decides that selling stuff inside America is bad but selling it overseas is good. It would also penalize American manufacturers who buy foreign components to improve the quality or reduce the price of the goods they make.
This is grossly unfair. A businessman might ask, How could you stop me from deducting my costs? This idea is confusing because in America we tend to tax profits, revenues minus the costs of revenues. The new tax is a total overhaul, though. It represents a move from an income tax to something of a consumption tax.
Why would Ryan and House Republicans change things so drastically? Because real corporate tax reform that allows significantly lower rates may not be possible by closing “loopholes.”
Many tax “loopholes” are really efforts to account for the vagaries of calculating profits in industries that may differ tremendously in their cash flows and business models. The loopholes that are obviously special carveouts (for instance on renewable energy or NASCAR stadiums) are tiny in budget terms.
So, on the corporate side, closing obvious loopholes and reducing rates won’t go very far towards simplifying things, getting lower rates, or juicing the economy. So tax reformers may need to go big. But the border adjustment tax isn’t the only possible approach.
Sens. Ron Johnson and Mike Lee have separately proposed tax plans that tap into a reform proposed by economists Alan Viard and Eric Toder, which would slash corporate tax rates but offset that cut by taxing investment income as ordinary income — that is, taxes on corporate profits would happen more at the investor level than the corporate level.
This should end the tax code’s bias in favor of corporate borrowing and diminish incentives for corporations to go overseas, while mooting the Warren Buffett complaint that his tax rate is lower than his secretary’s.
Lee and Johnson are trying to balance the economic imperative of increasing competitiveness and reducing government distortions with the political imperative of not passing a tax plan that simply benefits big business and the wealthy.
The path is tricky, but the need is great. If Republicans finish 2017 with no tax reform and no Obamacare replacement, they will be proving Democrats right when the say the GOP cannot govern.
