The decision by the “Freedom Caucus” to join House Democrats to defeat Trump and the House Republicans’ first agenda item, the American Health Care Act, was a big deal. But it was much more than it seemed: The AHCA’s defeat makes it unlikely that Congress can now pass any significant permanent tax reform.
Two birds. One stone.
Why? What does the health care reform bill have to do with tax reform?
Everything.
Obamacare itself was roughly a $1 trillion tax hike over a decade. It was a $1.2 trillion dollar spending increase over a decade. Unchanged, that tax and spending spree continues (and grows) without end. The AHCA bill that failed would have repealed the Obamacare taxes. It would have been the largest tax cut and the largest spending cut in American history: A trillion dollars, every decade, forever.
Because the spending reduction was larger than the tax cut, both would have been permanent victories for smaller government. The bill would have passed the deficit-neutral (or deficit-reducing) requirement of the Byrd Rule, and unlike the Bush tax cuts of 2001 and 2003 the tax cuts would not have lapsed within ten years. They would have been permanent victories. The tax cut was made possible, compliant with the Byrd Rule, by the spending reduction in the bill.
The tax reform that Trump and Ryan and the House GOP caucus planned to move after the AHCA passed — reducing the corporate rate from 35 percent to 20 percent, allowing immediate full business expensing, ending the Death Tax and the AMT, and expanding the personal exemption to $12,000 for an individual and $24,000 for a family of four — assumed that federal taxes would have been reduced by that $1 trillion already.
Then the required tax cuts could have fit inside the reconciliation package, been deficit-neutral into the future, and could be made permanent.
But now Republicans are $1 trillion short.
That tax plan, a combination of Trump’s campaign goals and the House blueprint, can no longer be made permanent.
Here are the three options.
1. Return to the scene of the crime. If the “Freedom Caucus” can find 218 votes for a plan they approve and can pass the Senate, then the taxes and spending in Obamacare can be repealed and we return to the original plans for radical and permanent tax reduction and reform. The last week was a hiccup. A bad dream.
2. If the “Freedom Caucus” choses to leave Obamacare untouched, then the House Republicans could pass permanent tax reform but would have to reduce the planned tax cuts by about $1 trillion. The top business rate would only be reduced to 28 percent instead of 20 percent. Or the border adjustable part of the corporate income tax (created to raise $1 trillion over a decade to offset other tax reduction) could be doubled in size to raise $2 trillion over a decade. Or the higher taxes could be sprinkled throughout the original tax reform effort, irritating everyone.
3. Republicans could abandon the idea of having the tax cuts be made permanent. Tax cuts could be deeper and one need not “restore” the $1 trillion lost in the Obamacare SNAFU if Trump and the GOP are willing to have the entire package last just 10 years. Just like the Bush tax cuts of 2001 and 2003 which, like Cinderella’s coach, turned into a pumpkin at the end of 2012. Temporary tax cuts lasting 10 years or less can be passed with 51 Senate votes inside the reconciliation budget process.
The downside of temporary is that businesses cannot plan well around a tax plan that they know goes away in 10 years.
Those are the three options on how to walk away from the train wreck of last week.
Grover Norquist (@GroverNorquist) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is the president of Americans for Tax Reform.
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