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Republican tax reform: Less ambitious, more realistic

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Republicans say they will seek to lower tax rates as much as possible by paying for them by eliminating tax breaks. (AP Photo/J. Scott Applewhite)

With border adjustment gone, Republicans are finally united around tax reform. The price for the consensus, though, is that the ultimate tax reform package is bound to be less ambitious than what the GOP originally envisioned.

"Unfortunately we're not going to have fundamental reform and it will make it hard to get the rates down low," Republican California Rep. Devin Nunes told the Washington Examiner Friday. "There are still opportunities out there, they're going to be hard to achieve, but we're going to try and get there."

Nunes was the original author of legislation, later picked up by Ryan and the House Ways and Means Committee, on which Nunes sits, to throw out the corporate income tax altogether and replace it with a cash-flow tax.

Thursday's joint statement from Republicans didn't include many details, but it did explicitly rule out a cash-flow tax along the lines envisioned by Nunes.

Instead, the statement made clear, congressional Republicans will seek to lower tax rates as much as possible by paying for them by eliminating tax breaks. The tax base will stay the same, but will simply be broader.

The statement was enough to bring business on board.

On Friday, the Business Roundtable, a group of big business CEOs, announced a multimillion-dollar effort to help the tax reform effort through cable TV and radio ads.

Previously, business had been split. Retail groups fought the border adjustment out of fear that it could result in higher taxes for imported goods.

Also on Friday, the Koch network of political nonprofits threw its full weight behind tax reform, after working for months to kill border adjustment. Americans for Prosperity and Freedom Partners, two Koch-affiliated free-market groups, announced that they would hold an event Monday promoting tax reform with Treasury Secretary Steven Mnuchin and White House legislative director Marc Short. The group's volunteers also will make calls throughout the summer to lawmakers to push them to pass tax legislation.

Tim Phillips, the president of Americans for Prosperity, said that his group favors lowering tax rates for all businesses.

Yet, without a border-adjusted cash-flow tax, rates cannot go as low.

In a cash-flow system, companies would no longer have to perform hideously complex accounting to determine what their taxable income was each year. Instead, they would simply tally up money in minus money out — a totally different tax base.

And when that tax is based on the destination of sales, using border adjustment, the base is larger than the current U.S. corporate tax base, to the tune of about $1 trillion more in tax revenue a year. With that revenue, House Republicans envisioned lowering the corporate tax rate to 20 percent, down from 35 percent now.

Republicans don't have a stated goal for the corporate tax rate, but several experts told the Washington Examiner that a target in the mid-20s would be a good outcome. Originally, Trump had set a goal of 15 percent.

"I think that's the central debate: How big is the tax reform going to be? How big are the tax reductions going to be?" Office of Management and Budget Director Mick Mulvaney said Friday in an interview with CNBC.

Without border adjustment, "it becomes more complicated," said David Schweikert, a member of the Ways and Means Committee. Without the revenue raised by border adjustment, the target corporate tax would be about 31 percent rather than 25 percent, he suggested.

Opponents who killed border adjustment "have an ethical obligation to step up" and propose ways to replace the lost revenue, he said just off the House floor Friday.

There won't be any easy replacements, however. Any break that lawmakers target for elimination would be fiercely defended by the industry or group that it benefits, the same way that retailers fought border adjustment.

"There's not some easy honey pot of money to go after," said Jon Traub, managing principal of Deloitte's Tax Policy Group and a former staff director of the Ways and Means Committee.

Any money lawmakers are able to raise to dedicate to rate cuts, he said, will involve "hand to hand combat, provision after provision."

But even getting to that outcome will be difficult.

And even harder will be including some of the bolder ideas, advanced by Ryan, meant to spur economic growth. Those include ensuring that reform is permanent, so that businesses can plan along 10- or 20-year timelines, and allowing companies to immediately write off all new investments.

The advantage of the vague joint statement is that "it leaves the experts and the taxwriters significant flexibility," said Jeff Kupfer, an adviser to Beacon Global Strategies and a former Bush Treasury official.

That flexibility, however, could undermine momentum for a comprehensive, permanent rewrite of the tax code.

Especially with their failure to pass legislation to repeal Obamacare, Republicans are "under tremendous pressure to get something done on taxes," said Marc Gerson, chairman of the law firm Miller & Chevalier and a former Ways and Means tax counsel. If they start to struggle to do the hard work of comprehensive tax reform, "you could see a pivot to more of a tax cut or a tax relief package."

That would be a letdown, from the perspective of Ryan and other House Republicans who have said that permanence is the goal.

In that sense, it's noteworthy that Thursday's statement said that Republicans would "place a priority" on permanence, but stopped short of saying that a permanent rewrite of the code would be a do-or-die goal.

Using the legislative process known as reconciliation, Republicans can pass a tax bill without Democrats. But under the procedure, a permanent change to taxes could not add to long-term deficits. Some Republicans would rather cut taxes deeply, even if that meant that the changes to the code would have to be temporary.

The statement also stopped short of endorsing "full expensing," or allowing companies to deduct all new investments from their taxable income in the year they are made. Under the current code, companies must depreciate investments over a course of years, according to a complicated schedule.

Ways and Means Committee Chairman Kevin Brady said Thursday that the goal remained full expensing. But he will face pushback on that priority, even with the new consensus.

Phillips said his group would be advocating rate cuts, as opposed to full expensing, both of which cost revenue. "We do think full expensing is not the right way to go, as it chooses a certain kind of economic activity to reward," Phillips said. He noted that start-ups and established companies make differing levels of new investments.

• David Drucker contributed to this article.