Tax cuts are coming; tax “reform” not so much

It’s been amusing to hear about how anxious Trump and Republicans are to do “tax reform.”  Does any serious person actually believe that?  Cutting top rates for high earners and corporations is simply tax cuts.  Fiddling with a few loopholes here and there does not make it reform.  The idea that there will be– or ever was going to be– any meaningful and systematic change to the structure of our tax system under current Republican leadership is pure fantasy.

The failure of the ACA repeal makes the job harder, because now Republicans will have to increase the deficit to get their tax cuts for rich people.  I have no doubt at all they’ll do that in the end– truly, deficits only matter to Republicans under Democratic presidents– but at least their hypocrisy on such things will be 100% transparent (and thus maybe finally make it through to the journalists who cover this stuff and go along with the farce that Republicans care about deficits.  I doubt it, but I can hope).

Jim Newell with one of the best explanations I’ve seen of what’s likely to happen with taxes:

The AHCA was supposed to lower the budget baseline to give leaders about $1 trillion to work with in the tax reform package. This would have gone a long way toward making tax reform revenue-neutral—i.e., not a long-run deficit increaser—which would be a requirement in order to pass the bill with a 51-vote majority under reconciliation if the changes are to be permanent. If the tax reform package isn’t revenue-neutral, its cuts will expire after 10 years like the Bush tax cuts did. Balancing rate cuts with a simplification of the code is what would define it as “reform, and not just an enormous temporary tax cut.

Being unable to mug poor people out of $1 trillion in health care deeply complicates the already complicated tax reform math. Republicans want to slash rates for corporations and individuals (on income and investment) and eliminate the alternative minimum and estate taxes. This was always going to involve some tough decisions, and now those decisions are tougher…

House Republican leaders, meanwhile, are hoping to raise another trillion dollars or so through a border adjustment tax, the tariff-like instrument that these leaders hope will satisfy Trump’s promise to his base to stick it to those foreign countries ripping us off. The problem is that this might increase costs for a small little subset of the economy called “importers”—everyone from oil refiners to big retailers like Walmart—and another called “consumers.” In a familiar dynamic, Senate Republicans aren’t sold on it, and neither is the House Freedom Caucus.

More simply, a border adjustment tax would create winners and losers. Everything in tax reform would create winners and losers, because everyone is a part of the tax system. This is why it’s so hard…

There is, however, one possibility that could make tax reform easier than health care: ignoring the “reform” bit, and the ugly business of revenue-neutrality altogether, and just cutting taxes for 10 years instead.

There is nothing preventing Republicans from cutting taxes to whatever levels they want under reconciliation, except that these cuts can’t be permanent. The 2001 and 2003 Bush tax cuts were passed under reconciliation this way. The bonus for Republicans is that, in 10 years time, there’s a better-than-decent chance political pressures will favor renewing most of these cuts. Most of the Bush tax cuts, except on top earners, were ultimately renewed in 2012.

This seems like the likeliest outcome: Republicans will simply choose to cut taxes for 10 years without having to worry about the uncomfortable trade-offs (beyond worsening the country’s fiscal outlook, which is probably not one of President Trump’s or the party’s priorities, despite whatever anti-debt protestations they make under Democratic presidents). For one, House Freedom Caucus chair Rep. Mark Meadows, speaking this weekend after a fresh kill of the AHCA, said he doesn’t think tax cuts need to be offset by spending cuts.

So, there’s what you can likely expect– deficit-financed tax cuts for wealthy people masquerading as “reform.”  And then when we get a Democratic president again in 2021?  “Oh no, deficits!!!”


About Steve Greene
Professor of Political Science at NC State

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