Have the stars finally aligned for a Republican overhaul of the U.S. tax code?
House Speaker Paul Ryan pitched a plan for this conservative dream back in June of 2016. Now, with President Trump in the White House and Republican majorities in the House and Senate, Ryan wants to write and pass the legislation by August. Unfortunately, Ryan's plan is bound to face potentially insurmountable resistance — and not just from Democrats.
The problem comes down to revenue. In the broadest sense, the tax code involves three dials: Taxes on individual incomes, taxes on corporate profits, and taxes on capital. That last group includes a hodgepodge of various things, from dividends to capital gains to the estate tax. If you wanted to keep things revenue neutral, you could turn some dials down while turning others up. Maybe cut individual income taxes, but hike taxes on capital. Or cut taxes on corporate profits while hiking taxes on capital. This would make bipartisan support for the change easier to drum up, making passage far more likely.
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But the GOP wants to cut everything. That means Republicans can't count on Democratic support, which in turn means they can't afford to lose more than a few defectors from their own party. And they're bound to lose at least a couple. That's because cutting everything in the tax code will lead to a flood of red ink, putting the plan at odds with Republicans' commitment to deficit reduction.
Now, it's an open question how serious most Republicans are about balanced budgets — the concern seems to only be front and center when Democrats are in power. But you'd still imagine a few of them would balk at a proposal that explodes the deficit by trillions of dollars.
Perhaps even more ominous for Ryan, though, are the procedural realities for a deficit-exploding plan in Congress.
Democrats may be the minority in the Senate, but they have enough votes to filibuster any bill they don't like. Republicans' way around this problem is a procedural gimmick in the Senate's rules called "reconciliation." It allows you to pass bills with simple majorities as long as they just deal with budget issues — like taxes. The catch is that, to use reconciliation, whatever bill you're passing can only increase the deficit in the first 10 years after enactment. Beyond that window, the effect must be budget neutral.
So even without Democrats' help, the Republicans still have to achieve budget neutrality in the long term. That means hiking taxes on someone — and as soon as you do that, you start pissing off various parts of the GOP coalition.
For instance, Ryan and other Republicans have long claimed they'll lower tax rates across the board, but also close loopholes, so the effect on revenue is a wash. But their commitment to this strategy never held up under scrutiny. The tax code's costliest loopholes tend to benefit wealthier Americans and powerful business interests, since they have the political clout to demand the carve-outs in the first place. They're also key GOP constituencies.
So in practice, the Republicans tend to tread lightly when closing those loopholes, and never close them enough to actually achieve deficit neutrality. The Tax Policy Center scored Ryan's blueprint, and found it lost about $3 trillion in revenue over its first decade, even with Ryan's proposed loophole closures.
Ryan's other idea is something called a border adjustment tax — basically, a tax penalty on all corporate profits that depend on imports. It would fulfill Trump's "America first" promises to promote exports, protect domestic industries, and lower the trade deficit. And it could help with the budget math, by raising around a trillion dollars in the first 10 years.
But this plan creates winners and losers, too. Industries that rely heavily on exports, like manufacturing, would be helped; but life would get more expensive for big corporate retailers like Walmart, who rely heavily on imports and might pass the costs of the border tax onto their consumers. So Republicans from districts where those latter businesses wield influence are mightily resistant. (On top of that, it may not raise enough revenue anyway: The border adjustment tax was included in the analysis that found Ryan's plan lost $3 trillion.)
Ryan's third option is to just work the refs.
The Congressional Budget Office (CBO) scores bills for their budget effect. Republicans have long argued the CBO should use "dynamic scoring," a method that incorporates the boost to economic growth — and thus to tax revenues — that comes from cuts in tax rates. The party is convinced this is the secret sauce that could save their plans. But earnest and sober attempts to measure the "dynamic" effect found it to be modest at best, and nowhere near big enough to cover the hole Ryan's blueprint would blow in revenue.
The final possibility is to just do what the GOP did in 2001 when it used reconciliation to pass the Bush tax cuts: Design the cuts to expire after 10 years, and hope to God something happens in the interim that allows them to make the cuts permanent. But that, too, would probably be seen as a failure; conservatives view their overwhelming power in Washington as a once-in-a-lifetime chance to see one of their most cherished ideals passed into law.
So with all these political realities clashing, no wonder support for Ryan's plan within the Republican Party is already coming apart. "The House is talking about a tax plan that won't get 10 votes in the Senate," Sen. Lindsey Graham (R-S.C.) recently snorted.
The stars have aligned for the GOP's tax dreams, alright — the unlucky ones.
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