Bannon's bright idea
Let Stephen Bannon rewrite the tax code
White House chief strategist Stephen Bannon has an unusual proposal for a Republican: He wants to raise income taxes on the richest Americans.
Specifically, a tax rate of 44 percent on all income over $5 million. Currently, the country's highest rate is 39.6 percent.
Bannon's economic views sit noticeably to the left of the GOP donor class. That means there's scant chance Republicans will take Bannon up on the idea. But if they were smart, they would.
First off, there's the simple matter of political self-interest. Tax hikes on the wealthy are actually quite popular across the broad majority of voters in both parties. In fact, compared to the golden age of America's mid-20th century, Bannon's proposal is weak tea: Back then, you would've paid a tax rate of over 90 percent on all income above $5 million.
But today, the wealthy wield disproportionate power in our political system. So the high commands of both parties — but the Republicans especially — balk at the idea at hiking taxes on the rich. And since President Trump is a snake oil salesman with no actual interest in policy substance or governing, the GOP's leadership has so far gotten its way.
However, Trump did campaign on precisely the kind of economic populism Bannon is pushing. He billed himself as a different kind of Republican: one who would shift the GOP back to a workers' party, and champion the "forgotten" men and women of the traditional American working class. "The people I care most about are the middle-income people in this country, who have gotten screwed," Trump said just last week. "If there's upward revision it's going to be on high-income people."
Republicans face a midterm in 2018. Trump faces re-election in 2020. If you promise economic populism, you should probably consider actually delivering some economic populism at some point. If you don't, eventually your voters will notice.
But Bannon's proposed tax hike is about more than getting re-elected. There's a procedural rationale, too.
The Republicans remain allergic to any negotiations with Democrats. But to avoid the filibuster in the Senate, and get bills through on a simple 51-vote majority, they've had to rely on a procedural move called reconciliation. And bills passed by reconciliation must either reduce the deficit or at least be budget neutral.
For a party that wants to cut taxes, this is a big problem. The GOP wants to cut the tax rate on corporate profits, cut the taxes paid by small businesses hit by the regular income tax, and probably cut the income tax for individuals as well. All that loses revenue, and threatens to expand the deficit. Republicans initially wanted to balance the ledger with a border-adjustment tax, but that appears to be dead now. They keep saying they'll close loopholes in the tax code to bring in more revenue, but so far no one's been able to articulate which loopholes they'd close. So for now, the Republicans have no way to make their tax cuts deficit-neutral.
Enter Bannon's plan to soak the rich.
Bannon's proposal would bring in $18 billion a year, or $180 billion over the 10-year window by which legislation is usually scored. But if you treated capital gains as regular income, subject to Bannon's new higher top rate, you could rake in even more tax revenue.
Raising taxes on capital gains is a longtime Democratic goal. Combine that with a willingness to raise income taxes on the wealthy, and the GOP could conceivably piece together a compromise that delivers big business tax cuts, but still gains a fair number of Democratic votes.
That brings in one last wrinkle.
Reconciliation is something of a one-off. Congress writes an annual budget, with specific reconciliation instructions for that year. The Republicans had planned to use the 2017 budget reconciliation to repeal ObamaCare, and the 2018 budget reconciliation to pass tax reform. But so far they've completely face-planted on the "repeal ObamaCare" part. And as soon as they write the 2018 budget reconciliation instructions to kick off tax reform, that's it: Their window to kill ObamaCare through the same process has closed.
But if Republicans can compromise with Democrats, and pass a filibuster-proof bipartisan tax reform through regular order, they don't have to use the 2018 reconciliation rules. And they can leave themselves the chance to come back to reconciliation on ObamaCare repeal.
Now, I've made it abundantly clear I think the GOP's desires for U.S. health-care policy are appalling. The point I'm making is simply that the Republicans could do themselves enormous favors, in both political and strategic terms, if they just gave a little on their tax cut devotion.
But this is the same problem they had with TrumpCare: The Republican Party's own demented ideological fixations backed it into a corner from which there was no good escape. Now, the unlikelihood that even Bannon's modest proposal could pass suggests the same thing is about to happen on tax policy.
More than ever, the Republican Party's greatest enemy is Republicans themselves.