America needs tax reform. But not like this.
The GOP will likely pass tax reform — but it will be the wrong tax reform
Cutting taxes, the raison d'être of the modern GOP, is proving far more difficult than Republicans ever imagined. August was supposed to be the month when President Trump signed an enormous tax cut, just like Ronald Reagan did in 1981. Maybe Trump would have even done it from the Reagan ranch in Santa Barbara, just like the Gipper himself.
But with August now come and gone, there is still no tax bill for Trump to sign. For now, at least, the GOP tax plan meant to supercharge the U.S economy is vaporware. In a speech Wednesday meant to publicly and belatedly kick off the GOP sales pitch, Trump offered only a few sketchy principles rather than firm details. So Trump being Trump, basically.
Yet despite the unexpectedly slow progress, it's hard to imagine the president not eventually signing some sort of tax cut into law. The plan might not get a single Democratic vote. And it almost certainly won't be the comprehensive tax overhaul House Speaker Paul Ryan has long pushed for. But at least the Trump GOP will be able to tell base voters before the 2018 midterm elections that they accomplished a key legislative goal to "make America great again."
In other words, it will be a terrible missed opportunity. The American economy needs tax reform, but not in the worrisome way that the Trumpublicans seem ready to deliver.
Take Trump's speech. The president mentioned that he would "like to bring our business tax rate down to 15 percent, which would make our tax rate lower than most countries, but still, by no means the lowest, unfortunately, in the world. But it would make us highly competitive."
That comment suggests that lowering the statutory corporate tax rate is the centerpiece of the plan. That move would be a mistake if it means that as a tradeoff Republicans would abandon the effort — long pushed by conservative wonks — to allow firms to immediately deduct investments in new plants and machinery. The goal of the latter effort is to boost business investment, the lack of which has been a chronic problem of the so-so economic recovery.
Not that cutting the corporate rate is a bad idea to boost growth! It's just that expensing is better, providing twice the oomph to growth according to Tax Foundation modeling, which assumes a more likely corporate rate cut to just 28 percent given budget constraints. And it is those constraints that will almost surely force a choice between a modest rate cut and full expensing.
There are other emerging problems as the negotiators from the Trump White House and GOP Congress scramble to complete a plan in time for a 2017 vote. Republicans don't have a politically viable way to pay for meaningful tax cuts — such as lowering the top corporate rate anywhere near 15 percent — especially since abandoning the "border adjustment" idea of no longer letting companies deduct the cost of imports. This means tax cuts might have to be temporary. (The rules are complicated, but if Republicans want to pass the bill without Democrats, it will either have to be deficit-neutral or temporary.)
But temporary tax cuts provide only sugary stimulus, not the deep structural reform needed to boost the economy's longer-term growth potential. The GOP also needs to figure out how this plan will directly provide tax relief for middle-class workers, even those who pay no income taxes. These are the people who really need help.
So what should Trump do?
Stop the scramble. Abandon the go-it-alone strategy that doomed the effort to repeal and replace the Affordable Care Act. To get the big reform the American economy needs, Republicans and Democrats should work together. Maybe lower the corporate tax rate all the way to 15 percent but pay for it by raising investment taxes. And perhaps help workers out by cutting payroll taxes, paid for by a new value-added tax or even a carbon tax.
These are big ideas and politically difficult lifts. But at least the effort, if successful, is more likely to be worth it.