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Former Trump Advisers Urge Piecemeal Approach to Tax Reform

Posted on April 20, 2017 by Jonathan Curry

Republicans risk getting bogged down in endless negotiations over tax reform if they continue to pursue comprehensive overhaul, but splitting up tax reform into separate bills could yield an early legislative and economic victory, four of President Trump’s former campaign advisers argued in an April 19 op-ed.

“We believe the Republican Party’s lesson for tax reform is this: Don’t try to rewrite the entire tax code in one bill,” they wrote in The New York Times.

The four authors -- Steve Forbes, Arthur Laffer, Larry Kudlow, and Stephen Moore -- cited the House's failure to pass legislation to repeal and replace the Affordable Care Act as a cautionary example, and urged Republicans to take a simpler approach: tackle corporate and small business taxation first, and save individual tax reforms for later.

They also recommended Republicans quit considering controversial tax provisions, like the border-adjustable tax or a carbon tax. The border-adjustable tax is a “poison pill” that “divides the very business groups that the party needs to rally behind tax reform,” they wrote. Instead, Republicans should get behind the three main business tax reforms Trump campaigned on: reducing corporate and small business tax rates to 15 percent, allowing full expensing, and establishing a low tax rate for the repatriation of foreign profits.

Such a plan would initially increase deficits, so Trump and House Speaker Paul D. Ryan, R-Wis., would have to drop the pretense of revenue-neutral tax reform, the former advisers said. Instead, Republican leaders should present it as a tax cut that will increase middle-income wages and boost job growth, they said.

“The additional increase in real wages could be nearly 10 percent over the next decade,” the former advisers wrote. “And, if we are right that tax cuts will spur the economy, then the faster economic growth as a result of the bill will bring down the deficit.”

They also urged Republicans to stick to the August timeline of signing tax reform legislation into law. The stock market and U.S. businesses “are starting to get jittery” over fears that tax reform negotiations will drag into 2018, which could undermine the “Trump bounce” in markets seen after the November election, they said.

'The All-Candy Option'

The former advisers’ proposal drew largely skeptical reactions from outside groups.

“I think it’s so blatantly irresponsible,” Maya MacGuineas of the Committee for a Responsible Federal Budget told Tax Analysts. “They’re selling the all-candy option, which we see time and time again in politics.”

Pro-growth tax reform is done by lowering tax rates, eliminating tax preferences, and providing sufficient spending offsets, MacGuineas said. By ignoring two of those elements -- eliminating tax breaks and reducing spending -- they’d be undermining their predicted outcome of economic growthshe said.

MacGuineas was equally skeptical that lawmakers would revisit individual tax reform after passing a business-only tax cut. “I would love to have someone point out a time when we did the sweetener today and did all the hard stuff later,” she said.

Allowing full expensing and lowering the corporate tax rate are “really good things,” but the plan overall sounds like “making a deal that you need to make” rather than a carefully thought-out policy, Alan Cole of the Tax Foundation told Tax Analysts.

To be most effective, expensing and corporate rate reductions should be long-term policy projects that don’t expire after 10 years, as they likely would under the reconciliation process, Cole said. He noted that the Senate’s Byrd Rule would prohibit reconciliation legislation from increasing the deficit outside the 10-year budget window, so those policies would have to have sunset dates, much like the 2001 Bush tax cuts did.

According to Cole, expensing and tax-cutting policies should be permanent or close to permanent, so that they encourage the type of job-creating behavior the former advisers are seeking. Cole provided the example of someone wanting to build a hotel, which then would yield jobs. A developer would need to plan the project and then build the hotel before it becomes operational, all of which would take several years. “If the corporate rate goes back to where it was because they only managed a temporary reduction, then you’ve really not accomplished something on the time scale that’s necessary for this to work,” he explained.

Cole acknowledged that even though the Bush tax cuts were set to expire in 2010 as required by reconciliation rules, many of them became permanent in subsequent legislation, and something similar could happen here. It's possible that by giving people a tax cut, once they adjust to that policy they’ll fight much harder to keep it, he said. But he added that still doesn’t give businesses the certainty they need for lower rates and expensing to have their desired economic effect. “I can’t predict what kinds of people will be around in 2027 to manage and prioritize tax policies,” Cole said.

He pointed out that the former advisers’ plan revives the long-standing question of how, if passthrough businesses can receive the lower 15 percent, lawmakers could adequately prevent the reclassification of wage income as passthrough income. Individual income tax rates would remain as they are -- with a top rate of 39.6 percent -- until individual tax reform was passed. Cole noted that the Trump campaign said it would include rules to prevent such gaming, but he added, “I will believe someone can do that well when we see a real proposal.”

The former advisers recommended using repatriation to pay for infrastructure as a way to draw Democratic votes, but Cole dismissed that as a one-time negotiation tool. He said it would have little economic effect unless it was paired with long-term international tax reform changes, like a transition from a worldwide tax system to a territorial tax system.