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Tax Reform Prospects for 2017 Dimming, Economists Say

Posted on March 13, 2017 by Jonathan Curry

The lack of progress on tax reform two months into President Trump's administration threatens any momentum to ensure legislation turns into law this year, two former White House economists said March 7.

"A really disproportionate amount of legislating happens in the first eight months" of a president's term, said Jason Furman, former chair of the Council of Economic Advisers during the Obama administration. "If you miss the first two months . . . you've not lost two out of 48, but more like two out of eight." Furman was speaking at a conference in Washington hosted by the National Association for Business Economics.

By this point in his first term, President Obama had already signed into law two major pieces of fiscal legislation, said Furman, adding that at this rate, Trump's chances of getting any sort of major tax cut passed is "going down a lot."

Former Congressional Budget Office Director Douglas Holtz-Eakin added that Republicans are stuck on the key issue of whether the tax cuts should be revenue neutral. House Republicans generally want tax reform to be revenue neutral, but Trump campaigned on enormous tax cuts, and has yet to release a new tax plan since taking office. Until they resolve that question, "it's unlikely we'll get to the finish line," he said.

The chance of enacting major tax reform in any year is less than 50 percent, said Holtz-Eakin, who pegged the chances of tax reform for 2017 at around 30 percent. "The White House needs to go all-in to get tax reform done. If they do, my guess is it will be much closer to the House construct, and they will have something like $100 billion to $200 billion in deficits as opposed to trillions," he said.

Support for Border-Adjustable Tax

Both Furman and Holtz-Eakin heaped praise on the business tax reform proposals in the House Republicans' "A Better Way" blueprint 2016 TNT 122-22: Congressional News Releases, which involves replacing the corporate income tax with a destination-based cash flow tax.

The House blueprint would be a "dramatic change" in U.S. business taxation, Holtz-Eakin said. "Its major virtue is that it protects the integrity of the tax base," and it moves from a tax system that favors foreign earnings over domestic earnings, to a tax system that is neutral, he added.

Furman called the border-adjustable tax provision in the House plan an "elegant solution," in that unlike the current system, which taxes profits based on where a headquarters is located, the destination-based cash flow tax is "taxing something that doesn't move."

Furman and Holtz-Eakin agreed that U.S. currency adjustments should theoretically offset the changes that come from exempting U.S. exports and taxing foreign imports at 20 percent, so that ultimately there is no net tax increase or decrease on either U.S. importers or exporters. However, Furman also said that reality may not exactly match theory, so he doesn't dismiss concerns about the plan creating "winners and losers."

The border-adjustable tax proposal could get hung up if the White House and some Republicans try to use it to address Trump's concerns on trade deficits, the economists said. "It is not a trade policy, it is a tax policy," Holtz-Eakin said, adding that in the "textbook model" of the plan, a border-adjusted tax is neutral on trade.

Although the administration and Congress, at times, have sold it as trade policy, other countries shouldn't interpret it that way, Furman added. Rather, they should try to emulate the proposed destination-based cash flow tax. "It's a nice system that creates a new equilibrium throughout the world," he said.

Growth Check

The Trump administration has yet to release a presidential budget with economic growth projections, but it could have trouble reaching the growth assumptions of between 3 and 4 percent made by top administration officials, according to the economists.

Policy changes have minimal effect, with most changes in GDP growth measured in tenths of a percent, not full percentage points, Furman said. Even repeal of the Affordable Care Act would only yield a 0.1 percent increase in the annual growth rate, he added.

The real obstacle to economic growth isn't policy, but rather demographics, as baby boomers age out of the workforce and the increase in labor force participation by women tapers off, Furman said. Also, the Trump administration's actions on immigration make it unlikely that an influx of immigrants will give a jolt of economic growth during the current administration.

Holtz-Eakin predicted the administration could optimistically get half a percent of growth from the House GOP's business tax reform plan "if it doesn't get watered down." He also approved of the 2-for-1 reg elimination executive order 2017 TNT 19-31: White House News signed by Trump, noting that it imposes an annual cap on regulatory costs.