Tax Analysts Blog

The Clock Is Ticking for Tax Reform

Posted on May 8, 2017

For most of the year, Republicans have said that passing healthcare reform and presidential involvement in the process could make tax reform much easier. In the last two weeks, President Trump released a tax plan and the House passed a repeal-and-replace bill by a narrow margin. Unfortunately, it’s not all that clear that either of these events will actually help the GOP accomplish anything on taxes.

Let’s start with Trump’s April 26 release. The president teased a plan for months, with administration officials emphasizing after the collapse of the first healthcare reform vote that they would be driving the train on tax reform. This might have led some to believe that Treasury Secretary Steven Mnuchin and Gary Cohn of the National Economic Council would be discussing an in-depth plan to compete with the House “Better Way” blueprint. No such luck.

Trump’s plan was a one-page outline that basically reemphasized his campaign positions: a 15 percent corporate rate, consolidation of individual brackets into three with a top rate of 35 percent, a switch to a territorial system, a doubling of the standard deduction, and the possible elimination of all individual deductions except those for mortgage interest and charitable giving. What wasn’t in the plan was a lot more important that what did make it onto that page. There was no mention of a border-adjustable tax, no references to full expensing, and no discussion of corporate interest deductions. There also wasn’t much specificity on passthroughs, with some reference to a 15 percent rate for small businesses but no clarification on what exactly that meant.

Trump’s plan was essentially a broad call for a major tax cut. It was mostly giveaways and would create very few losers. That simply isn’t how tax reform works. Even the House blueprint causes some industries and taxpayers a bit of pain.  Many commentators argued that the Trump proposals set back the cause of tax reform by being so unrealistic. Each business group and lobbyist will now latch on to the parts of the plan that benefit it most, making it a lot harder for Congress to actually put together pay-fors or draft a balanced package. Trump offered all carrot and no stick.

Arguing that the president did only harm is a bit harsh. Trump certainly didn’t release anything like the Reagan Treasury did in 1984, but any presidential engagement can help. The administration has now put some political capital on the line, and it’s reiterated to Congress the parts of tax reform that are most important to it (the 15 percent corporate rate and the doubled standard deduction, for example). Also, by not endorsing the destination-based cash flow tax, Trump sent a powerful message to House members who have pushed it. He’s given GOP opposition to the cash flow tax even more reason to force House Speaker Paul Ryan and Ways and Means Chair Kevin Brady to abandon the complicated plan in favor of a simpler rate cut.

The May 4 vote on the American Health Care Act finally sent repeal of the Affordable Care Act to the Senate. It was hailed as a major triumph for Ryan in particular and Republicans in general – they finally delivered on their promise to begin repealing and replacing Obamacare. Finishing with healthcare reform in the House for now is a major step for tax reform. It will allow Ways and Means to focus exclusively on melding Trump’s plan with the parts of the blueprint that fit. And repealing Obamacare gives the GOP a much more favorable baseline to work with when it finally puts together a bill that can be scored by the Congressional Budget Office and Joint Committee on Taxation. 

But the healthcare vote also exposed the deep divisions in the Republican caucus. It only passed by a 217-213 vote. That isn’t a lot of room for error. Tax reform will create even more cleavages, dividing Republicans by ideology (deficit hawks vs. tax cutters; pro-business vs. populist) and geography (high-cost-of-living states vs. low-cost-of-living states, for example). 

The healthcare debate might have exposed the limits of Ryan and Trump’s ability to bring together the recalcitrant wings of their party.  How much political capital do either have left?

The release of a presidential plan and the passage of healthcare reform should have made the future for tax reform a lot clearer.  Instead, it only put reformers on the clock.

Read Comments (6)

Edmund DantesMay 9, 2017

Last fall I was quite optimistic that Trump would get tax legislation through. Naive, I guess. I am deeply disappointed with the slow pace, and with the failure to articulate easily understood pro-growth tax changes. By this point in 1981, the outlines of ERTA were coming into focus.

Rather than find a new shape for the wheel, I wish Congress would simply re-enact the 1986 Tax Reform Act word for word. We know that Code worked, it set the stage for sustainable economic growth well above our recent experience.

I guess it's going to take a stock market crash to get Congress to get down to business to fix this mess.

Mike55May 9, 2017

Good/balanced summary of where things stand. A couple observations...

Enacting something that can be touted as "tax reform" during the 2018 elections is almost a given at this point: a permanent rate reduction on the corporate side (however much can be paid for via mandatory repatriation at a reduced rate and dynamic scoring), coupled with temporary cuts on the individual side, would have enough votes. The challenge for Republican leadership is figuring out exactly how much they can improve upon this less than exciting baseline. Hopefully a lot, but I guess we'll see.

As for healthcare: I'm hopeful dumping this mess onto Hatch's plate represents a step forward (or at least sideways). That was of course the sole point of passing the AHCA; the major players in the House finally accepted they are in the wrong chamber for this sort of work.* I'm not sure how much better the Senate will actually do, but it seems like a rational move. Also, sometimes when a process is failing any change is a good change.

*Fixing our healthcare system is going to take a very long time, with countless hard/unpopular choices to be made along the way. The nature of the Senate (e.g., 6 year terms, factions play a much smaller role, meaningful primary challenges are less likely, etc.) lends itself more to this type of work.

Edmund DantesMay 17, 2017

When I say we need a stock market crash to get tax legislation, what I mean is that the next recession has to start, followed by a 25% market correction, which will be sufficient to drop the "revenue neutral" nonsense that Republicans are spouting. There is no such thing as a knowable revenue neutrality. Every projection of the consequences of tax changes in the past has been ranged from wrong to insanely wrong, what were they thinking? Dynamic scoring can't change this, because who is to say what really contributed to an economic trend change? Yes, when we put the luxury tax on yachts it killed the New England boat building industry, it's easy to see the negative dynamics, but not so the positive dynamics. I believe that ERTA led directly to improved GDP growth, and the 1986 Tax Act sustained it, but no Democrat will agree with those conclusions.

As to health care, I've given up. Let's keep the ACA and just watch it die. It was never intended to live anyway. Only when the true dimensions of the catastrophe are unambiguous will we the kind of bipartisan action needed for government takeover of the medical industry. Just kick that can down the road.

Travis RechMay 18, 2017

I think its fairly unambiguous that the 1986 reform sustained GDP growth, and I doubt many Democrats would deny that. I think the Democrat, or at least progressive Democrat, position is that much of the GDP growth benefited those most poised to take advantage of lower capital gains and income taxes. No doubt the securities markets boomed and executive compensation began to rise as direct results. Real wages for the average America were rather stagnant relative to the boom in GDP growth, which I think is where the rubber meets the road.

As a corollary, Reagan initiated massive deficit spending in conjunction with (as a result of?) the tax cuts so it isn't hard to see why the GDP rose when a huge influx of money is transferred to the rentier class and taxes on the rentier class are lowered, and interest rates are raised to pay for it. I do not think Democrats are ignoring some kind of revealed economic truth by not being interested in a repeat of that.

Mike55May 18, 2017

The failure of the ACA is already unambiguous. Don't confuse political rhetoric with actual policy positions: "the ACA was a really great start that we need to refine and build upon" is as close to an admission of failure as you're ever going to see in U.S. politics. Democrats will try very hard to ensure the ACA replacement minimizes the number of people who lose their insurance, but they have zero desire to save the ACA itself.

The problem with the ACA is that it only works if the individual mandate penalty is effective and, with the benefit of 20/20 hindsight, we now know the penalty is far too small.* Democrats believe the penalty is as large as U.S. voters can stomach, so increasing it further would be political suicide. Everyone in Congress understands this, so one way or another the ACA is already done. So why wait to act? It's never going to get any easier than it is now.

*I personally think there are several problems with the ACA, but am focusing on the mandate because there's no real disagreement on this point.

Edmund DantesMay 19, 2017

There is plenty of room to increase the ACA penalty--health insurance policies that cost $15k and have a $5k deductible have become routine. You could push the penalty to $10k per year, and for many that would still be much preferable to locking in a $20k expense against the statistically remote chance of having more than $5k of medical expenses in a single year. OTOH, if you have to pay a $10k penalty for the privilege of working, why work at all?

The real problem is that the ACA makes health insurance that people want to buy illegal. My insurance now covers sex change operations! WTF??? Seriously, I'd like to opt out of that and about 75% of my other mandated "coverage."

The interesting question will be, when ACA repeal fails this year (as it will), who gets the blame? The press will work overtime to blame the Republicans, even though the blockage will come from the Democrats. If Democrats really want the ACA reformed, why won't they cooperate with fixing it? What is their proposal? No, their game plan will be to blame the Republicans for the catastrophes that unfold next fall, as more and more companies exit the individual market, hoping the blame game works for them as well as it earlier worked for Republicans. I don't know if that strategy works if the Democrats use the filibuster to stop the legislation.

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