Tax Analysts Blog

Despite Pence's Pledge, Tax Reform Is Far From Certain

Posted on Nov 21, 2016

President-elect Donald Trump's 100-day agenda is starting to take shape.  While a lot is still not known (including a number of key Cabinet appointees), Vice President-elect Mike Pence laid out four priorities over the weekend.  "Repealing Obamacare will be the first priority in a session that will be characterized by tax reform, rebuilding the military, infrastructure, ending illegal immigration, and that’s where we’re focused," Pence told Face the Nation

While Pence made clear that the repeal of Obamacare is the top priority, the mention of tax reform is key.  Republicans have been laying the groundwork for tax reform ever since retaking the House in 2010.  And Speaker Paul Ryan, who has said in the past that being chair of the Ways and Means Committee was his dream job, is probably more committed to taking on the challenge than any other speaker in decades.

Can Ryan reconcile the House Republican blueprint with the plan that Trump put out during the campaign?  The answer is almost certainly yes.  For one thing, Trump's plan was not exactly a major feature of his campaign -- at least in terms of the details.  The president-elect promised tax relief and did little else to tout specific proposals.  And the final version of the plan wasn't really very Trumpian anyway.  It was put together by conservative economists who hoped to bring down the cost so that Hillary Clinton couldn't paint Republicans as irresponsible on the deficit (she did anyway). 

 If Trump's Treasury secretary ends up being someone like Steven Mnuchin, then it's even more likely that the administration leaves the details of tax reform to Congress.  Mnuchin is much more likely to be focused on Dodd-Frank and regulatory reform than coming up with a detailed counterplan and battling Ryan on pay-fors.  As long as Ryan avoids too much crony capitalism or too many corporate handouts, then Trump will probably go along with whatever tax reform bill seems likely to land on his desk.

 So with Trump not likely to be a major impediment to GOP tax reform, it seems like a slam-dunk, right?  After all, Republicans have a big majority in the House, and the use of reconciliation means 52 votes is more than enough in the Senate (where West Virginia's Joe Manchin, and some other vulnerable red state Democratic senators, seem likely to cooperate).  Not so fast.

 Ryan may  have the most developed plan in the form of the House blueprint, but it's not clear that Senate Majority Leader Mitch McConnell and Finance Committee Chair Orrin Hatch will be so quick to abdicate on the issue.  Hatch, in particular, has never seemed all that enthusiastic about the House plan, including the destination-based cash flow tax that is the centerpiece of the corporate component.  In fact, Hatch has been busy drafting his own complicated business tax reform proposal.  He has yet to get a score from the JCT on his corporate integration bill (or at least a score he likes), but that doesn't mean he isn't serious about it.

 If Hatch, McConnell, and other Senate Republicans are skeptical of the destination-based cash flow tax, that will make it much less likely that the main part of the House plan will make it to Trump's desk.  Such a radical reworking of the corporate tax system will require a broad consensus if it's going to be achievable in the first days (or even years) of the incoming administration. 

 Republicans are likely to feel a lot of pressure to deliver quick legislative victories.  Repealing Obamacare and passing an infrastructure plan might be two (relatively) easy wins.  But if they want to include tax reform on that list, they might decide not to go down Ryan's VAT-like rabbit hole.  And that might cause some tension with the House taxwriting leadership.  If Ryan insists on the blueprint (or something similar) over Senate objections, the entire process could be bogged down. 

Tax reform is hard enough when everyone wants the same thing.  If Hatch, Ryan, or the administration don't compromise to get things done easily, then this opportunity might slip through the GOP's fingers.  

Read Comments (3)

Mike55Nov 22, 2016

Great article. For what it's worth, I preferred the basics of Trump's corporate tax reform plan (end deferral, allow full expensing) to the House's plan. There's a solid understanding/wide agreement regarding the economic impact of such a plan, whereas no one truly knows what the House plan would do.

The bigger challenge though is the same as it has been since we first began this new push for tax reform almost a decade ago: (1) no one has a workable idea on the individual side, and (2) there seems to be very little appetite for corporate only tax reform. Item (1) seems unlikely to be solved anytime soon... rational individual side tax reform requires corresponding changes to entitlements.* That won't happen until most people under 45 actually vote. At the moment, the prospects of that happening appear to be slim.

*Pretty much every good reform idea on the individual side would make the tax code less progressive. This means redistribution must become correspondingly more progressive to offset the inequality impact. This can only happen if federal entitlements are means tested rather than age tested.

Bob GoulderNov 22, 2016

Jeremy: Thank you for using the V-word (VAT) in your conclusion to your piece. That observation should be front and center. The main take-way from the Ryan/Brady GOP Blueprint is not the rate cut -- that's almost beside the point. The radical element here is that the Blueprint promises to completely change how the Code computes corporate earnings. The Destination-Based Cash-Flow Tax (DBCFT) would go a long way toward converting the corporate tax to a consumption base. (Could we still label it an "income tax"?) That's an important distinction because it carries major implications about who bears the economic burden of the tax. At a recent AEI-IMF event, one of the speakers was directly asked if the Blueprint included a VAT. She responded "no", unequivocally. I suppose she's allowed to do that with impunity since the Blueprint is not a traditional credit-invoice VAT -- like the ones used in more than 160 nations around the world. Nevertheless, as we enter 2017 and Congress finally starts to get serious about tax reform legislation, all stakeholders should be advised that DBCFT is properly described as a VAT-like creation. (And BTW, that's not necessarily a bad thing; we just need a little more truth in advertising.)

Mike55Nov 23, 2016

Great point, though I do sympathize with the hesitance to use "the V-word." The House plan is not quite a pure subtraction method VAT and, presumably, Ryan/Brady believe the few added wrinkles make a big difference. Trouble is, once you utter the "V-word" no one is going to be interested in discussing those wrinkles.

To me the biggest "truth in advertising" problem is that we still haven't seen the dynamic analysis from the JCT (or at least I haven't). Folks at places like the Tax Foundation and the Tax Policy Center do outstanding work, but there's a limit to the amount of weight one can place upon dueling think-tank scores.* Until the House plan gets a dynamic score from the JCT, it remains too opaque/conceptual for me.

*I get what the differences in the models are (e.g., savings glut vs. crowd out effect) but, since I'm not a tax economist, I have no available means of determining which methodology is more appropriate. For that reason, I need a reliable/bipartisan resource to offer their view on this sort of thing. In the area of taxation that either means the JCT, the CBO or the OECD (with the JCT being the correct group for this particular issue).

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