Tax Analysts Blog

It's Time for Ryan and Brady to Drop the Cash Flow Tax

Posted on Jan 23, 2017

The House Republican blueprint has received surprisingly positive reviews from many economists and tax observers.  In one bold stroke, the destination-based cash flow tax could eliminate the aspects of the tax code that encourage businesses to locate jobs overseas.  It could be a powerful engine for domestic job creation and economic growth.  All that being said, however, it's time for House Speaker Paul Ryan and Ways and Means Chair Kevin Brady to accept that the tax will almost certainly never become law.  Republicans need to start coalescing behind tax reform that is actually doable and supported by the Trump administration, the Senate, and indeed, rank-and-file House Republicans.  

President Trump is already on record as being skeptical of the tax.  Calling the tax "too complicated," the president told The Wall Street Journal last week that he doesn't "love it" and that border adjustments usually mean that the United States adjusts into a bad deal.  It isn't the first time that Trump implied that he prefers to handle trade issues through tariffs.  Further, Trump and his Treasury secretary nominee, Steven Mnuchin, have said they are more focused on a tax plan that will cut taxes for middle-income families and companies

Ryan wasn't that concerned by Trump's statements, and Trump and a spokesman later said that everything was still on the table.  But that doesn't change the fact that support for the House blueprint is far from widespread.  The blueprint might not have been designed to ever become law.  It was drafted at a time when Hillary Clinton was heavily favored to win the presidency and other Republican tax reform plans fell by the wayside (including Senate Finance Committee Chair Orrin Hatch's long-delayed corporate integration proposal).  That the blueprint is getting any attention at all is probably more because it is the only Republican plan available than because it is widely popular in the GOP caucus.  

Drafting actual legislative language and then enacting a bill that radically overhauls business taxation will be enormously difficult.  It will take time -- considerably longer than 100 days.  The House blueprint is far more radical of a reform than the Tax Reform Act of 1986, and a lot less work has been done on it.  It's hard to imagine all of the details being ironed out and Republicans coming together to support it while Trump's momentum is at its highest.

And that's why the GOP should move on now to something else.  If lawmakers want to get anything done on tax reform in Trump's first year (or even first two years), they need to avoid getting bogged down on a plan that might ultimately fall apart.  Instead, they should focus on the aspects of Trump's campaign plan that can be combined with smaller-scale reform efforts.  A GOP plan that simply cuts the corporate rate to around 25 percent, consolidates individual brackets, eliminates or caps many corporate tax expenditures, and tweaks some individual deductions (perhaps a cap on itemization) is much more likely to attract majority support in Congress.  Throw in some base erosion and an end to deferral (or at least a tax on unrepatriated foreign earnings), and you've got the makings of a bill that might come together quickly. It might even pick up more than a handful of votes from red-state Democrats (particularly in the Senate) facing tough reelection bids in 2018.  

No tax reform effort will be easy.  But Ryan and Brady are making things much more difficult than necessary.  If House Republicans were serious about enacting a completely different form of corporate taxation in 2017, they should have been holding hearings and drafting language in 2016.  Ryan and his supporters did neither.  He should be more realistic about what the GOP can pass this year and get to work on a plan more like those in 1981 or 2001 than a more complicated version of TRA 1986.  Otherwise Republicans will let a historic opportunity for tax reform (one they've supposedly been waiting for since 2011) slip away.

Read Comments (3)

Mike55Jan 23, 2017

Great article, and I 100% agree.

In addition to the Trump WSJ interview you noted, on January 12th Larry Kudlow provided an intriguing glimpse into how Trump's team* views the Blueprint on CNBC. Kudlow slammed the Blueprint on two basic grounds: (1) the border adjustment feature is a complex, macro-level solution to a simple, micro-level problem; and (2) all indications (polling, reaction to similar prior plans, etc.) suggest that voters will hate the cash flow feature so, even if a good idea in the abstract, America isn't ready for it yet.

While I personally find argument (1) to be misleading and disingenuous, I've got to concede that argument (2) is a great point. Sometimes it's easy for tax wonks to get so caught up in debating the merits of various plans we miss the forest for the trees... Congress exists to enact the will of the people, so if "the people" don't like something (or just don't understand it yet) the technical merits are irrelevant.

*While the precise nature/extent of Trump's relationship with Kudlow is not entirely clear (at least to me), he seems to be part of Trump's inner circle in some fashion.

AndrewJan 30, 2017

Thank you to both Jeremy and Mike for the excellent discourse on this topic. Jeremy, I agree that the Blueprint is getting so much PR simply because it one of the few items out there matching the changing times. If it is realistic or not is clearly up for debate.

Edmund DantesJan 26, 2017

Excellent article and comment by Mike55. I agree with the insights in both.

I just wanted to say thank you.

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