Tax Analysts Blog

Ryan Talks Permanence and Pay-Fors

Posted on Feb 14, 2017

To say that House Speaker Paul Ryan is jazzed about tax reform legislation is an understatement. During his recent television interview on the PBS NewsHour, Ryan’s expression changed markedly once the subject matter shifted from President Trump’s tweeting habits to rewriting the Internal Revenue Code. The mention of the House’s “Better Way” tax reform blueprint  produced a smile reminiscent of a kid in a candy store.

Interviewer Judy Woodruff focused on two issues: Would tax reform be permanent, and would it be revenue neutral?

The first struck me as odd. Why wouldn’t tax reform be permanent? Then I remembered that the last time a Republican administration assumed power (under George W. Bush), we had tax cuts that were programmed to sunset after 10 years. In hindsight that approach seems conceptually flawed. It stemmed from the need to make the package appear less costly than it actually was. Those Bush-era tax cuts were too generous to have been permanent features of our tax code. It was politically much easier to phase out the tax cuts after a few years than to pay for them with either revenue raisers or spending cuts.

If tax reform were to happen today, would Congress recycle the same gimmick? Ryan’s response was unequivocal: No, the big tax bill everyone is expecting this year will not rely on temporary tax breaks. Whatever gets enacted – be it the destination-based cash flow tax or something else – will be permanent, apart from the necessary transitional rules that are probably inevitable.

Woodruff’s second question concerned the deficit, which is forecast to increase significantly in coming years. Trump outwardly seems blasé about fiscal responsibility. During last year’s presidential campaign, he endorsed a tax reform package that was projected to cost $11 trillion over 10 years. (A revised version of the plan was less costly, but still nowhere close to being revenue neutral.) The Trump presidency is still in its early days, but many detect a proclivity to increase public spending while cutting taxes. This is causing fiscal hawks to worry.

Ryan attempted to quell those concerns, and in so doing perhaps sent a subtle message to the White House about how he views the tax reform process as unfolding.  He told Woodruff that any tax reform bill coming out of the House would need to be revenue neutral. Ryan’s counterpart in the Senate, Majority Leader Mitch McConnell, has adopted the same position. In other words, the two most influential people in Congress are now on record as insisting that tax cuts be paid for, albeit with the benefits of dynamic scoring and favorable baseline assumptions.

Woodruff pressed Ryan on whether the necessary offsets would take the form of painful spending cuts. After all, Ryan is known to favor entitlement reform. But that’s not what he has in mind – at least right now. Ryan can assert with confidence that tax reform will not depend on cutting Social Security, Medicare, or Medicaid. That’s because he has a powerful revenue raiser up his sleeve in the destination-based cash flow tax. As Alex Brill of the American Enterprise Institute recently explained, the border adjustment will bring in roughly $1 trillion over 10 years (assuming a 20 percent rate). Presumably that’s sufficient to pay for a large corporate rate cut and the immediate expensing of capital acquisitions – which are policy priorities for the GOP.

True, not everyone loves the border adjustment. The list of opponents seems to be growing. It includes national retailers like Wal-Mart and Target, plus a business coalition associated with the Koch brothers. We can add to that list financial publisher and flat-tax advocate Steve Forbes and South Carolina Sen. Lindsey Graham, who tweeted that he wants to avoid price increases on guacamole, Mexican beer, and tequila. That’s an odd assortment of products on which to base our nation’s tax policy, but maybe it’s what Graham keeps in his cupboard. (If so, I know which senator I’m watching football games with next season.)

Ryan has a blunt message for all these skeptics: If you want a low statutory rate and expensing, then you’ll need to suck up your objections to taxing imports. As he sees it, there’s no alternate path to tax reform. The long-term viability of the destination-based cash flow tax will certainly depend on a multitude of stakeholders becoming comfortable with that trade-off. As things now stand, it remains a work in progress.

Read Comments (9)

Mike55Feb 14, 2017

Good article on an interview that I'd have otherwise missed, so thanks.

It's encouraging to hear Ryan & McConnell espouse long-run revenue neutrality, though a cynic might question whether it has anything to do with deficits. Corporate tax reform that is revenue neutral in years 11 forward would require 51 votes in the Senate instead of 60 (due to the Senate's budget reconciliation rules). So perhaps when Ryan says "revenue neutral after a transition period," he's actually saying "we're going to cut corporate taxes as much as we possibly can with 51 votes."

Bob GoulderFeb 14, 2017

Yes. I think that's exactly why Ryan & McConnell insist on revenue neutrality - reconciliation rules. Concerns about the deficit tend to go away when you're no longer the opposition party.

Edmund DantesFeb 14, 2017

I'm afraid I don't know anything about a destination-based cash-flow tax. But if Walmart and Target are against it, then I must be in favor.

The concern about getting 60 votes is overblown. I expect the Senate to use the "Harry Reid option" to blow up the "Byrd rule" and bury the filibuster once and for all, in all situations. Good riddance to an outdated idea.

Once the Democrats lose the need for strict party discipline for cloture votes, I expect many Democrats will feel free to support tax reform on the merits. Many Democratic Senators from Trump-won states are up for re-election in two years. They will prefer to be on the tax reform bandwagon, instead of obstructionists. You lure more voters with honey than with vinegar.

Sure, they'll wail about the elimination of the estate tax as a "giveaway to the rich," but there will be enough sweeteners for the middle income voters to win bipartisan support.

Bob GoulderFeb 14, 2017

Well said. Regarding the viability of DBCFT, a lot will depend on whether President Trump formally embraces the idea. He's promised to release a newly revised tax reform plan soon (in the next few weeks). Will be interesting to see if it includes the cash-flow concept and the border adjustment. If Ryan and Brady can succeed in winning over Trump, that might help them gain ground with skeptics among the Freedom Caucus and Senate Republicans.

Travis RechFeb 14, 2017

When you hear "revenue neutrality" from Ryan and McConnell you know that really means "social security and medicare cuts." There isn't enough discretionary spending to cut and they certainly won't cut the military and they most certainly won't raise new revenues, so what else could it be?

Bob GoulderFeb 14, 2017

Ryan has always said he wants to do entitlement reform, little doubt about that. But I'm not sure he intends for it to be a revenue raiser for tax reform. If the border adjustment can really bring in $1 trillion over 10 years, that should be able to pay for a lot of rate reduction. I'm very curious how JCT (or others) will score the DBCFT.

Mike55Feb 15, 2017

Nobody is going to mess with Medicare or Social Security until after the 2018 elections while, conversely, if tax reform is going to happen it will be sometime before the 2018 elections. Regardless of what you think Ryan & McConnell WANT to do, political reality places real limits on what they actually CAN do.

Voter composition differs significantly between midterm and general elections, so both parties do the best they can to launch significant initiatives before the correct type of election. Attacking Social Security or Medicare before a midterm election would be foolish; people under 50 can only be bothered to vote in the general elections. This means Social Security and Medicare are safe for now and tax reform must be paid for another way.

Edmund DantesFeb 15, 2017

I like Mike55's analysis.

To this I would add that if we can get back to 4% annual GDP growth, that will narrow the deficits and ease the pressure for any entitlement reform Can you imagine how different the economy would be if we got back to 68% labor force participation?

Unfortunately, the economic effects of Trumpism will only begin to show up in 2018.

Mike55Feb 16, 2017

If Trumpism lead to sustained 4% GDP growth, its namesake would go down as the greatest President in U.S. history. That sort of growth would swamp pretty much every serious socio-economic issue that currently exists in our country.

Frankly I'd settle for much, much less. If we see rational healthcare and tax reform, I think even Trump's critics (myself included) would have to admit they were wrong and label his first term a big success. I'm growing a bit pessimistic on the healthcare front, but there's still plenty of time.

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