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.