I’ve previously opined that Treasury Secretary Steven Mnuchin, whatever his other talents, is not a tax guy. That was in the context of his bizarre utterance on reciprocal taxation. (The jury is still out as to whether he was referring to an origin-based VAT or a retaliatory tariff regime disguised as a corporate tax. Neither is good policy.) The latest statement from Mnuchin, that he thinks tax reform will be easier than healthcare, is equally dubious. He made the comment March 24 at a policy forum in Washington hosted by Axios Media :
In a way, it [tax reform] is a lot simpler. It really is. It's a lot simpler… I think there's very, very strong support. I think healthcare is a much, much more complicated issue, where you start out with Obamacare, which had all these issues, and you're trying to kind of get rid of it and make changes simultaneously.
In other words, he’s saying the main obstacle to enacting a healthcare bill is that we’re not starting from scratch, but from a situation where multiple systems are already operative (e.g., Obamacare, Medicaid, Medicare). Each of these has various categories of stakeholders, and removing their benefits makes change difficult. Fair point. The GOP healthcare effort was stymied by legacy issues and path dependency. But how exactly is that different from tax reform?
Tax reform will necessarily be antithetical to starting from scratch. For starters, there’s this little thing called the Internal Revenue Code. Toss in the voluminous federal income tax regulations that accompany it, plus decades of case law from the courts, plus a tax treaty network, plus mountains of administrative law, and so on. You get the point. From where I sit, the legacy issues presented by Obamacare pale when compared with the sheer vastness of our tax system. The tentacles of the tax code reach every aspect of our lives. From birth to death, from education to housing, from marriage to retirement, nothing is left unaffected.
Mnuchin might be thinking Obamacare is an entitlement program, and entitlement programs are notoriously difficult to scale back once the genie is out of the bottle. Because the tax code isn’t an entitlement, we can slash away at it without the same intensity of opposition.
Wrong. The difference is illusory. For purposes of advancing fundamental tax reform, the tax code should be viewed primarily as an entitlement program. Think food stamps, but with more zeros on the cost ledger. For better or worse, the tax code is as much about dispensing subsidies as it is about collecting revenue to cover the costs of governance. To the extent there’s a difference vis-à-vis healthcare, it’s that subsidies delivered through the tax system are often subtle. They go largely unnoticed by most people.
The average Joe or Jane will take a keen interest in whether their 20-something offspring can be added to the parent’s health coverage, or whether a preexisting medical condition can be used to deny coverage. The typical household will be far less concerned about whether carried interest survives, or how foreign earnings will be repatriated. No, families won’t be invested in those outcomes, but multinationals will and they’re the ones who hire lobbyists.
Tax reform should seek a level playing field. It strives to make the tax environment more neutral and free from economic distortions. But that necessarily requires eliminating those tax benefits already baked into the cake. Removing them won’t be easy. That’s why we haven’t witnessed true tax reform since 1986.
Trump’s original tax plan called for taxing all corporate earnings (foreign and domestic) on an accrual basis. Regardless of how much you lower the statutory rate, multinationals are expected to fight tooth and nail to preserve deferral. They also expect tax reform to include a territorial regime that fully exempts foreign profits through a dividends received deduction. Territoriality has been the holy grail of the business lobby for more than a decade. Trump’s plan rejects it, retaining the current worldwide system. That’s a street fight waiting to happen. Trump also advocates a cap on overall itemized deductions. The cap is so high as to be meaningless for roughly 99 percent of the population. Nevertheless, it involves a restriction (however slight) on the deductions for charitable donations and mortgage interest expense. Easy pickings? No way.
Speaking of itemized deductions, what about the one for state and local taxes? Many conservatives call for its repeal on the grounds that it inappropriately encourages fiscal largesse among state lawmakers. Again, not so fast. I doubt Republicans in Congress will flock to increase taxes on everyone in the country who itemizes – even if much of the pain is felt by the residents of high-tax blue states like California, Massachusetts, and Illinois. Those states lean left, but their populations include many Republican donors.
Besides, would Trump sign a tax reform bill that eliminates his own state and local deduction? (Despite all the time spent in Florida, he remains a resident of New York state, with some of the highest taxes in the country.) The answer might be yes, but the larger point is that none of this will be easy. To suggest otherwise seems like wishful thinking. Also, the failure of the GOP’s Obamacare repeal effort makes tax reform more difficult due to our fiscal arithmetic. Had it succeeded, repeal would have cut federal tax revenues by roughly $1 trillion over 10 years. That would have had the effect of lowering the budgetary baseline against which any coming tax reform bill will be measured. Instead, the baseline now remains where it was – meaning it will be more challenging for tax reform proponents to come up with a bill that’s revenue neutral. In effect, the same amount of rate cuts now requires a trillion dollars in extra revenue raisers, relative to the situation in which the Obamacare repeal went through. Revenue raisers of that magnitude don’t grow on trees. House Speaker Paul Ryan conceded the challenge that lies ahead of him during a press conference held just after the House healthcare bill failed. "Yes, this does make tax reform more difficult … but it doesn't in any way make it impossible." A very hard task just got much tougher.