Tax Analysts Blog

Tax Reform Will Be Easy, Just Like Healthcare

Posted on Mar 28, 2017

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.

Read Comments (6)

Mike55Mar 28, 2017

I agree with Mnuchin: healthcare is much harder to fix than the tax code. I didn't like the shot he took at Obamacare,* but the underlying point was accurate. I can think of 5 reasons:

#1. When you screw up the tax code, nobody dies as a direct result.

#2. We've been taxing a lot longer than we've been trying to provide universal healthcare access. Presumably a century's worth of experience, experimentation and research has created a knowledge base that makes tax policy easier than healthcare policy.

#3. With federal tax policy you only need to legislate the terms of one transaction flow: taxpayer to federal government. Granted that one transaction has countless secondary effects, but you're still legislating one thing. With healthcare you are legislating an overlapping series of transactions between the federal government, state governments, insurance companies, doctors, patients, pharmacies, drug/device manufacturers, hospitals, etc.

#4. Aggressive tax rhetoric makes the differences between the political factions look bigger than they actually are (especially on the corporate tax side), whereas in healthcare the exact opposite is true.

#5. The federal government has complete and utter control over federal tax policy. The only challenge for Mnuchin and Congress is figuring out the right thing to do, with the ability/authority to execute the chosen reforms being a given. The same is not true in the health policy debate, where the feds must try to push their authority to its very brink in an attempt to persuade/cajole other actors (citizens, states, insurance companies, doctors, hospitals, etc.) to behave in a certain way.

*The next person who tries to assign blame for this fiasco to another political faction ought to be immediately removed from government. We are fast approaching crisis mode on healthcare, so it's time for everyone to put aside campaigning for 2018 until a viable long-term policy has been enacted.

Bob GoulderMar 29, 2017

"When you screw up the tax code, nobody dies as a direct result." Well, I can't disagree with that. You've made other excellent points as well.

Still, I think fundamental tax reform that rewrites the tax code (e.g., the House Blueprint or something like it) will prove to be a bridge too far. But that isn't to say we won't get a tax cut - for both businesses and individuals.

Although my personal preference is for a revenue neutral bill in which the changes to the tax code are permanent, I'm not sure how likely that is at this point. If the Administration wants a quick legislative victory, they could shoot for simple tax cuts (without matching pay-fors) and get it done through reconciliation. Then we might be looking at another batch of temporary tax cuts that sunset after a decade; much like we had in the early 2000s.

Temporary measures aren't ideal from a policy perspective, but the world won't come to an end because a bunch of wonks and academics are mildly displeased with the outcome. Budget hawks will also hate the idea of adding to the deficit, but I'm not sure there are many of them left.

Thanks for leaving feedback.

Mike55Mar 30, 2017

"Then we might be looking at another batch of temporary tax cuts that sunset after a decade . . . [b]udget hawks will also hate the idea of adding to the deficit, but I'm not sure there are many of them left."

Fully agreed this is a very plausible outcome. "Easier than healthcare" certainly doesn't mean "easy" after all.

Like you I would deem this a bad policy outcome. I think sometimes people get so focused on the nuts and bolts of the budget (e.g., exactly how much debt load can we handle, does printing the world's "reserve currency" give us unfettered budget flexibility, will increased economic growth render budget concerns moot, etc.) they miss the forest for the trees. We need some mechanism to (1) incentivize elected officials to consume our limited resources efficiently, and (2) score-keep how well they are doing at that task. The budget is a blunt tool for accomplishing these goals, but if there's a viable alternative I've yet to hear about it.

Edmund DantesMar 30, 2017

Excellent and entertaining debate.

At one time I thought tax reform should be easy, just re-adopt the 1986 Tax Act that gave us so many years of prosperity and declining deficits. Seems obvious.

At this point, I'm hoping instead for something like ERTA, a "Christmas tree" of tax benefits so compelling that it becomes bipartisan, avoiding the 10-year sunset. Trouble is, all the easy tax benefits have already been distributed.

Instead of talking about how hard it will be to limit itemized deductions, we ought to be talking about major base broadening. We ought to eliminate tax-exempt status entirely, and bring everyone into the tax tent--churches, schools, hospitals, everyone. It is fundamentally unfair that I have to pay taxes on my paltry investment income and the $36 billion Harvard endowment pays nothing. These forgone tax are so large they aren't even tallied as tax expenditures. The non-for-profit sector has grown up, and no longer requires tax subsidies to fulfill its mission.

And while we're at it, all muni bond income ought to be taxable. That tax subsidy has been abused and has encouraged excessive borrowing at the state and local levels.

These are the tax subsidies that the 1% really care about.

Bob GoulderMar 30, 2017

Harvard University has been described (half-jokingly) as a 36 billion dollar hedge fund with a few class rooms, a rowing team, and a glee club. As viewed through a tax prism, that's not far off. One does need to question the policy basis for their tax exemption. When people talk about the need to broadening the tax base (in order to pay for rate reductions), the tax-exempt sector would be a fine place to start. Thanks for commenting.

Thomas HaleckyMay 10, 2017

As a deeply disappointed Trump voter, you see first hand that attempt to increase the disparity between the middle class and the wealthy. The healthcare proposal obviously accomplishes this goal. The defacto elimination of itemized deductions will also work hard at eliminating personal wealth for the middle-class. Home ownership, historically was the best way for the average person to generate personal wealth. By eliminating the tax deduction and doubling itemized deductions, you eliminate the incentive to buy.

You want to make the 'common mans' tax return easier. Eliminate unreimbursed employee expenses - a million unanswered and unverified questions go away.

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