Tax reform: Implications and prospects

by Robbin Johnson
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Tax reform: Implications and prospects
Tax reform is a high-risk strategy for Republicans, but it also may be a high-risk strategy for the economy.
 

WASHINGTON — The looming congressional struggle with tax reform looks to be an extension of attempts at one-party rule, which has bedeviled Republicans since President Donald Trump’s election. It is a high-risk strategy for Republicans, but it also may be a high-risk strategy for the economy. A great deal more than 2018 election politics hangs in the balance.

As this essay was being written, the Republican leadership was crafting a budget agreement that will set a limit on how much federal tax revenues could be reduced over the next decade. That would enable a tax bill to pass the Senate with just a simple majority vote. It is similar to the strategy they pursued in their efforts to “repeal and replace” the Affordable Care Act (A.C.A.), an effort that failed when three GOP senators broke ranks.

Unlike with the A.C.A., there have been plenty of hearings on tax reform over the last five years — more than 40 before the House Ways and Means Committee and 70 before the Senate Finance Committee. Plenty of study, however, does not make tax reform any easier. There are disagreements within the Republican party, not to mention with Democrats. And as soon as specifics materialize, lobbyists mobilize to defend their clients’ interests and benefits.

Understanding the framework

The general framework for tax reform has been announced. For individuals, seven income brackets will be reduced to three (or four), the standard deduction is nearly doubled, itemized deductions are reduced, the child tax credit increased, the estate and alternative minimum taxes eliminated, and the personal exemption dropped. There are disagreements among Republicans on how to treat the state and local income tax deduction and 401(k)s.

For corporations, the tax rate is cut to 20% (or 25% for businesses reporting on individual returns), interest deductions are eliminated but investment write-offs accelerated, a one-time tax holiday for foreign earnings is granted, and a territorial approach to taxing foreign earnings adopted.

How to pay for these changes, however, remains unclear, including disputes about how to score revenues from these changes relative to budget requirements. And there will be significant disagreements on the effects of various measures on both economic growth and equity.

The Republicans hope to walk the same Senate-vote tightrope they failed to navigate on “repeal and replace” of the A.C.A. The apparent strategy is to impose tight timelines — passage as early as Thanksgiving or early December — in an effort to minimize organized resistance. Obviously, it is a high-risk approach. Among other things, it will put huge pressure on Republicans who have long worried about budget deficits.

What’s at stake

After a string of false starts on health care and worrisome threats on trade, civil discourse, nuclear and climate issues, this Republican attempt to govern alone, if it fails, would likely bring a return to divided government after the 2018 elections. Also at stake may be the core beliefs — beyond winning elections — of the Republican party. This seemed to be on former President George W. Bush’s mind when he recently lifted his long silence on the Trump presidency. His remarks reflect some sharp differences with President Trump:

“We’ve seen nationalism distorted into nativism, forgotten the dynamism that immigration has always brought to America ...,” Mr. Bush said. “We should not be blind to the economic and social dislocations caused by globalization. People are hurting. They’re angry, and they’re frustrated. We must hear and help them. But we cannot wish globalization away any more than we could wish away the agricultural revolution or the industrial revolution.”

Mr. Bush seemed to be urging his party to rally to its core belief in the efficacy of markets, the benefits of trade and the gains from engagement with the world. These clearly reflect more traditional Republican values, not those of President Trump’s base.

Supporters of the Trump tax package argue that it can spur economic growth, create more room for better jobs and higher wages and make the American economy globally competitive again. That would define a different country than one withdrawing from the North American Free Trade Agreement, turning away from the Trans-Pacific Partnership or alienating longstanding allies by reneging on commitments in the Iran nuclear and Paris climate agreements. Whether it could become such a pivot point, however, remains unclear.

That, in turn, poses an interesting challenge for the Democratic leadership in Congress. They seem likely to approach tax reform as yet another wedge issue, criticizing various aspects as inequitable, fiscally irresponsible or poorly considered. If they are successful and tax reform fails, it could mark a pivot point in another direction. If Congress cannot pass tax reform, President Trump is likely to follow President Obama’s response to an uncooperative opposition party by governing increasingly through executive orders and actions. That likely leads to more instability on health care and core social issues, more intensified divisiveness and more uncertainty about the future.

So, the tax reform effort will bear careful watching, not just for what it does for tax policy or for the economy but also for what it demonstrates about governance. Is there a consensus on any issues that would bring a moderating influence to policy and debate, or will divisiveness continue to rule?

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