Following the collapse of the House GOP health plan, President Trump and many congressional Republicans say they will pivot to tax reform. Passing that initiative, they insist, will be easier. For example, on Friday Treasury Secretary Steve Mnuchin put it this way: “In a way, it is a lot simpler. In health care, it’s a much, much more complicated issue.”
Mnuchin and others could not be more wrong. If lawmakers think rewriting the nation’s health laws are hard, just wait ‘til they tackle full-blown tax reform. There is a good reason why a major rewrite of the tax code has not happened for more than three decades. And here are eight reasons why true tax reform will be an even tougher climb than a health care redesign.
The revenue problem. If lawmakers can’t agree on how much money they want their new tax code to raise, any initiative is doomed. But Republicans have reached no consensus about whether they want a tax reform that raises the same amount of revenue as current law, or a huge tax cut. Speaker Paul Ryan (R-WI) says he wants revenue-neutral reform. Trump talks about tax reform and tax cuts as if they are interchangeable.They are not. And the problem can't be papered over with rhetoric.
The winners and losers problem. It helped sink the American Health Care Act, where younger, healthier, and higher-income people would have come out ahead on average, while older, sicker, and lower-income people would have been worse off. Revenue-neutral tax reform will have a similar winners-and-losers problem-- on steroids. Just look at one small example: the border adjustable tax. Exporters believe they will come out billions of dollars ahead while retailers and other importers argue they will lose billions. No politician wants to get in the middle of this kind of dispute, especially since the losers are more vocal than the winners.
Who wants to slash tax breaks? This is the nitty-gritty of the winners-and-losers problem. In revenue-neutral reform, popular tax cuts must be paired with unpopular tax increases. It is not hard to find lawmakers, especially of the Republican persuasion, who are enthusiastic about cutting tax rates. But who will be willing to take the heat for killing popular tax breaks to pay for those rate cuts, especially in a partisan bill? Just imagine the negative campaign ads.
The baseline problem. As many have written, Trump and Ryan wanted to pass a health bill first because it would have made the job of passing a revenue-neutral tax reform about $1 trillion easier. Now, without that $1 trillion, it will be much tougher to pass a bill that the Congressional Budget Office and the Joint Committee on taxation certify is revenue neutral over the long run. That, in turn, means that any tax changes passed through the fast-track reconciliation process likely would expire in 10 years (this happened to President George W. Bush’s 2001 tax cuts and it wasn’t pretty).
Corporate taxes, individual taxes, or both? This issue has bedeviled tax reformers for years. Some believe that doing only corporate reform would be easier than tackling individual taxes. That’s debatable, but even if it is true, how does Congress cut tax rates for multinational corporations without also cutting taxes for individuals, including owners of pass-through businesses, such as sole proprietorships and partnerships? The optics are terrible and the policy issues are difficult.
The number of people affected. For all the controversy over AHCA, most Americans would have been largely exempt from the bill. It principally targeted the uninsured, those with coverage in the individual market, and those on Medicaid. That’s about 100 million people. But two-thirds of Americans are covered by insurance from employers, Medicare, or other government programs and the effects on them would have been either indirect or long-term. By contrast, every one of the 324 million Americans and every business is directly affected by the tax laws.
Congressional politics. The AHCA was a case study in how deeply Congress was divided over a big complicated issue. The divisions were mostly partisan and partially ideological. When it comes to taxes, the splits are even more complex. Sometimes they are regional, as with energy taxes or agricultural subsidies. Or members will vote based on the views of a big employer in their district or state. This provides some opportunities for deal-making, but it also makes the politics more intricate.
Trump’s depreciating political capital. Every new president comes to Washington with a supply of clout, but it has something of a half-life. Trump started off with less capital—and a lower public approval rating--than any president in modern history. He’s used up quite a bit in the failed AHCA effort. The ongoing investigation into Russian interference in the 2016 election is chewing up more. No big tax reform will pass without the enthusiastic support of a strong president. Does Trump have the clout?
If the White House wants a big tax cut this year, it can probably get one. The big constraint will likely be how much moderate Senate Republicans are willing to add to the national debt. But tax reform? Not much chance, especially if senior administration officials really believe that truly reforming the US tax system will be simpler than remaking the nation’s system of financing health care.
