President Trump is about two weeks away from discovering how complicated tax reform can be.
Now, it was always going to be difficult, but, as we’ll get to in a minute, it got a lot more so after the GOP’s seven-year quest to repeal and replace Obamacare stalled not with a vote, but with another one of the Trump administration’s ritual rounds of recrimination. Indeed, at this point, Trump getting tax reform done looks about as likely as Trump University joining the Ivy League.
Before we get to that, though, what’s the difference between a tax cut and tax reform? Easy: the first is just about reducing tax rates, while the second is about paying for reduced tax rates by closing tax loopholes. The problem, of course, is that one person’s tax break is another person’s tax essential, the kind of “essential” —such as deducting mortgage interest, or state and local taxes, or not having to pay anything on health insurance — that voters would rather have than a lower tax rate. That’s especially true of the industries whose entire business models are built on the assumption that these tax breaks will exist, like realtors and developers and private equity managers.
In other words, tax cuts are easy because everyone is a winner, but tax reform is hard because there are losers.
But if Republicans want to permanently cut taxes for the rich, which they unquestionably do, then they’re going to have to do some kind of tax reform. That’s because they don’t have the 60 votes it would take to beat a filibuster in the Senate, so the only way they can get anything done is through what’s known as reconciliation. That’s the mechanism that lets them pass a budget-related bill with just a simple majority in the Senate, but it can only be used on legislation that doesn’t add to the deficit after a decade. Now, they can always use this to pass a tax cut that turns into a pumpkin after the clock hits 10 years — that’s why the Bush tax cuts were set to expire after a decade—but House Speaker Paul Ryan has bigger ambitions. He wants his tax cuts to be the fiscal equivalent of a diamond: forever.
Which is why Republicans need to figure out how to pay for their tax cuts so they don’t lose any revenue. The question, though, is not lose any revenue compared to what? This is where repealing and replacing Obamacare would have helped them quite a bit. See, it’s not just that Republicans wanted to get rid of a lot of Obamacare’s Medicaid spending and health insurance subsidies. It’s also that they wanted to get rid of almost all the taxes that paid for all that. If they’d undone these $1 trillion worth of taxes before they’d done tax reform, that’s $1 trillion less that they would have needed to come up with to make it look like they weren’t losing money. Or, more to the point, another $1 trillion that they could have put toward slashing the top tax rate.
So here’s the big picture. Republicans were already having trouble coming up with ways to pay for their tax cuts, but now they need to come up with $1 trillion more — and maybe $2 trillion. Why is that? Well, their “border-adjustment tax” (BAT) that was supposed to raise $1 trillion in new revenue didn’t take long to go from political gambit to political albatross. And it isn’t hard to see why. It would start taxing everything that American companies import, which is just another way of saying that every company that depends on imports, including big GOP donors like Koch Industries and Walmart, will be as opposed to it as can be. Senator Tom Cotton, who’s from Walmart’s home state of Arkansas, has gone as far as calling the BAT something “so stupid only an intellectual could believe” it—and he’s a Republican! Even worse, his conservative colleagues David Perdue of Georgia and Lindsey Graham of South Carolina seem to agree, albeit in politer terms. The three of them alone likely have enough power to kill it in the Senate.
These are savings that aren’t easily replaced. After all, are Republicans going to start taxing people’s health insurance benefits or their 401(k) contributions? Not a chance. What about stopping people from deducting their charitable donations and mortgage interest payments? Not that either. And they’re certainly not going to get rid of the preferential rate that people pay on capital gains. So if they’re not going to touch five of the biggest tax loopholes there are, how are they supposed to do tax reform? Eliminating the state and local tax deduction will only get them so far.
The answer, in all likelihood, is they won’t. If they’re forced to choose between a tiny tax cut for the rich that never expires, and a bigger one for the rich that lasts 10 years, they’ll go for the bigger one every time.
That’s not nearly as complicated.