How Republicans Ditched Tax Reform for Tax Cuts

Now that the repeal of the Affordable Care Act is dead—at least temporarily—Republicans are moving on to the next big item on their legislative agenda: taxes. For months, a group of Trump Administration officials and top congressional Republicans, known as the Big Six, has been working in private with the goal of developing a plan that the White House, the House of Representatives, and the Senate could jointly endorse. The result of that process, a plan called the “Unified Framework for Fixing Our Broken Tax Code,” was finally released yesterday.

The document proclaims, in bold, all-caps letters at the top, that the plan is “tax reform.” That’s not really the case, at least not in the way that the term has been used for decades.


The original ambition of Republicans in Congress, as they have repeatedly stated, was to rewrite the tax code along the lines of the 1986 Tax Reform Act, which was signed into law by President Ronald Reagan. “This October will mark 30 years since President Ronald Reagan signed into law the Tax Reform Act of 1986—landmark legislation that is recognized as the single largest reform of the U.S. tax code in our nation’s history,” the G.O.P.’s “Better Way”plan, which was the brainchild of House Speaker Paul Ryan, notes. “In many ways, our current tax and political environment is remarkably similar to the one that allowed President Reagan to successfully overhaul the tax code three decades ago.”

The 1986 effort had one simple idea at its core: revenue neutrality. Some taxes would be cut and some would be raised, but the over-all money taken in by the federal government would remain the same. The idea was to make the tax code fairer and more efficient, not to cut taxes for the sake of cutting taxes. Every serious legislative effort in recent years that proclaims to be “tax reform” has abided by this simple metric. Some policymakers have argued that tax reform should also have “distributional neutrality,” so that that no income group is better or worse off after reform. But, at the very least, tax reform as a concept with any meaning is about changing the code in a way that doesn’t add to the national debt.

Ryan used to agree with this. His “Better Way” plan “envisions tax reform that is revenue neutral.” But, even before Wednesday’s announcement, Republicans signalled that they would not be able to devise a tax-reform plan along the lines of the 1986 changes. To use the process known as reconciliation, which prevents a filibuster in the Senate, Republicans must first produce a budget that includes the broad parameters of their rewrite of the tax code. In the Senate, they recently agreed to a budget that included a tax cut that would add $1.5 trillion to the deficit. In other words, they replaced tax reform with tax cuts.

Trump made this clear on Wednesday, after being introduced to a raucous crowd at the Farm Bureau Building, in Indianapolis, Indiana. “Thank you very much,” he said welcoming the crowd. “You just want massive tax cuts. That’s what you want. That’s the only reason you’re going so wild.” He occasionally tried to stay on message, mentioning tax reform here and there, but he couldn’t help bragging about “the largest tax cut in our county’s history.”

So what happened? The Big Six, which includes Ryan, Senate Majority Leader Mitch McConnell, the chairmen of the two tax-writing committees in Congress, Treasury Secretary Steven Mnuchin, and Trump’s chief economic adviser, Gary Cohn, couldn’t agree on enough reforms to raise revenue. Ryan had one idea, a so-called border-adjustment tax, which would have raised a trillion dollars to offset some of the rate cuts in the plan by taxing imports. But that was nixed by the White House and never replaced with anything as ambitious. In the end, the Big Six also couldn’t agree on as many details as the group originally proclaimed. “We are all committed to having a bill that the six of us sign onto,” a member of the group told me earlier this year.

“There’s going to be one tax bill and one tax bill only.” Wednesday’s nine-page plan, which had lots of large type and empty space, is far short of a “bill.” Most of the details will now be left up to the tax-writing committees, which, from a process perspective, is a better way to legislate. Yet that still falls short of what the Big Six promised.

Instead of doing the hard work of crafting a revenue-neutral tax reform, which requires taking on powerful political constituencies and working with Democrats, Republicans will fall back on arguing that the economic effects of the tax legislation will be so powerful that it will pay for itself with growth. Trump started to make this case during his speech in Indiana, citing two historic tax cuts that are often used as evidence that tax cuts have an almost magical power to turbocharge the economy.

Trump said that “Democrat President John F. Kennedy championed tax cuts that surged the economy and massively reduced unemployment.” And he pointed to “the tax strategy that Ronald Reagan used to create an economic boom in the nineteen-eighties, when our economy took off, the middle class thrived, and the family income of all families was increasing more and more,” adding that “it was a beautiful sight to behold.”

There are some problems with this history. Kennedy proposed cutting the top tax rate from an astronomical ninety-one per cent to sixty-five per cent—and, after Kennedy was assassinated, Lyndon Johnson did sign a similar cut into law. In 1981, Reagan cut the top tax rate from seventy per cent to fifty per cent. The top rate today is 39.6 per cent, and the G.O.P. plan envisions bringing it down to thirty-five per cent, while bringing the corporate rate of 38.9 per cent, which in reality very few corporations actually pay, to twenty per cent. 
Tax rates in 2017 are nothing like they were in the sixties or the eighties, and there is no evidence for the outlandish claims being put forward that a few points’ reduction in rates will pay for all the revenue that is lost.


But even Reagan’s large rate cuts didn’t produce the kind of growth that Republicans now claim they did. Reagan may have cut taxes, but then he signed into law numerous tax increases over the next eight years that clawed back half the revenue lost from the large 1981 cut. As Bruce Bartlett, the former Reagan adviser turned fierce critic of the G.O.P., noted yesterday in testimony, Reagan’s defense buildup—a classic Keynesian stimulus—and the Federal Reserve’s steep interest rate cuts had far more to do with bolstering the post-1981 economy than the original tax cuts ever did.

Reagan passed his 1981 cuts relatively quickly and easily, but the 1986 tax-reform bill was the work of almost three years of difficult bipartisan negotiations. That’s the real lesson of the eighties: tax reform is hard; tax cuts are easy. That’s why Trump has ditched the former for the latter.

MGID

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