Sunday, April 30, 2017

Listen: why tax reform won't be any easier than Obamacare repeal.

Right now, Republicans are still far away from repealing and replacing Obamacare.  Efforts to finally -- perhaps, maybe, possibly -- pass a bill in just the House seem to have stalled for a second time... an embarrassment that's further exacerbated by the brutal reality that the proposed bill stands no chance in the Senate and seems to be taking unexpected public criticism from the president.  And so the administration is eager to move on to tax reform, seemingly out of the expectation that it will be easier.  This is wrong.  Not, it's not even wrong... it's hilariously out of touch with reality.

Let's start with some of the rules that are going to apply to any reform deal.  There are two possibilities:

  • A reconciliation bill: Not subject to filibuster in the Senate, this bill would need to be revenue-neutral after ten years.  It can pile debt onto the deficit for any period less than ten years, but not beyond.
  • A bipartisan bill: This sort of bill would require cooperation from at least some Democrats in the Senate, and it would not be subject to any limits in terms of debt or scope.

The problem for Republicans, of course, is that they really, really want to pass tax cuts for the rich and corporations, but that is not a very popular thing to do.  Even less popular would be a plan that raises taxes on the poor and middle-class to pay for those tax cuts.  So where do you get the money to pay for those cuts?

Well, Republican Budget Myth #1 holds that you can just eliminate "waste" and "fraud" from the government, slashing it drastically.  If you're spending less, you don't need as much money.  Presto!  That extra can be used for tax cuts!

But here in reality, we know that this is crazy.  The discretionary budget is less than a third of the entire budget.  You could cut the whole thing -- every department in the government! -- and you'd barely manage to pay for half of Trump's proposed cuts (as we understand them right now).  And since the president has promised not to touch Medicare, Medicaid, or Social Security, and has promised to increase the military budget, there's nowhere left to go.

When confronted with these numbers, the frequent reply is Republican Budget Myth #2: tax cuts pay for themselves.  By allowing businesses to invest in workers and expansion, the idea goes, we can increase the tax base.  More economic activity means more tax collected, even if the rates are lower, and everyone is better off.  Presto!

But again, here in reality, we know that this is bunk.  We know because it's been tried over and over again.  Most recently, they tried it in Kansas, where Governor Brownback proclaimed a "conservative experiment."  It's an experiment that has failed in spectacular fashion.  On a national level, the Bush tax cuts coincided with a slight increase in GDP borne on the back of a real estate and financial bubble.

Confronted with the hard numbers, then, the Republicans are in a bit of a bind.  They aren't going to be able to get a bunch of Democrats to vote for a tax cut for the wealthy that's just piled on to the deficit, especially not when rank-and-file Democrats loathe the idea of helping this president.  But if they don't get any Democratic votes, then they can't pass anything that will increase the national debt after ten years -- deficit-funded tax cuts included.

These broad outlines are further complicated by the fact that Trump has opposed a border-adjustment tax (a special sort of tax, based on where things are sold) that the Congressional leadership hopes will help pay for the tax cuts.  And since neither Trump's plan nor the current House plan are anything more than a broad outline, it seems likely that they're struggling with the same difficult realities that have made healthcare reform so difficult.

I predicted, months ago, that Obamacare would be fine -- either de jure or de facto.  That has proven to be true.  I predicted more than a month ago that Trump would find that his best avenue for immediate action would be flashy but insubstantial executive action.  That has proven to be true.

Believe me now when I say that Republicans will find it extremely difficult to solve their own internal differences, much less actually pass any sort of tax reform.  If you had any fear of the GOP passing some sweeping remake of the American system of taxation that just glides right through, you can lay aside your fear.  This is going to be painful for them, and they might have to settle for more temporary tax cuts, passed by reconciliation, rather than achieving any lasting change.

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