Friday, April 14, 2017

The Gang That Can't Shoot Straight Takes Aim at the Tax Code

by Neil H. Buchanan

One of the recurrent questions of the Trump era has been whether there is any difference between the president and the rest of the Republican Party.  It is not just a matter of noting the many ways in which the national party establishment, which uniformly reviled Donald Trump during last year's primaries, so quickly and embarrassingly fell into line, although that is certainly a story in itself.

The bigger question has been whether the Trump Administration's conspicuous incompetence is merely a result of the White House team's inexperience or is instead evidence of something deeper.  It is becoming clearer every day that the Keystone Kops-like ineptitude that we are seeing in the era of Republican dominance is caused by ideological commitments and political rigidities across the Republican terrain.

There is, of course, a certain comfort in all of this.  As John Dean put it recently: "The [Trump Administration's] incompetence is the only thing giving me comfort at the moment."  But is it really just Trump and Steve Bannon who are being exposed as bumblers?

Think of how this could have played out.  The Republican establishment could have quickly come to view the new administration as an unexpected gift, a crew so overwhelmed by their own hubris and naivete that they could have been led by the nose by party leaders like Mitch McConnell and Paul Ryan.

Republicans in Congress could have patted Trump on the head and convinced him that he was in charge, all the while deftly pulling the strings and fooling him into doing what they have wanted to do all along.  Think of it as a new Hollywood blockbuster: "The Swamp Creatures Strike Back."

But that would have required the Republicans outside of Trump's circle to be competent as well as at least somewhat united.  Even on the biggest issues, that is turning out not to be the case.  Trump has created an enormous vacuum of leadership, but no one is there to fill it with a Republican policy agenda that Trump could be induced to support and adopt.

The most obvious example of this problem has been in the health care debate.  The repeal-and-replace rhetoric ran up against the simple reality that Republicans never had the competence or the discipline to come up with their own health care plan.  After a few months of scrambling and then coming up with a plan that was worse than the Affordable Care Act (ACA) in every way, the party was saved from itself by members who wanted to be even more cruel.

After a few weeks of saying that they will put their health care failure behind them in order to turn their attention to passing their cherished regressive tax cuts, Trump announced a few days ago that, sure enough, he really does again want to pass a bill to gut health care before taking on the tax code.

Some of this tap dancing is apparently due to confusion about the so-called Byrd Rule, which I discussed in a recent column and which requires sixty votes in the Senate to pass any bill that increases deficits beyond a 10-year forecasting window.  As I noted in that column, it is not obvious why passing health care legislation would avoid the Byrd Rule, but it is at least clear that the real strategy from Trump and the Republicans is to use the harsh cuts to health care spending for non-wealthy individuals to fund not one but two sets of tax cuts for the rich.

The first regressive tax cut comes in the health care plan itself, in which Republicans would repeal the ACA's progressive tax provisions that currently fund subsidies to allow people to afford private health insurance.  The Congressional Budget Office has estimated that those tax reductions are a few hundred billion dollars less than the cuts in health care spending in the Republicans' bill, such that the ten-year net effect of the bill would be to somewhat decrease federal borrowing.

With or without the Byrd Rule, this creates a public relations opportunity, because it would allow Trump and the Republicans to say that they partially paid for their second round of regressive tax cuts with "savings" from the health care bill.  Any further reductions in rich people's taxes then become easier to justify.

But what would that second round of tax cuts look like, exactly?  On my most recent visit to Australia and New Zealand, I delivered a lecture to tax academics in which I discussed what the new president's tax policies would look like -- a topic that is of intense interest abroad.  Even when the U.S. government is functioning reasonably well, after all, our policy choices affect nearly everyone around the globe.  With a volatile and unknown quantity like Trump taking power, people were understandably wondering what might happen next.

But here is the two-sentence distillation of what I was able to say: "I am not sure whether they will be able to pass anything, and even if they do, we only know that it will redistribute income to the rich from everyone else.  There is no way to know what form those regressive tax cuts would take."

How is that possible?  After all these years, is there not some basic set of tax cuts that all Republicans support?  Trump was famously surprised that "health care could be so complicated," but there are so many different ways to cut taxes for rich people that health care might look simple by comparison.

And again, this is not just an issue with Trump.  Congressional Republicans, too, are all over the map.  For example, Arkansas Senator Tom Cotton, who is somehow viewed as a rising star in the party -- this is the guy who authored the 2015 letter to Iran's leaders claiming that any deal signed by President Obama was somehow not binding -- recently made the following jaw-dropping claim:

“Most conservatives I know have long believed that tax reform would look at all of the carve-outs in the tax code, not introduce a whole new concept of taxation.”

It is difficult to determine which conservatives Cotton knows, but apparently he does not get out very much.  For at least two decades, Republicans have been running on all kinds of root-and-branch proposals to rewrite the tax code and make it regressive.  National sales tax proposals, various Flat Tax proposals, and many other fundamental tax reform proposals are constantly on offer from the right, with think tanks supporting each one.

And this is not some sort of wonks-only discussion.  Presidential campaigns have been built around "whole new concepts of taxation."  In 1996, Steve Forbes briefly enjoyed status as a front-runner in the Republican primaries with a regressive flat tax plan.  In 2016, Ted Cruz proposed a similar radical revamping of the tax code.

Perhaps, however, Cotton is merely trying to make it sound as if his position is the only position that conservatives endorse.  Saying it might make it so.  And it is true that some conservatives are talking not about the tax code equivalent of repeal-and-replace but would prefer to eliminate various tax expenditures (deductions, credits, exclusions, and so on) in order to lower rates.

That is, in any case, a coherent position.  There are a few obvious problems with making it a reality, however.  The most obvious is that this "broaden the base and lower the rates" version of tax reform has been around for a long time, and everyone likes it in theory but hates it in reality.

For example, when George W. Bush was president, he created a blue-ribbon commission to "study" the tax code (as if thousands of experts are not doing that every day) and to recommend a large-scale tax reform plan.  When the commission floated the idea of eliminating the deduction for mortgage interest, however, the political blowback was fierce -- even from the left, notwithstanding colorable arguments that the mortgage interest deduction is regressive.  The proposal went nowhere.

The other two largest categories of tax expenditures, in addition to support for home ownership, are tax-free employer-provided health insurance and tax-advantaged retirement accounts.  Surely, no one would defend those from the axe, right?

The larger point is as familiar as it is important: Tax reform is difficult because everyone likes the tax provisions that favor them, and they are willing to defend those provisions to the death.  There is no evidence at all that the Republicans in Congress or the White House have the expertise or the inclination to force a grand compromise.

Which brings us to the second, related problem with Cotton's preferred approach.  Everyone who really does favor a complete revamping of the tax code is going to want to oppose a grand compromise, even if they actually like the elements of the compromise.  That is, if I really and truly believed that the U.S. should have a consumption tax instead of an income tax -- which I most emphatically do not, but no matter -- I would understand that a big tax bill that reforms the current system makes my preferred solution less likely to pass in the future.  The good is the enemy of the perfect.

Anyone who thought that it was amusing to watch the radical conservatives in the Freedom Caucus kill TrumpRyanCare because it was not vicious enough, therefore, is in for a comedy jam on tax reform.  Even people who are well informed and acting in good faith have reasons to move strategically to kill tax bills.  And these guys are ignorant and malevolent.

What about smaller-bore reforms?  Even if the Republicans run aground on big-picture tax changes, might they end up settling for something smaller?  Maybe, but maybe not.

Even the dreaded estate tax (or, as Republicans continue to insist on dishonestly labeling it, the "death tax") could survive, even though Trump agrees with Republicans that it is horrible and must go.  (It is one of the few truly progressive elements of the tax code, so of course Republicans hate it.)  In addition to the strategic issues that I noted above, Republicans also understand that railing against the estate tax is one of their most reliable fire-up-the-base applause lines on which they raise lots and lots of campaign money.  Why not keep it around?

I am not predicting that the estate tax will survive.  My point, in fact, is that no one can predict anything.  All we know is that anything that could pass and be signed by Trump is surely going to be a hugely regressive change, which is exactly what I told my audience Down Under earlier this year.

The problem for Republicans is that there are many, many ways to change the tax code.  Even people who are united in their desire to worsen inequality will find themselves engaged in nasty intramural battles that will be exhausting and most likely will lead to another big failure.

Even so, incompetent people sometimes manage to get things done.  We can only hope that Trump and the Republicans continue to trip over each other.

1 comment:

David Ricardo said...

We do know a little about the Trump/GOP tax ‘reform’.

1. There will be huge tax cuts for the wealthy, primarily in the reduction of the top rate and probable elimination of AMT. This will accompany very modest reduction in middle income tax rates as an enticement.

2. The Estate Tax will be repealed, but the question will be how much it will be replaced by having Carry Over Basis for inherited assets. Most likely there will be a huge exclusion of gains, $10 to $20 million and if the capital gains rates are reduced or even eliminated than COB won’t make much difference from total elimination of any taxes on inherited wealth.

3. The corporate tax rate will be reduced substantially. Full one year write off of depreciable investment will replace accelerated depreciation. Most corporate welfare deductions will remain.

4. The big question is the Border Tax. What no one seems to focus on is the utter impracticality of this tax. On the import side it is straight forward, but on the export side it seems that what they want to do is to allow a full deduction for income generated by export sales. This is impossible because it is impossible to compute income to various products. If Company X makes widgets and domestic sales are $1 billion and exports are $500 million Company X will have to allocate costs in a manner so as to compute the net income on the $500 million in exports.

This is simply not possible given cost systems in place today even if the tax code can be written in a clear manner to define what ‘net income per product’ even is. How is factory overhead allocated? How are non-factory administrative and fixed costs allocated? The rules here will either allow corporations to do whatever they want or they will be so complex that even good accounting cannot understand them.

And once they are in place there will be tremendous incentive for corporations to game the system, much the same way the system is now gamed by transfer pricing and the shifting of corporate taxable income to low tax jurisdictions. Except in this case the shift will be from domestic sales to export sales.

We do know as Mr. Buchanan alluded to that the impetus to do health care tax cuts before general tax cuts is so that under the complex rules of taxing and spending the baseline changes if ACA taxes are eliminated first and greater and more permanent tax cuts for the wealthy can take place.

In the end all we are likely to get is a large tax decrease for high income individuals and the resulting deficit used to justify eliminating federal programs for the disabled, low income and otherwise vulnerable part of the population that needs the programs. In short, basic orthodox Republican policy.