Economy & Business

Ticking Time Bombs in Tax Reform

(Photo: David Burke/Dreamstime)
A future Congress might undo the ‘permanent’ corporate cuts to keep the individual ones from expiring.

The same pressures that led to the GOP debacle on health care are also shaping the current effort at tax reform. As happened with health-care reform, these pressures might end up making tax reform less popular and undermine some of its core goals.

Because Republicans have spent 2017 trying to pass major legislation on a party-line basis, to avoid a filibuster in the Senate they have limited themselves to measures that can be passed by “reconciliation.” Reconciliation legislation mostly focuses on finance (which limited the GOP’s options on health-care reform), and under the Byrd rule it cannot add to the deficit after a set window (currently, ten years). This concern with the deficit has caused Republicans to lard up tax reform with legislative gimmicks and potentially divisive measures, such as the elimination of popular deductions.

In order to keep the tax bill from adding to the deficit after a decade and to keep it from adding more than $1.5 trillion over the next ten years (as their budget resolution required), Republicans have settled on a strategy that might be too clever by half: Have the popular tax breaks (on families) expire while making the less popular (business) tax breaks permanent. Without the extension of these tax breaks, many families are projected to see higher taxes after 2025 than they would have under the pre-reform tax code. Republicans are gambling that these personal tax cuts will be extended by later Congresses.

This is a plausible gamble; members of both parties are likely to want to defer a tax hike for many American families. But it is quite possible that future Congresses might consider rolling back some of the supposedly permanent business tax cuts in order to pay for extending those individual tax breaks. President Bernie Sanders (to speak hypothetically here) would no doubt gladly sign off on that deal. On the other hand, if those personal tax cuts are extended without any corresponding tax increases, the tax-reform proposal likely blows an even bigger hole in the deficit. By embedding a ticking time bomb in tax reform, Republicans increase the likelihood of a new battle over taxes in the medium term.

The prospect of a new battle over taxes, of course, vitiates one of the major claims made on behalf of tax reform: that a simpler, clearer tax system will encourage businesses to make long-term investments in the United States, adding to GDP calculations and employment rolls. Because the current iteration of tax reform has been so politically polarized, businesses might have reason to doubt what their taxes will be in ten years or even five years. It’s possible that Republicans overestimate the ability of tax policy to shape business decisions, but if they are right about the influence of taxes, a less stable tax system might not generate the economic growth hoped for in tax reform.

Tax reform in 1986 was passed with huge, bipartisan majorities. And even that reform was changed in the 1990 Omnibus Budget Reconciliation Act. Especially if Democrats recapture power in Washington, the current iteration of tax reform could be on even less steady ground. The bill has many political dangers. Polling for tax reform has been mixed at best (and many recent public polls show relatively little support for it). By eliminating many deductions, the reform could end up raising taxes on the upper-middle-class suburbanites already skeptical about a Trumpian GOP.

Passing the legislation on a party-line vote means that the GOP will own all the downsides.

So far, tax reform has not proven as politically toxic as the misconceived effort at health-care reform earlier this year; after the debacle of the American Health Care Act (which would have slashed capital-gains taxes and health-care subsidies), congressional job approval began a sustained downward slide. Still, there are significant political dangers, and passing the legislation on a party-line vote means that the GOP will own all the downsides. A more targeted effort at reform — headlined by permanent benefits for working families and smaller corporate rate cuts — might have been an easier sell.

Despite all these political and policy pitfalls, tax reform seems to have a surprising amount of momentum. Much of this momentum derives from the fear Republicans have of having wasted a year of complete control of Congress and the White House. According to this thinking, Republicans have to pass something — anything — to convince voters (and especially donors) that they can get something done. Fear of an empty legislative record might be able to concentrate congressional minds, but Republicans should not blind themselves to the fact that the substance of any legislation matters, too. While passing the tax bill might be something, it is not entirely clear that this something will prove politically popular or provide a foundation for a long-term consensus on tax policy.

READ MORE:

The Senate Tax Reform Won’t Raise Taxes on the Poor

Republicans Should Go Big or Go Home on Tax Reform

The GOP’s Tax Plan Paves the Way to a Democratic Majority

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