Economy & Business

My Meeting with Mnuchin and Ivanka Tells Me Tax Reform Is in Trouble

President Trump meets the House Republican leaders about tax reform, November 2, 2017. (Reuters photo: Carlos Barria)
No one is willing to cut spending, and the current plan would raise taxes on many individuals.

This morning, Treasury Secretary Steve Mnuchin and presidential adviser/daughter Ivanka Trump visited the Bahnsen Group’s humble abodes for an intimate gathering on tax reform. Roughly 65 people attended. Audience questions were not allowed, and the panelists primarily provided their own biographies and cursory comments on why generic tax reform is needed.

The challenges in having an event like this largely replicate the challenge of tax reform itself — there is always someone who likes something, and someone else who doesn’t. And fundamentally, for the first time, I believe I understand the mistake underlying the new plan’s troubles.

The deep challenge in getting tax reform done is that the government spends too much money, and no one — including the president — wants to tackle that. No attempt to address “government spending” means anything without entitlement reform, a subject Trump has placed off-limits. The size of government, therefore, is not going to be addressed in any tax reform this year or next, and we basically knew that going in.

To the president’s credit, he has not wavered from identifying our present business tax code as antiquated, uncompetitive, and growth-suppressing. That simply has to change, and the administration’s endeavor there is admirable and productive. The proposed bill, as it stands, strikes at the “big three” of problems in the corporate code — it lowers the rate from 35 percent to 20 percent; it allows for repatriation of foreign profits; and it moves to a “territorial” system going forward, enhancing competitiveness and taking away perverse incentives for locating offshore. The extra icing on the cake, full expensing, is stimulative, supply-side, and pro-growth. The efforts of Secretary Mnuchin, adviser Gary Cohn, and congressional leaders to reform the business tax code deserve an “A” grade.

But the mistake I alluded to above is the early decision to blend corporate-tax reform with individual-income-tax reform. To keep the package from increasing the deficit more than Congress’s budget resolution allows, Republicans have blended together very wise individual reforms with incoherent ones, and it is the individual tax side of this package that threatens to undo the whole thing.

For many, the controversy is in taking away the deduction for state and local taxes. As I have written previously, I support this endeavor wholeheartedly, and in fact I support it to the point of being willing to see my personal income taxes go higher to see it done. An elimination of the mortgage-interest deduction should come next, but the House bill managed to do this just about as imperfectly as it could be done — lowering the deduction, ensuring its supporters are livid; but not getting rid of it, avoiding the case for why it is bad policy. Rather than litigate all the individual deductions now, the bottom line is this: Nearly anyone in a high-tax state making over a few hundred grand per year will see a tax increase, and the Left will still present this as a rich-favored tax package. Lose-lose.

The attempt to remedy this for small-business owners is incoherent, with pages of text in the bill devoted to the treatment of so-called pass-through entities, the end result being that after five days of discussion there is still no consensus about who will receive the new pass-through benefit and who will not.

Essentially, Republicans are going to have to pick between passing a bill that raises taxes on their constituents and denying the president his desperately needed legislative victory. How did this happen?

Because the Right has bought into the heretical argument that the rich in our country do not pay enough taxes. I am not talking about the politics of this, but rather the policy. Secretary Mnuchin did something very interesting in our meeting today. He said that “anyone under $300,000 of income regardless of your state is going to see a tax cut from this reform,” and I basically believe he is right about that. Yet his next sentence was, “But we didn’t design these cuts for those over $1 million of income; they will see their taxes go up in certain states.”

This is interesting on two levels. Most obviously, there is a big gap between $300,000 and $1 million, and the sleight of hand between those two sentences should not be missed by hundreds of thousands of hard-working American doctors, dentists, business owners, programmers, accountants, and more. Yes, they make a good living, but it would be news to them that they are not paying their fair share. Secondly, even for the admittedly high-income — for those above $1 million — “the tax cuts were not designed for you” and “you will see your taxes go higher are two sentences that need not go together.

The legislative process has forced congressional Republicans into a corner.

The legislative process has forced congressional Republicans into a corner. Their budget resolution prevents them from increasing the deficit by more than $1.5 trillion over ten years, at least if they want to use the reconciliation process to avoid a filibuster in the Senate. They are unwilling to cut spending. And the president has drawn a red line around a 20 percent corporate rate. Therefore, individual tax rates cannot come down to offset the loss of deductions (losses I fully commend), and many will face a higher tax bill. This seems beyond the pale of orthodoxy for conservatives, but it is not if the new “conservative” view is that the rich do not pay their fair share. It is a flawed argument, but it is the cousin of the populism that helped elect this president.

Whether or not Republican lawmakers can find the leverage to change this plan and avoid that outcome remains to be seen. Would a 23 percent corporate rate, with more income-tax relief for individuals, get it done? The common retort is that the White House and the Congress do not want this bill to look like a benefit to the wealthy. Fair enough. But guess what? It is a massive cut for middle-class earners as it stands now, and it is still being blasted along standard class-envy lines. The left has no other play but that. Why expect anything different?

In a perfect world, we get really good tax reform done because we led with entitlement and spending reform. That is not going to happen at this juncture in time. The business-tax reform Republicans have proposed is transformative and real. But at what cost? Could it be that the path to 50 percent marginal income-tax rates will be laid with the rhetoric and arguments that the Right is all of a sudden using?

Heaven help us, if so.

READ MORE:

NR Editorial: The GOP’s Tax Plan Is a Decent Start

Eight Important Changes in the Tax Cuts and Jobs Act

The Perlious Path to Tax Reform

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