Economy & Budget

Bet on a tax cut, not tax reform

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President Trump and congressional Republicans are barreling ahead with what is likely to be the biggest U.S. tax legislation in decades.

But will it be tax reform? Or a tax cut? They are not the same thing. And the difference matters to everyone who pays taxes or cares about the U.S. economy.

Let’s start with—pardon the pun—a short taxonomy. Tax reform is a broad restructuring of the system the government uses to collect revenue. A tax cut is, well, a tax cut.

In today’s world, tax reform comes in two varieties.

{mosads}The first is a revised income tax, usually where Congress eliminates or scales back targeted tax breaks and uses the money to lower tax rates. That’s what Congress and President Reagan did in 1986. Another version of reform shifts from an income tax to a consumption tax, where you are taxed on the money you spend rather than on what you make. Economists sometimes call these value-added taxes or cash flow taxes. These reforms usually (though not always) raise roughly the same amount of money as the tax system they replace.


Then there are the far more common tax cuts. Congress passed big ones in 1981 and 2001 and smaller versions in 2003, 2009, and 2010. Since their goal is to cut people’s taxes, they raise less money than the old law. And, not surprisingly, it is much easier for lawmakers to cut taxes, where they create mostly winners, than to reform taxes, which inevitably produces losers.

That brings us to today. In the 2016 presidential campaign, several Republican candidates, including former Gov. Jeb Bush (R-Fla.), Sen. Marco Rubio (R-Fla.), and Sen. Ted Cruz (R-Texas), proposed versions of tax reform, at least for businesses. Their idea: Replace the corporate income tax with a cash flow tax. In June 2016, House Republicans, led by Speaker Paul Ryan (R-Wisc.) and Ways & Means Committee Chairman Kevin Brady (R-Texas) did the same.

Trump was not a fan. He proposed several tax plans during the course of the campaign. Each was an enormous tax cut. None was reform. My colleagues at the Tax Policy Center have estimated that his most recent plan would add more than $7 trillion to the national debt over the next decade, including its effects on the overall economy.

Moreover, Trump has expressed strong skepticism about the most reform-like proposal in the House GOP plan—its so-called destination-based cash flow tax. There is no need to explain here how it would work or why Trump doesn’t like it. The point is that he doesn’t. And neither do many U.S. retailers or the influential Koch brothers. Without one key element of that proposal, called border adjustability, the House GOP plan has a $1.2 trillion problem.

That’s how much the Tax Policy Center estimates that single provision would raise over 10 years. It is the cash cow that Ryan and colleagues hope will finance their plan to lower business tax rates from 35 percent to 20 percent.

Without it, their ambitious plan to reform the tax code without adding to the nation’s debt is sunk. They could eliminate most business tax breaks and still could not get the corporate rate below 28 percent without increasing the debt. And targeting those tax breaks will generate a firestorm unlike anything Washington has seen in years.

While few have been paying attention, GOP lawmakers have a similar problem with the individual tax. They want to cut tax rates across the board. But if they don’t want to add trillions of dollars to the deficit, they’ll have no choice but to eliminate many popular tax breaks. That was the “lower-the-rates-broaden-the-base” formula that Reagan used in 1986.

Economists love this idea. And lawmakers like to diminish these tax breaks by calling them “loopholes.” The problem is they are not. They are popular tax subsidies for mortgage interest, state and local taxes, retirement savings, and employer-sponsored health insurance. And the only way Congress can reduce tax rates without adding to the debt is by dumping or cutting most of them.

And that will get ugly.

So where does this leave Congress? Without strong political cover from the White House or Democratic support, which Republicans will take the heat for eliminating these popular tax breaks?

Republican leaders on the Hill are already acknowledging that a tax bill is likely to take a lot longer than they had hoped. My bet is that it will not only take more time, it will morph from reform to a tax cut. They may try to put lipstick on the pig by calling it a down payment on reform, but don’t count on them ever delivering.

Howard Gleckman is a senior fellow at the Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution. He edits the center’s TaxVox fiscal policy blog and Daily Deduction newsletter. He is a former Washington correspondent for Business Week, where he was a 2003 National Magazine Award finalist.

The views of contributors are their own and are not the views of The Hill.

Tags Budget Congress Donald Trump Fiscal policy Kevin Brady Marco Rubio Paul Ryan Republicans Tax reform Ted Cruz
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