Fractured GOP may revert back to Bush-era tax cuts for the rich
Last Friday, Republicans abandoned their long-promised campaign to repeal the Affordable Care Act (ACA). Many commentators have noted that the next item on the legislative agenda — rewriting and reforming the tax code — might be just as hard as repealing the ACA, but this depends on just what we mean by “tax reform.”
Revenue-neutral tax reform that permanently changes rates and the tax base is not going to happen. Instead, we are much more likely to get a deficit-financed, regressive tax cut that will likely expire in 10 years, much like the 2001–03 Bush tax cuts did.
Before explaining why revenue-neutral reform is likely to fail, I want to be clear that not too many tears should be shed over its future demise. If it’s going to be useful, tax reform should raise more revenue. And yet, as unneeded as revenue-neutral reform is, what we’re likely to get will be worse — deficit-financed tax cuts for the rich that will just exacerbate inequality.
Why will revenue-neutral, permanent reform fail? First, to get around the 60-vote threshold for a filibuster, congressional Republicans are planning on using the “budget reconciliation” process.
But there’s a catch — for a reconciliation bill to make it through the Senate and become permanent, it can’t increase the deficit any year outside the 10-year budget window. So they’ll have to pay for any tax cuts. And so far, their proposed pay-fors are clear political quagmires.
For example, the Tax Policy Center (TPC) estimates that the House GOP “Better Way” tax plan would increase the debt by $3.6 trillion over the second decade following its passage. Astoundingly, 99.6 percent of its benefits will go to the top 1 percent by 2025. How will they pay for this under reconciliation?
One previously anticipated offset is already gone — spending cuts embedded in the proposed ACA repeal. Maybe congressional Republicans can just resuscitate huge Medicaid spending cuts to finance high-end tax cuts, but last week’s ACA repeal debacle should not raise their hopes that this is a winning strategy.
Additionally, the TPC score of how much the GOP plan adds to the deficit is kept low by revenue from the “destination-based cash-flow tax (DBCFT)”; sometimes called the “border adjustment tax”(BAT). This is problematic on two fronts. First, it’s unpopular.
Exporters love the DBCFT because it gives them rebates, but importers hate it because it taxes imports. When Wal-Mart hates your Republican tax plan, it is pretty hobbled. Wal-Mart’s home-state senator, Sen. Tom Cotton (R-Ark.), described it by saying, “Some ideas are so stupid, only an intellectual could believe them.”
The second problem for the DBCFT is that, because imports are taxed but exports are given rebates, it only raises money so long as the United States continues to run large trade deficits. Are official tax scorers willing to make this blanket assumption for the next two decades? That’s far from obvious.
The TPC score of the Republican plan also includes substantial revenue raised from closing special interest loopholes in the tax code. As always, this is easier said than done. For example, the TPC score assumes that the itemized deduction for state and local taxes paid will be done away with. We’ll see if they keep this in the face of voters’ howls.
So, the GOP plan for revenue-neutral, permanent reform was already starting about $3.5 trillion in the hole before the ACA spending cuts melted away. The DBCFT offset has already sparked a savage pushback, and the remaining pay-fors include zeroing out very popular itemized deductions. This sounds very hard, and there’s a much easier path.
They can follow the lead of the Bush tax cuts, and just say that the tax cuts will disappear after 10 years. Remember, they can increase the deficit as much as they want within the 10-year budget window, just not outside of it. If the real plan is just to permanently reduce taxes paid by high-income households, this is awfully tempting — the vast majority of the Bush tax cuts actually never went away.
At the end of the day, budget math makes it unlikely that Republicans will be able to engineer permanent, revenue-neutral reform. Instead, the bill that seems most likely to gain enough support from a fractured Republican caucus is just a dusted-off, deficit-financed tax cut for the rich that “sunsets” in 10 years.
At least this will prove whether congressional Republicans really care about lowering deficits, or just care about giving tax cuts to the rich.
Hunter Blair joined is a budget analyst for Economic Policy Institute, a nonprofit, nonpartisan think tank created to include the needs of low- and middle-income workers in economic policy discussions. Blair researches tax, budget and infrastructure policy.
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