“White House takes lead role on tax plan,” says a headline in the Wall Street Journal. But if you read the article under the headline, you can see the White House is in no position to provide leadership.
The Journal’s well-reported story amounts to this: President Donald Trump would like to sign a tax reform bill, but he and his aides have no vision for what the tax reform bill should say.
“Broadly, Mr. Trump wants a simpler tax code and lower business tax rates to stimulate investment and spur manufacturing,” according to the WSJ.
That all sounds nice. But substantially everyone in Washington claims to be in favour of a simpler tax code that imposes lower rates on a broader tax base. Republicans and Democrats say this all the time, and yet, tax reform does not get done.
This is because, in practice, “simpler” means eliminating tax preferences that benefit various constituencies. When the specifics of “simplicity” get laid out, tax reform plans start to draw a lot of opposition.
To overcome that opposition, you would need a White House with a clear vision of how taxes should be reformed, and the political capital and acumen to convince Congress to adopt such reforms.
We don’t have any of that.
The White House does not like Paul Ryan’s plan
Paul Ryan’s big tax reform idea is to change the way the corporate income tax works, so the tax is “border adjusted,” meaning companies would deduct everything they export and add back everything they import before calculating taxable income.
This would raise a lot of revenue, making it possible to hand out other tax cuts. And there are some reasons to believe a border-adjusted tax would be more economically efficient than the current corporate income tax and make it harder for multinational companies to use clever strategies to avoid tax.
But such a tax would have uncertain effects on consumer prices, possibly making imported goods a lot more expensive. It could be terrible for retailers that sell imported goods, in some cases imposing tax bills that exceed their current profits. For these reasons, many Republicans in the Senate hate Ryan’s idea, especially if they come from states where major retailers are headquartered.
Oh, and a border-adjusted tax might violate World Trade Organisation rules, and it also might cause the dollar to appreciate wildly, triggering debt crises in foreign countries that issued debt in dollars and reducing the wealth of American businessmen who own foreign assets like, for example, golf courses in Scotland.
Given all these problems, you will not be surprised to learn the WSJ says Trump’s administration is “wary” of the border-adjustment idea.
The White House does not have its own plan
White House officials “have stepped up efforts to find alternatives that might help simplify the tax code while raising more revenue,” the WSJ says.
The problem is, ideas for raising more revenue — that is, ideas for tax increases — always draw opponents.
One report surfaced in the last few days saying that, instead of Ryan’s border-adjustment plan, White House officials were looking at a carbon tax or a value-added tax, the latter of which is similar to a sales tax.
These ideas, whatever their merits, would be very unpopular, especially with Republicans. They are “considered nonstarters within the administration,” two administration officials tell the WSJ.
Of course, Republicans could simply pass a plan that cuts taxes without raising offsetting revenue. But, because of Senate rules, such a tax cut could only run for 10 years. Republicans in the House have repeatedly stressed their focus on doing a permanent reform, because tax changes are more likely to spur investment if investors are confident the changes will be permanent.
A temporary, 10-year tax cut would be open to political attack on the grounds of simply being a repeat of the Bush tax cuts, which were temporary tax cuts, mostly aimed at the rich, with no apparent positive economic effects.
All of these are tough political problems, and the White House has given no indication of how it would prefer to resolve them.
The White House does not know what its coalition is to enact tax reform
Trump officials hope to work with Democrats on tax reform, according to the WSJ.
Unfortunately, Trump has so poisoned the well with Democrats that he won’t be able to get them to back one of his major initiatives unless they can credibly claim to have beaten him in the negotiation, something to which Trump is unlikely to submit.
In practice, Trump is married to Republicans on the tax issue, just like he was on the healthcare issue. This means any tax package can be held hostage by hard-liners in the House Freedom Caucus, who aren’t likely to be sympathetic to the middle-class-directed tax ideas promoted by National Economic Council head Gary Cohn and others in the White House.
It also means any tax package is going to have to navigate the sharp disagreements between House Republican leadership and key Republican senators over the border tax.
All the White House knows is it wants Trump to sign a tax reform law
Extreme flexibility might seem like an advantage in a negotiation. If all Trump wants is a bill he can sign so he can say he reformed taxes, shouldn’t he be able to get people to “yes” on something?
Well, that was the theory on the healthcare bill, too.
In practice, any tax-reform plan is going to draw specific opponents when it has specific provisions. And Trump will be hampered in his efforts to build a coalition around those provisions when, as with healthcare, it becomes clear he has no actual investment in those provisions.
The knowledge that Trump is desperate to sign a tax-reform bill and doesn’t care about the specifics will, as was the case with the health care bill, provide an incentive for legislators to be inflexible about details, knowing they can get Trump to bend to their will if they are obstinate enough.
The knowledge that Trump just wants a positive photo-op at the bill signing will give Democrats extra incentive to refuse any cooperation on tax reform.
We have seen this movie before. President wants bill, president doesn’t learn details of bill, president tells members of Congress they had better vote for bill or else, president says he never cared about stupid bill anyway, president demands Congress still act like it might pass bill, and so on.
This movie doesn’t end with the enactment of fundamental tax reform. It ends with the president watching cable news and tweeting bitterly.
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