Does The Health Reform Fail Mean Tax Cuts Are Unlikely? I Strongly Doubt It.

My CBPP colleagues and I will have much more to say about this in coming weeks, but there’s no rest down here at Dysfunction Junction as we move from health care to taxes.

If you go by Monday morning’s papers, there’s a meme developing that tax reform looks just as hard as was health care reform. From Monday morning’ s NYT  (my bold):

Picking themselves up after the bruising collapse of their health care plan, President Trump and Republicans in Congress will start this week on a legislative obstacle course that will be even more arduous: the first overhaul of the tax code in three decades...

“It’s like asking whether climbing Kilimanjaro or another mountain of equal height is harder,” said Mr. Graetz, who was a Treasury Department official in the early 1990s. “They are both very hard...”

Hmmm. I’m not sure this is right.

Obviously, and especially after last Friday, betting on this Congress’ ability to legislate is not exactly a safe bet. But here are some mitigating points to consider:

Perhaps the most important point is that while the Republican caucus is far from united on what health care reform should look like, they’re far less divided on tax reform, or more specifically, tax cuts. They really have no idea what they want to do re: health care their “bill” made absolutely no sense to anyone and was really a big tax cut, thinly disguised as health reform. But they know what they want to do with taxes, which is to cut them, preferably for everyone, but mostly for the wealthy.

How can I say the Republicans are united on tax cuts when they disagree about the Border Adjusted Tax, or BAT? Again, I think tax-reform-watchers are overplaying this card. Yes, this is a complicated, contentious idea favored by Brady and Ryan, and yes, it scores as raising needed revenue to partially offset the cuts. But when it comes to following his guidance, Ryan’s stock is low and falling, and if you think a Republican tax cut hinges on getting the BAT, I urge a rethink.

Based on the failure to cut $1 trillion (over 10 years) in taxes in the health bill, the difficulty moving the BAT, and the need to move tax reform without Democratic votes (meaning adding to the deficit outside the 10-year budget window is disallowed), ambitious tax reform faces challenges for sure. But that leaves less-ambitious reform, a la George W. Bush. Cuts in rates, sure, but smaller than they’d like. No permanent reform, but a sunset after 10 years. Lots of dynamic scoring and magic asterisks (”assume a bunch of loophole closing”). EG, I see the corporate rate coming down from its current 35 percent to ~25 percent instead of the 15 percent in Trump’s plan. Maybe tax cuts ultimately amount to maybe 1 percent of GDP versus the 2+ percent Trump and the Republicans originally craved.

How, then, do they pull this off if they lose their big payfor? Easy: larger deficits. Check out this quote from an influential Republican (from the Times piece linked above):

In a rare shift, Representative Mark Meadows of North Carolina, whose House Freedom Caucus effectively torpedoed the health legislation, said Sunday on ABC’s “This Week”  that he would not protest if tax cuts were not offset by new spending cuts or new streams of revenue, such as an import tax [ie, the BAT].

“I think there’s a lot of flexibility in terms of some of my contacts and conservatives in terms of not making it totally offset,” he said. “Does it have to be fully offset? My personal response is no.”

Remember, many Republicans do not care about deficits and only feign concern to block spending plans and shrink government. The idea that even deep seas of red ink will dissuade them from cutting taxes seems awfully naive to me.

One wild card scenario: Trump gives up on Ryan and teams up with D’s to pass a smaller tax cut with lots (too many, from my perspective) of goodies for the top 1 percent, but also a real infrastructure plan (not his original one which gave investors a wasteful tax cut for stuff they were going to build anyway).

So, I’m not saying it’s going to be easy, but if you’re thinking the failure to repeal and replace means the odds of passing a tax cut are well below half, I suspect you’re wrong.

That’s what they could do, but should they do so?

No, for three obvious reasons. First, the structure of our economy is such that the benefits of growth already flow disproportionately to the wealthy. Exacerbating pretax inequality with regressive tax cuts is a both bad and unjust tax policy. Second, we’re going to need more, not less, revenues going forward. Based on our demographics alone, this should be obvious, not to mention other challenges that the private sector will not address, from climate to geopolitics. Finally, to reduce the deficits generated by their forthcoming tax cuts, the Republicans will go after spending on low and moderate income people, just like they do in their budgets and did in their health bill. Again, such reverse Robin-Hood’ism is the opposite of what’s needed in an economy where inequalities are already too high.

Cross-posted from Jared Bernstein’s On the Economy blog .