Why Tax Reform Isn't Going to Be Any Easier

Michael D. Tanner

As the Trump administration and Republicans in Congress survey the wreckage of their efforts to repeal Obamacare, the rush is on for tax reform. But, unless President Trump and the Republican leadership learn the lessons of their health-care debacle, they are racing down the road to another defeat.

Speaking for the administration, Treasury Secretary Steve Mnuchin insists that tax reform will be easy. “Health care is a very, very complicated issue,” Mnuchin recently told a group of financial journalists. “In a way, [tax reform is] a lot simpler. It really is.”

Um, no it’s not.

If tax reform were easy, we would have done it long ago, especially given the widespread agreement that our tax code is opaque, cumbersome, inefficient, and riddled with inequities. Yet, the U.S. has gone more than three decades, encompassing four presidents, since the last time we seriously reformed taxes. There’s a reason for that.

Unless President Trump and the Republican leadership learn the lessons of their health-care debacle, they are racing down the road to another defeat.

The tax code is a cornucopia of special-interest goodies. There will be losers as well as winners. Any change is going to make for many powerful enemies. The tax code isn’t just part of the Washington swamp, it is the swamp. And draining that particular swamp was never going to be easy.

Making matters worse, there is no evidence that the Trump administration has learned anything from its defeat on health care.

First, as with health care, Trump doesn’t actually have a tax-reform plan. During the campaign, Trump put forward a series of evolving tax plans, but those have largely been dropped as the action shifts to Capitol Hill. Rather than trying to rally Republicans behind a specific proposal, Trump is leaving the details to Congress, while promising “something phenomenal in terms of tax.”

One of the Republican complaints about negotiations over the health-care bill was that Trump had little knowledge of health-care policy or the details of the bill. According to some of those in the room, when members of the Freedom Caucus raised their concerns about the bill, Trump responded, “Forget about the little sh**. Let’s focus on the big picture here.” As one person at the meeting complained, “it became clear … that no serious changes were going to be made, because the president didn’t have sufficient command of the policy details to negotiate.”

Nothing the president has said since then indicates that he has a better grasp of the intricacies of tax reform.

Second, Republicans face the many of the same divisions over tax reform that they did with health care. For example, both the Trump administration and Republican congressional leaders reportedly favor a border-adjustment tax (BAT), an extremely complicated mechanism that essentially exempts exports from taxation, but imposes a 20 percent tax on imports, including component parts.

Most members of the House Freedom Caucus, however, see the BAT as a $1 trillion tax on consumers. As Representative Jim Jordan (R., Ohio), one of the leaders of House conservatives put it, “the idea that you’re going to add an entirely new tax is a big problem.” Likewise, many of the conservative senators who opposed the health-care bill are opposed to the BAT.

During the debate over health-care reform, President Trump’s efforts to bully the Freedom Caucus proved counterproductive. Trump reportedly dispatched Steve Bannon to the Hill, where he attempted to order Freedom Caucus members to vote for the bill “This is not a discussion. This is not a debate,” Bannon said. “You have no choice but to vote for this bill.” To which one member reportedly responded that the last time he was talked to that way, he was 18 years old and being lectured by his father. “It didn’t work then either,” the member reportedly told Bannon.

Yet, Trump’s post-defeat tweets blaming the Freedom Caucus and conservative groups for the defeat suggest that the president is still of the opinion that he can tell congressmen how to vote.

It’s not just the Freedom Caucus that has concerns about the direction of tax reform. Deficit hawks are worried that, in the absence of corresponding spending cuts, a big tax reduction would balloon deficits and the debt. Further complicating matters, the defeat of health-care reform means the loss of $300-$500 billion in savings over the next ten years that Republicans were counting on to offset revenue reductions from tax reform. If the BAT is not included in the final bill, that means the loss of as much as an additional $1 trillion in revenue. While the tax reductions and other changes can be expected to spur economic growth, no one expects growth to offset every dollar in lost revenue. Spending restraint remains the key to making tax reform work, but so far the Trump administration has shown little appetite for cuts. The president’s so-called skinny budget moves spending around but doesn’t actually reduce it.

Third, hopes for Democratic support are likely to prove fantasy. While a few Democrats, particularly in the Senate, have made positive noises about reducing corporate tax rates, no one has yet spoken favorably about the Republican proposals under way. At the same time, Democrats are united against any tax-reform proposal that significantly reduces taxes for upper-income earners. Most Democrats remain firmly in “resist” mode, opposing any Trump initiative even before it is launched. And the defeat of health-care reform has not done anything to make Democrats more willing to compromise. One can argue that Republicans were similarly obstructionist with President Obama, but that doesn’t change the basic math. Without Democrats completely reversing their positions, it is going to be hard to muster a majority for any tax reform worth its name.

Finally, the legislative process remains complex. The plan is for the tax-reform bill to go through reconciliation to avoid a Democratic filibuster. That’s the same process that wrecked such havoc on health-care reform. There are a host of arcane procedural hurdles under reconciliation that will make drafting a successful bill more difficult. For example, the bill must be revenue-neutral for years outside the reconciliation window. Similarly, the bill cannot increase budget deficits in any year outside the target period, unless other provisions fully offset those increases. That is why, for example, the Bush tax cuts expired after ten years. Any tax-reform bill is going to have to be shoehorned into that framework, and that will be no easy task.

Even passing the budget bill with reconciliation instructions might be problematic. The budget-resolution bill passed in January did little more than set the stage for health-care reconciliation. Even most deficit hawks held their nose and voted for it, despite its high deficit and spending levels, because it was necessary to repeal Obamacare and the real budget was yet to come. Republicans cannot play that game again. The next budget bill will be the real thing, with formal spending and deficit targets, as well as tax-reform reconciliation language. Fiscal conservatives are likely to be unhappy.

Tax reform is vital to spurring economic growth and increasing American competitiveness. Indeed, it is long overdue. But so was repeal of Obamacare. The Republican defeat on that measure should have taught President Trump that governing is not nearly as easy as he thought. Unless he learns that lesson — and quickly — yet another crucial reform could be headed for defeat.

Michael Tanner is a senior fellow at the Cato Institute and the author of Going for Broke: Deficits, Debt, and the Entitlement Crisis.