Does the health reform fail mean tax cuts unlikely? I strongly doubt it.

March 27th, 2017 at 8:58 am

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 this AM’s papers, there’s a meme developing that tax reform looks just as hard as was health care reform. From this AM’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 R’s 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 an R 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 D 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 corp 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 1-2 percent of GDP versus the 2-4 percent Trump and the R’s 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 R (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 Rs 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.

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.

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).

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11 comments in reply to "Does the health reform fail mean tax cuts unlikely? I strongly doubt it."

  1. Smith says:

    Great, tax cuts of course. Moreover, the Trump’s defeat is actually his greatest victory. Repealing Obamacare would (and will) be a disaster and the Republicans would pay for this at the polls, starting with the mid terms. Instead, the rich top 1% earning over $250,000 investment income will be unhappy, but will still get enough back from regular tax cuts to buy that new yacht they’ve been wanting. It’s a win win that the liberal media seems to be ignoring. This is the best outcome for the Republicans though it has a very healthy outcome for millions depending on Obamacare.

    Regarding the tax cuts, Democrats don’t know how to play the deficit scare game, or they’d use that as the reason for raising taxes on the rich. They could say money for roads and bridges or to keep us ahead of the Chinese (the new Russians) are given to the rich instead making us weak. Instead they foolishly say raising taxes on the rich is needed to give money to the poor, and redistribute wealth, a stupid, self-defeating way to sell tax hikes. This is common sense, tax hikes to make us strong and compete with the Chinese, tax hikes to close the huge deficit. Well even give a token tax hike to the poor so the rich don’t feel picked on, they’ll have skin in the game too.

    Reagan, tax cuts, big deficit, reelected.
    Bush H. W., tax hike, smaller deficit, defeated
    Bush W. tax cuts, big deficit, reelected.


    • Barbara Rider says:

      So, why wouldn’t the tax cuts go the same way as the Obama repeal and replace?
      The Republicans would put together a tax cut bill that they want saying supply side economics will make sure the deficit does not increase due to increased revenue from the tax cuts. But the Freedom Caucus says we want more and your bill doesn’t go anywhere near far enough. They make their ultimatums that are too extreme and the bill doesn’t get the votes. Democrats do not vote for the new tax cuts and so it all has to come from the Republicans who are divided. Unless, the Freedom Caucus can moderate their demands and be in agreement with the Republicans….I see the Republicans as two parties now….right and extreme right.
      The Dems will certainly be in favor of infrastructure spending to stimulate the economy and create jobs.
      But I hope they will not be in favor of huge tax cuts for the high income/wealthy. They should vote no and insist that the bills be separated out.


      • Smith says:

        Repealing Obamacare is a disaster waiting to happen, the Republicans save face by allowing the repeal to fail.
        Tax cuts increase the deficit, increase inequality because the rich benefit most, and rob needed infrastructure funding, but the consequences of some higher debt servicing are felt by the entire population, in the future, and making only the powerless 90% of income earners poorer. That’s different from healthcare, where only 10 to 15% are affected, the consequences are harsher, personal health vs less government services and infrastructure. In fact, due to available capacity in the economy, it won’t be very inflationary, but the money will be spent on new yachts instead of new shoes for the baby.


  2. Ronald Boggio says:

    I tend to agree with our points, Jared, but have a question. How can they push through tax cuts with big deficits as you imply without Dems help since adding to deficit would not be allowed under reconciliation?


    • Jared Bernstein says:

      Deficits are not allowed outside the 10-year budget window, so, like W. Bush, you legislate that the cuts sunset in year 10. Then, they throw a sh__fit when the sunset arrives and rail at D’s for raising taxes!


      • watermelonpunch says:

        Yes.
        I know people who really believed the end of the payroll tax holiday was an “obamacare tax” started to pay for welfare programs.
        And I know people who really believed that ALL employer insurance is now taxed simply because of the DD box on the w-2.
        (Do they do the math or read the news? I don’t know, but that’s what people believe because somebody spreads that misinformation and nobody combats it effectively.)


      • Smith says:

        The Democrats are responsible for retaining 80% of the Bush tax cuts. The top 1% (earning over $450,000) did get their rates hiked from 35% to 39.6% (and then ACA added 3.8% on investment income over $250,000). Were Democrats afraid of spooking the poor recovery (their own fault anyway) or more scared of offending all but their richest donors. In any event, they failed in 2010 or 2012 or any election before or since in recent memory to make the case for higher taxes on the rich. Clinton kind of sort of, promised to add 4% to those making $5 million and make sure those making a $1 million pay at least 30% rate, same as Warren Buffet’s secretary.
        https://www.hillaryclinton.com/briefing/factsheets/2016/01/12/investing-in-america-by-restoring-basic-fairness-to-our-tax-code/

        You need to change the debate on taxes, why not restore the rates to Eisenhower Kennedy levels, to save our country, invest in research and development to fend off the challenge from the Chinese, and cut the deficit. ( 95% percent on income over $1 million in effect until 1963, why does anyone need to make over a $1 million per year, they can’t eat that much for sure).


        • EMichael says:

          Marginal tax rate increases on the wealthiest Americans were 60%. Going from 15% to 23.8%,


          • Smith says:

            What are you talking about? Marginal rates were up to 90%. Effective rates were lower because the marginal rates did their job suppressing incomes, just as conservatives claim. Also the top 1% earned half the share of national income they do today (closer to 10% vs. 20%). That extra 10% is nearly $2 trillion a year you are giving away to the top 1.5 million workers or households, take your pick (or an extra $1 million and a 1/3). The next 10% also picked up an extra 10%, those 15 million now raking in an additional $150,000. But really, it’s so difficult to make ends meet these days on anything less than $400,000, which is why Obama and Majority Leader Sen. Schumer kept the Bush tax cuts for those poor folks.
            If you earned a $1 million (in 2017 dollars) in 1960, you were paying an effective rate of 60% or more.

            Don’t let me see nonsense about 23%. Greg Mankiw uses the same argument because he neglects the doubling of the share of national income. Krugman falls into that trap too. Not all that bright of him to do, either (he was defending Obama and by extension Clinton).


      • Ronald Boggio says:

        Thanks for the clarification.


  3. Fred Donaldson says:

    While everyone is discussing income tax rates, the so-called “Death Tax” seems to be rolling to repeal, primarily because a bunch of very untouchable folks want to see their family power grow and grow. There is about $1.5 TRILLION, assuming just a 55% rate on ONLY billionaires, and even exempt everyone else. The idea will go nowhere, because Americans are not allowed to “offend” the very, very rich: https://goo.gl/g24ayi


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