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GOP begins charting path to tax reform, but experts see many obstacles

In this March 29, 2017, photo, President Donald Trump speaks at a women's empowerment panel in the East Room of the White House in Washington. (AP Photo/Andrew Harnik)

House Republicans say their party must come together on a tax reform package because that is what voters put them in office to do, but economists say there are many reasons why that will not be an easy promise to keep.

“The American people are expecting us to do something on tax reform,” Rep. Darin LaHood, R-Ill., said Wednesday.

He expressed hope for the sort of compromise that eluded lawmakers in their effort to repeal the Affordable Care Act. The attempt to undo President Barack Obama’s signature legislative accomplishment understandably did not attract any Democratic support, but this could be different.

“This shouldn’t be a partisan issue,” LaHood said.

While Trump recently voiced surprise at the complexity of health care reform, members of Congress hold no illusions that overhauling the federal tax code will be any simpler.

“There’s a reason this hasn’t been done in 30 years,” said Rep. Thomas Massie, R-Ky. “It’s complicated and a lot of people are going to start screaming when you take away their deductions.”

The last major reform of the tax code occurred in 1986 after President Ronald Reagan worked for years to forge a bipartisan agreement.

Under the best of circumstances, rewriting the tax code is an inherently challenging task for lawmakers to tackle, and despite unified GOP control of Congress and the White House, these are not the best of circumstances.

Though Republicans are aspiring to a consensus on tax legislation, deep divisions remain within the party after the House failed to bring the American Health Care Act up for a vote last week. Members of the conservative House Freedom Caucus withheld their support even after extensive negotiations with the president and the vice president.

Some in the House were critical of their colleagues for opposing a bill that, while flawed, was the best Obamacare repeal legislation they could craft.

“I’m afraid we allowed the perfect to become the enemy of the good. There’s never going to be a perfect bill,” said Rep. Markwayne Mullin, R-Okla.

President Trump may have exacerbated those tensions Thursday by issuing a Twitter threat against the Freedom Caucus.

Some Republicans fear that the collapse of the health care reform bill will drag tax reform down with it, and they are continuing negotiations and keeping hope alive that a deal can be reached on repealing the Affordable Care Act.

“If we don’t get health care done, that does have a detrimental effect on our ability to get tax reform done,” said Rep. Bradley Byrne, R-Ala.

The repeal of all Obamacare-related taxes specifically is seen as a first step toward the larger tax overhaul effort.

“This is a trillion-dollar tax cut that helps put our next effort in place,” said Rep. Blaine Luetkemeyer, R-Mo.

Still, others are counting on House leadership and the president to learn a lesson from the AHCA debacle.

“Hopefully we won’t go at tax reform like we did health care,” Massie said. “The Republican leadership tried to ram this through in 18 days.”

Something does need to be done soon, though, according to economist Alan Cole of the Tax Foundation, because the corporate tax code in particular is hopelessly outdated.

“Right now, the U.S. has the highest corporate rate in the industrialized world and the highest effective corporate rate,” Cole said.

In the 30 years since the corporate rate was last reduced, the global economy has changed drastically. The kind of origin-based corporate income tax currently in place has been abandoned by other countries, putting U.S. companies at a competitive disadvantage.

Proposals for revising the personal income tax code have been less ambitious.

“I don’t think there’s too much need to reinvent the wheel yet” on personal taxes, Cole said.

Alan Viard, a resident scholar at the American Enterprise Institute, observed that economists and politicians have often said tax reform was essential in the past and it never happened.

“It’s easy to say in the abstract that major reform is needed,” he said. Agreeing on a specific package is much harder.

President Trump put out an informal proposal on the campaign trail that would give nearly half of its cuts to the top 1 percent of earners and only boost the after-tax income of many in the middle class by less than 2 percent, according to the Tax Policy Center. Estimates for its impact on the deficit over ten years ranged from $4.6 trillion to $6.2 trillion, depending on economic growth.

House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady laid out their own blueprint last summer. The Tax Policy Center concluded it would add up to $2.5 trillion to the deficit over the next decade and direct 77 percent of its cuts to the top 1 percent.

The Tax Foundation’s analysis of both plans is slightly rosier, with larger estimated economic growth, but they concur that both would add to the deficit and bestow greater income gains on the upper income brackets.

The House and Trump plans would reduce the number of tax brackets, lower rates and eliminate many deductions, but many details are still fuzzy. The White House has indicated that Trump is taking the lead on this issue, but his public statements and promises about tax cuts have often been contradictory.

A recent Fox News poll found a majority of voters believe their taxes are too high and 73 percent want to see reforms this year. However, only 36 percent believe their taxes will go down under Trump.

According to Cole, while the public likes tax cuts in general, the dynamics of loss aversion and concentrated interest complicate the process of passing them once the offsets that pay for those cuts are announced.

“The people who lose from a tax reform trade-off tend to be much louder than the people who win,” he said.

Hunter Blair, a budget analyst at the Economic Policy Institute, made a similar observation about the pitfalls of broad tax reform.

“You’re just by necessity going to create winners and losers,” he said. “The losers in that tend to be very, very loud.”

Viard noted that there are many different directions that reforms can go and it is difficult to get a majority behind one approach.

In defending the AHCA, Republicans often insisted many of its flaws were due to “arcane” rules of the Senate. Because they would never get Democratic support for repealing Obamacare, any bill would need to be passed with a simple majority through the reconciliation process, which meant it had to be budget-related and revenue neutral after 10 years.

That obstacle also looms for any House-approved tax reform bill, leaving Republicans with three options: enact a much less ambitious plan that is revenue neutral, phase out the tax cuts after a decade, or craft a deal that picks up at least eight Democratic votes.

Experts are not optimistic about the prospects for a bipartisan agreement. According to Cole, Republicans and Democrats simply have different priorities for tax policy.

“It’s usually the case that a Democratic package is going to raise too much revenue to be popular with Republicans… Republicans tend to propose plans that are distributionally unacceptable to Democrats,” he said.

Even under reconciliation, the slim Republican majority can only afford to lose two votes in the Senate. If the Ryan and Trump proposals are any indication of where they are going, they can expect to take heat from the left for granting most the benefits to the wealthy.

“It is a really large tax cut for the rich and corporations… It would really exacerbate the ongoing trend of rising inequality,” Blair said of the Ryan blueprint.

One controversial option for making the cuts revenue neutral would be a destination-based cash-flow tax, often called the border adjustment tax, which is included in Ryan’s plan. Exports from U.S. businesses to foreign buyers would not be subject to this tax, but imports would.

Viard said the border tax idea has gotten more pushback than Republicans expected, with major corporations that rely on imports being especially vocal against it. He suggested their concerns about rising costs and trade imbalance are misplaced because the strengthening of the dollar brought on by the tax would balance those effects.

“The economic theory is pretty clear, but non-economists generally don’t believe the economic theory,” he said.

However, Blair said there is a concern that exchange rates will not rise sufficiently to offset the costs.

“If exchange rates don’t adjust, it could end up raising the prices for imports,” he said.

The National Retail Foundation is already running ads hyping the danger.

Getting 50 votes for such a tax in the Senate would not be easy, especially with prominent Republicans like Sen. Tom Cotton, R-Ark., hailing from states that are home to huge importers that oppose it. Instead, the president and Congress may end up abandoning reform altogether and choose what Viard called “the path of least resistance.”

This would mean a temporary measure similar to the tax cuts implemented under George W. Bush in 2001 and 2003 that were scheduled to sunset after 10 years with the hope of making them permanent later.

“What we are really likely to see from a Republican Congress is that they keep the tax cuts for the rich and then they don’t pay for them,” Blair said.

Those cuts would probably be quite popular. They would not necessarily be fiscally responsible.

“The only people that would complain would be those of us that are concerned about the deficit,” Viard said.

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