GOP tax reform debate: 20, 22, whatever it takes

The epic adventure of Republican tax reform continues as House and Senate Republicans confer — apparently for the first time ever — on the cornerstone of their economic agenda. Both versions of the bill qualify under Senate rules for reconciliation, but political pressure on deficit spending has apparently prompted negotiators to look for more revenue. According to the Washington Post, a proposal to change one of the few major features in common between both bills has gained momentum in conference, despite its potential impact on what was supposed to be the bill’s main motivation — economic stimulus.

They’re making it up as they go along, aren’t they?

Leading Republicans are looking at scaling back some of the corporate tax cuts that they are trying to usher into law, two people involved in the tax negotiations said, convinced they need to find new revenue in order to make last-minute fixes to the giant package moving through Congress.

The House and Senate passed separate tax cut packages in recent weeks, and both bills would lower the corporate tax rate from 35 percent to 20 percent. But GOP negotiators are now openly discussing the possibility of moving that rate up to 22 percent in order to free up more revenue, people familiar with the discussions said. One of those people said the 22 percent rate is “seriously under discussion.”

The two people spoke on condition of anonymity because they are not authorized to discuss sensitive negotiations. No decisions have been made. The White House has been resistant to making this change, but President Trump said casually on Saturday morning that the 22 percent corporate rate might be necessary. Each percentage point that is added back to the corporate rate would free up around $100 billion in revenue over 10 years. Still, White House officials have tried to stress to Congress in the past two days that their strong preference is to keep the corporate rate at 20 percent.

Donald Trump’s agenda relies on significant economic stimulus, and for that matter, so does the Republican agenda. Whether or not one agrees with supply-side economics, the GOP and Trump won the election on that argument, especially on providing a fair shot for American corporations to compete in global markets. The 20% rate was an explicit part of that argument, and was defended on the basis of its stimulus impact. If Republicans want to roll that back up to 22%, they’ll have to admit that they’re also cutting back the stimulus potential too — and if they are, it might mean lower gains next year, when they’ll really need the economy to peak in order to counter their sagging political fortunes.

It’s not clear why the change is necessary. Republicans planned for a $1.5 trillion deficit impact up front, and both bills meet that goal, which allows them to pass the bill with simple majorities in both chambers. They may be working on a compromise on making the rates permanent; the House bill has corporate tax rate cuts expiring in year eight, while the Senate did that to individual rates, and in both cases the purpose was to provide a theoretical revenue boost. The theory was that a future Congress would not allow the rates to go up again, but that’s a big roll of the dice. The same bet by George W. Bush on tax cuts caused years of budget instability and brinksmanship down the road, and there’s no guarantee that won’t happen again, especially on corporate tax rates.

George Will writes that the tax bill is a mess, which is an understatement at this point. However, he also thinks that the GOP should stick to its guns and give themselves the opportunity to prove themselves correct:

The Republicans’ tax legislation is built on economic projections that are as confidently as they are cheerfully made concerning the legislation’s shaping effect on the economy over the next 10 years. This claim to prescience must amaze alumni of Bear Stearns and Lehman Brothers, which were 85 and 158 years old, respectively, when they expired less than 10 years ago in the unanticipated Great Recession. …

In 2002, when Dick Cheney — a strict constructionist, but not of economic data — said “Reagan proved deficits don’t matter,” the publicly held national debt was 33 percent the size of GDP; today it is 75 percent. At some point, the debt’s size matters, and we seem determined to learn the hard way where that point is.

This tax legislation, an amalgam of earnest hoping and transparent make-believe, is a serious lunge for sustained 3 percent growth. Without this, the economy, and hence the entitlement state, will buckle beneath the strain of 10,000 of the elderly each day becoming eligible for Social Security and Medicare. The Republicans purport to know how changed tax incentives will affect corporations’ and individuals’ decisions, and how those decisions will radiate through the economy. Republicans do not know — nobody, including the Republicans’ equally overconfident critics, does — but they might be right, and their wager is worth trying.

The problem is more basic than that, I argue in my column at The Week. The issue isn’t whether Republicans are better at predicting outcomes from their social engineering; it’s that neither party should be conducting this kind of economic social engineering through the tax code in the first place. Republicans used to know that, and it wasn’t all that long ago that the tax reform debate was about real reform:

The real problem with the Republican tax reform effort is the opposite of Pelosi’s claims. The flaw isn’t that it goes too far — it doesn’t go far enough. A few years ago, Republicans debated whether a tax-system overhaul should adopt a flat-tax model that would eliminate social engineering and crony capitalism, or the “fair tax” consumption-based model that would end the income tax altogether. Instead, Republicans have only offered tweaks to the existing system for individual taxes, and in the Senate version hardly even that much; it retains the same number of brackets and just distributes the deductions a little differently. It’s only a mild adjustment to the status quo of individual taxes, not a groundbreaking effort to put America on the path of simplicity and fairness. (It does reduce the corporate tax rate much more significantly, but this is hardly some undemocratic travesty of justice.)

True national leaders in the Democratic Party would cast the bill for what it really is — an unimaginative tweak with little hope for real impact. Of course, that can also be said about the Republican leadership that produced this bill, only they probably will find the conference report so divisive that the final version may not pass in either chamber, let alone both. American voters will remain stuck between the hysterics and the incompetents, and wonder which party will get its act together first — or if either of them ever will.

If Republicans provided real tax reform, we wouldn’t be in the business of calculating rates for short-term stimulus; we’d set rates for proper revenue to support a responsible level of federal spending. Instead, we’re getting this scene from Mr. Mom. Twenty, twenty-two … whatever it takes, man