Trump Tax Reform Really Means Tax Cuts But Needed ACA Repeal First

Well, that didn’t take long. After praising the effort of Paul Ryan and blaming Democrats for the failure of Trumpcare on Friday, Trump recommended that everyone listen to Jeanine Pirro’s show on Fox last night. Pirro then went on to put the entire blame for the Trumpcare failure on Ryan, calling on him to resign.

Pirro blistered Ryan, saying,  “Paul Ryan needs to step down. The reason? He failed to deliver the votes on his health care bill … The one that he had seven years to work on … The one that had to be pulled to prevent the embarrassment of not having enough votes to pass.” Pirro also went on to vigorously defend Trump for this enormous failure. Said Pirro, “I want to be clear. This is not on President Trump. No one expected a business man to completely understand the nuances, the complicated ins and outs of Washington and its legislative process.” Actually, we do expect our President to understand the ins and outs of the legislative process. After all, that’s his freaking job. And, if he doesn’t understand how complicated it can be, maybe he should spend more than three weeks trying to get it done. But we all know Trump is incapable of that type of focus and intellectual curiosity.

One of the themes of those disappointed Republicans is that Ryan made a huge error by convincing Trump to lead off the legislative agenda with healthcare reform. That blithely ignores the fact that Republicans have been campaigning on repealing Obamacare for the last seven years and Trump continually said that it would be the first thing he would do when he got in office. The cries of betrayal would have been loud and long from the GOP base. More importantly, Trump is President and he has the ability to control the agenda, especially when Republicans control Congress.

But that criticism of Ryan also ignores the fact that the real goal of the Republican agenda is tax cuts, as it has always been. And the repeal of Obamacare was how the GOP was going to get a majority of those tax cuts. Trumpcare would have lowered baseline spending by over $1 trillion over ten years and about $600-$700 million of that went to tax cuts, all of which went to the top 2%. For the GOP, that would have been a great start.

But now that Trumpcare has failed, because of some of those arcane rules that Trump does not understand, especially in the Senate, it will be more difficult to get huge tax cuts out of real tax reform that Trump has promised. That’s because tax changes are required not to increase the deficit over a ten year window in order to avoid a filibuster in the Senate. Ryan’s plan, which leveraged off of Trump’s campaign promises, hoped to bank that lower baseline spending number and tax cuts by repealing Obamacare. In fact, the lower baseline spending number was an important impetus for doing Obamacare repeal first, along with its obvious political benefits, or so the thinking went. Then Ryan would make good on Trump’s pledge to impose tariffs on Mexico and other countries with a complicated border adjustment tax. The tax would actually be paid by American businesses and citizens but it was designed be sold as a tax on cheap imports and a benefit to exports. That tax would actually create an additional $1 trillion in revenue which could then be used to reduce the corporate tax rate and add further individual tax cuts while still remaining revenue neutral and avoiding a Democratic filibuster. In addition, the GOP could get further tax reductions by having the CBO provide “dynamic scoring” of revenue “created” by the tax bill. “Dynamic scoring” is essentially the myth that lower tax rates will induce greater economic activity and actually increase tax revenue. It has never been shown to work in practice, as Kansans can ably attest, and was rightly called out by George H. W. Bush as “voodoo economics”. But its has been a GOP mantra for the last 30 years, despite no evidence supporting it.

These were the three legs that supported the GOP tax cut plans and everyone in the GOP knew it. And the beauty of this plan from the Republicans’ perspective is that it would require the Democrats to control Congress and the Presidency in order to roll back these tax cuts in the future. The first problem that it encountered was that certain powerful business interests hated the border adjustment tax. There were clear winners and losers with that tax and the losers were not only not happy but also powerful, such as retailers like WalMart. In mid-February, Trump seemed to back off the border adjustment tax and many GOP Senators expressed their opposition as well. That was the first leg of the tax cut plan to fall. Now, with the failure of Trumpcare, a second leg has fallen as well. Without the spending cuts from Obamacare repeal and its associated tax cuts and the extra revenue from the border adjustment tax, there is not a lot of room for additional tax cuts through a supposedly neutral tax reform. The only leg left is the controversial dynamic scoring option which will not produce too much either.

That leaves just two options to pushing tax cuts through Congress. First would be to pass a budget that dramatically cuts spending, freeing up money for tax cuts. But the budget is likely to be even more contentious than health care, even within the GOP caucus. It would once again pit the moderates in the party against the more radical fringe like the Freedom Caucus. Republicans controlled Congress last year and were unable to produce a budget on their own even then. Budget issues are further complicated by Trump’s desire to increase military spending, while at the same time being required to adhere to budget sequestration rules included in the Budget Control Act. Sequestration puts caps on defense and non-defense spending and the law prohibits breaking through the defense cap and then trying to offset that with cuts in non-defense spending, and vice versa. To break sequestration, the Senate would need the 60 votes to break a filibuster which is not going to happen in the current environment. So there is no real way to get the spending cuts needed for tax cuts through the budget process, especially if you want to increase military spending.

The only option remaining for Republicans to get tax cuts enacted is to repeat what they did in the Bush administration. The GOP pushed through massive tax cuts but made sure they sunset in the 10th year and thereby avoided the filibuster and could pass with just 51 votes. That path is still open to them now but it may be more difficult getting it through the fiscal conservatives in the party, as it will clearly increase the deficit in the short term. In addition, rather than requiring the Democrats to control Congress and the Presidency, these cuts will end after 10 years without the Democrats even having to take a vote, just like the Bush tax cuts did. Trump and the Republicans may describe this effort as tax reform, which has always implied revenue neutrality beyond a 10 year window, but it will clearly not be tax reform. It will be another tax cut. And there are indications that this is the Republican strategy. Yesterday, Vice President Mike Pence, in what sounded like his first campaign speech for the potential 2020 nomination, stated that Trump and the GOP will enact the biggest tax cut since Ronald Reagan. And today, Mark Meadows, the embattled head of the Freedom Caucus, who the Wall Street Journal and others on the right have clearly blamed for the Trumpcare failure, has said today that tax reform does not necessarily have to be revenue neutral. That essentially admits that it will not be tax reform but tax cuts inside the ten year window. That it certainly an interesting position for the fiscal conservatives in the Freedom Caucus, who are constantly demanding a balanced budget, to take.

One thing that Republicans can always agree on is tax cuts. And I’m pretty sure that they will get them one way or another, most likely by sunsetting them in ten years. But they also agreed that Obamacare had to be repealed and that proved too difficult for them. Tax cuts under the guise of tax reform may also prove pretty difficult as well. That is especially true now that the Republican party is almost in open war. The tax-cutting right like the Wall Street Journal is blaming the Freedom Caucus while Trump is blaming Ryan and avoiding any blame himself. It will not make for a happy and unified party as they tackle the rest of their agenda.