Will the GOP Tax Reform Fail Too?

Speaker of the House Paul Ryan (R-Wis.) is desperate to pass tax reform legislation.  His objective is to replace President Ronald Reagan’s 1986 tax reform with a “revenue neutral” plan that would not alter the current Congressional Budget Office 10 year revenue projection of $43 trillion.

There are several reasons why Ryan is taking the reform route.  Under the 1974 budget act, legislation that increases deficits after 10 years must expire in 10 years.  This law caused President George W. Bush’s budget busting tax cuts of 2001 and 2003 to end on December 31, 2012.  (Remember the fiscal cliff?)  Tax legislation that is revenue neutral becomes permanent and is much more difficult for a future administration to change.

Ryan’s plan proposes a border adjustment tax of 20 percent to be levied on imports.  This tax would collect $1 trillion over 10 years.  Needless to say Walmart and numerous other retailers and importers are strongly opposed to it.  So why does Ryan want this unpopular tax increase?  Well, the added revenues will allow him to give greater tax cuts to the wealthy and still keep his tax plan revenue neutral.

The GOP’s Better Care Reconciliation Act (BCRA ) being argued in the Senate also figures in Ryan’s tax planning.  The BCRA repeals the Obamacare taxes, which would reduce federal revenues by around $1 trillion over 10 years.  Consequently Ryan’s plan could be revenue neutral by collecting $42 trillion instead of currently projected revenues of $43 trillion — and he could give even greater tax cuts to the wealthy.

Still, how do Republicans cut tax rates without decreasing revenues?  It’s really quite simple; they shift the tax burden to those who aren’t so wealthy and even to some who are.  Tax experts call it broadening the tax base.  One way to do this is by eliminating deductions and loop holes.  For example, the mortgage interest deduction is a huge benefit to millions of homeowners.  Placing limits on the amount of interest that can be deducted or limiting the deduction to one home would add billions to government coffers.

Another important itemized deduction is that for state and local taxes.  Ryan’s plan would eliminate it.   Of course, taxpayers in high income tax states like California, New York and other typically Democratic controlled states would likely suffer the most if they can’t take this deduction, particularly the wealthy.

Can tax reform be passed quickly by partisan politicians?  Not likely.  The effort on Reagan’s tax reform began in November 1984.  By the time it was signed in October 1986 it was a bipartisan bill supported by prominent Democrats.  Republicans liked it because it lowered the top rate to 28 percent.  Democrats liked it because it closed loop holes and raised the capital gains rate from 20 percent to 28 percent.  Even though Reagan lowered the top tax rate from 50 percent to 28 percent, taxes increased for some higher income taxpayers and for corporations.

That’s the way tax reform is done; it benefits some and burdens others.  Therefore it is difficult to achieve and takes a long time to accomplish.  For Reagan it took around two years.  Ryan and the GOP are trying to accomplish this feat in a couple of months and without support from Democrats.

President Trump has a tax proposal too.  It differs somewhat Ryan’s plan and it doesn’t attempt to achieve revenue neutrality by cutting some taxes and raising others.  According to Treasury Secretary Steve Mnuchin Trump’s plan will “pay for itself” with enhanced economic growth.  Ryan knows that won’t happen and so do many Republicans.  Just last month they watched the “pay for itself” tax cut plan of Tea Party Kansas Gov. Sam Brownback go down in flames after it caused four years of fiscal agony for Kansas.

The BCRA has apparently backed up everything in Congress and Republicans can’t seem to find the right laxative.  Lawmakers haven’t started to deal with raising the debt limit; and they haven’t produced the 12 appropriations bills for FY 2018 that starts October 1.  Congress is scheduled to recess the entire month of August, and as the song says, “the days grow short when you reach September.”

Perhaps Speaker Ryan and Senate Majority Leader Mitch McConnell will try to pass a health care bill and a debt limit increase in July.  They may also cancel the August recess so Republicans can work on tax legislation and the appropriation bills. Obviously they are running out of options.

I think the only thing Republicans can do with taxes this year is cut the rates for higher income taxpayers and fiddle with some other provisions of the 1986 law.  Lowering rates will no doubt increase the federal deficits that are already projected to add $9.5 trillion to the national debt by 2027 according to the CBO.

Still, there is a chance that none of this legislation will come to fruition by late September.  Then Congress will have to pass another “kick the can down the road” continuing resolution to temporarily fund the government and increase the debt limit.

The Republican legislative fiascos so far this year clearly show how an incompetent president and a divided GOP handle domestic issues – very poorly.

 

About eeldav

I am a retired corporate attorney who has lived in both Europe and Asia. While working my responsibilities took me to over 40 countries in Europe, the Middle East, Africa and Asia.
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