This has not been a great year for the congressional GOP. Despite holding majorities in both houses, Republicans failed to repeal and replace Obamacare. They are very close to triggering a government shutdown. The few times Congress has taken action, it has been to check the Republican president’s odd predilection for warmer ties with Russia and colder ties with the State Department.
This lack of legislative momentum has led to a raft of stories about whether the GOP can actually govern. This week, however, Republicans have a chance to erase their mistakes of 2017 and pass some genuine tax cuts. If there is anything the Republican Party should be good at, it’s passing tax reform, right? To use the language of social science, failing at this would be a “tough test” of the hypothesis that the GOP can’t govern.
Watching this week’s machinations, however, I am thinking that the GOP has failed regardless of whether tax reform passes.
As I noted earlier this week, the distributional effects of the proposed tax bills are pretty straightforward: the wealthy benefit disproportionately and the poor and middle classes do not benefit much at all. This might explain why the proposed tax bill polls abysmally. This might be one reason that the tax proposals have failed to attract the support of a single Democrat.
Beyond the distributional effects, there is the question of whether the tax bill will cause the deficit to explode. My Post colleague Greg Sargent explains the GOP dilemma:
The center of the Senate GOP tax plan is a large permanent cut to the tax rate paid by corporations. These would themselves overwhelmingly benefit the wealthy, because the vast majority of their benefits would go to shareholders and capital. But Republicans face two challenges. The first is to sell this primarily as a middle-class tax cut, so voters accept it. They do this by front-loading a bunch of preferences for the middle class along with cuts to individual rates across the board. The second challenge is to do this while simultaneously making the case that the plan would not balloon the deficit, to hold on to deficit-hawk senators and because if it raises the deficit in the long term, procedurally it can’t pass by simple majority with only Republican votes. Republicans address this problem by ending all the middle-class preferences and individual rate cuts after 2025.
My other Post colleague Catherine Rampell examines why the GOP is in such a rush to pass the bill before finding out whether the tax bill blows a hole in the budget deficit:
For years, Republicans promised that their tax cuts would pay for themselves, once you accounted for all the economic growth they’d unleash. They even mandated that Congress’s own nonpartisan internal scorekeepers take into account this “macroeconomic feedback” when evaluating the budgetary effect of major bills such as this one.
But now the Senate is racing to vote before those scorekeepers have a chance to evaluate their claim about the bill’s cost (or lack thereof, supposedly).
This is surely no accident. Outside groups, including one favorable to the tax overhaul, have already done their own analyses. So far none has found that the bill generates enough growth to pay for itself.
Leading economists certainly do not seem to expect higher rates of growth from any tax bill. The IGM economic experts panel survey revealed that every economist expected the U.S. debt-to-GDP ratio to rise as a result of the bill. An overwhelming majority thought that GDP growth would be unaffected. It’s not like private-sector economists are any more convinced:
There is also the question of what the proposed changes in corporate taxes would do to the balance of trade. The GOP narrative is that lowering the corporate tax rate to 20 percent would lead firms to invest more in domestic production. Except that corporate CEOs have admitted that they would direct most of their tax windfall directly to shareholders.
Indeed, the Tax Policy Center’s Steven Rosenthal looked at the tax proposals and reached the opposite conclusion from the GOP. Because the tax bill would shift to a territorial system of taxation, firms would have an incentive to shift production overseas. Rosenthal concludes that, without sufficient guardrails, “the proposed legislative shift to a territorial system could still encourage jobs, factories, and profits to move out of instead of into the US.”
To be fair to Republicans, there are members of their Senate caucus who seem concerned about blowing a hole in the deficit. One possible solution being proffered, according to Politico, is a “trigger mechanism that would kick in and potentially change tax rates if the economic growth needed to defray the cost of the tax overhaul doesn’t materialize.”
A trigger mechanism sounds sensible until one realizes that the macroeconomic effects are to exacerbate the booms and busts of the business cycle. If such a trigger mechanism had been in place in, say, 2009, then rates would have risen because tax revenues would have dropped because of the financial crisis. The first rule of Macroeconomics 101 is that it is a bad idea to raise taxes when the economy is in a recession.
The inverse is true as well: tax cuts when the economy is robust don’t make much sense either. Priming the pump during a boom could cause the economy to overheat. This would lead to inflation, forcing the Federal Reserve to raise interest rates. Of course, none of this has stopped President Trump from making this wrongheaded argument:
As Vox’s Matthew Yglesias notes the basic problem with trying to make the math work on this tax bill: “the lesson is that it’s hard to take an inherently flawed concept like a large regressive tax cut enacted at a time of low unemployment, rising interest rates, and high debt, and then tack on extra provisions that make it workable.”
It’s worth remembering that as late as 2014, there were long-form articles about how the GOP was becoming the party of ideas. It is impossible, however, to look at the tax bill working its way through Congress and have any confidence that the GOP knows what it’s doing.
The Republican Party cannot craft a competent bill on the issue that is nearest and dearest to its ideological heart. Just imagine what the party will do in the areas where it knows even less.