President Trump, as we well know, is all about going BIG.
That was on display, yet again, in the latest update on tax reform. The statement on taxes from the White House and top GOP leaders was only 600 words long Thursday, but it told us three key things.
First, Trump wants to go big. Trump is still committed to a sweeping reform of the U.S. tax system, similar to what President Ronald Reagan did. He's dismissing calls to do a “skinny” bill with just a few tax cuts, as some former campaign advisers like Larry Kudlow and Stephen Moore had been pushing.
Second, there's a long way to go to a final deal. For all the talk of “unity” in the statement that Republican leaders issued Thursday, there is no agreement yet on the critical issues. How low will the rates go? And how will the GOP ensure this tax plan doesn't add more to America's nearly $20 trillion debt?
Third, in the fierce internal GOP power struggle, the House Republicans were the first to cave. House Speaker Paul D. Ryan and budget guru Rep. Kevin Brady (R-Tex.) really wanted to do a border adjustment tax (BAT), which would tax companies that import products from overseas and give a break to companies that export American goods abroad. They have now officially given up. “We have decided to set this policy aside in order to advance tax reform,” the statement said.
The short statement was full of phrases about “unity,” “shared commitment” and “our shared sense of purpose” for cutting taxes for U.S. businesses and households. It was issued jointly by the “Big Six” who are leading Trump's economic agenda: Ryan, Senate Majority Leader Mitch McConnell (R-Ky.), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Sen. Orrin G. Hatch (R-Utah) and Brady.
After a scrappy fight on health-care reform, Republicans wanted to send a clear message that tax reform is their No. 1 priority in the fall and there is a lot of cohesion around it.
“They are going to move heaven and earth to get tax reform done. That is the point they are trying to drive home,” said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, a business lobbying group that has been urging action on taxes. The chamber and other business groups applauded the statement as genuine progress.
But what the statement did not say was equally important.
There were no numbers (except to say the Trump administration has met with 200 members of the House and Senate). In other words, there is still no agreement on tax rates — for businesses or individuals. Trump wants a 15 percent corporate rate. Will it go that low? We don't know. The statement just says, “The goal is a plan that reduces tax rates as much as possible.”
There is also no agreement on how to ensure tax cuts don't pile on more to the national debt. The statement says the Big Six “place a priority on permanence” of any cuts or reform measures. That makes sense because businesses and households probably aren't going to go out and spend a lot more money — and thus boost economic growth — if the tax cuts are only good for a few years and then no one knows what will happen.
The business community has been pushing for permanent changes to the tax code. But here's the catch: According to Congressional rules, changes that last more than a decade aren't allowed to add to the debt. They have to be “paid for” with spending cuts or extra revenue from somewhere else.
“The statement makes clear that permanence is a high priority for our discussions. That means this tax reform has to move us toward a balanced budget, not away from it,” Brady told reporters."That is still our top priority.”
But making the math work is going to be tricky. The goal of tax reform is to lower the rates but eliminate a lot of deductions so the government still brings in about the same amount of money, if not more. But so far, there's no consensus on what goodies to slash. Instead, the White House is pushing the idea that tax cuts pay for themselves. The Trump budget was heavily criticized for relying on this dream scenario coming true. The White House predicts that the tax cuts will cause growth to soar to 3 percent in the coming years.
Few economists — on Wall Street or in Washington — are willing to go that high. The GOP budget predicts 2.4 percent growth. The nonpartisan Congressional Budget Office says 1.8 or 1.9 percent.
“I am very committed we can get to 3 percent GDP, and we will,” Mnuchin said Thursday at a congressional hearing.
This debate matters because the White House assumes tax cuts will lead to much stronger economic growth, which will then cause tax revenue to go up.
Outside experts, like those at the Committee for a Responsible Federal Budget, a nonpartisan public policy think tank, disagree. They predict Trump's plans will add trillions to America's debt. The GOP statement Thursday did nothing to ease their fears.
“The outline today did not include deficit neutrality as a principle, a glaring omission and key factor for any plan intended to grow the economy and rein in our unsustainable debt,” says Maya MacGuineas, president of the CRFB.
If anything, the statement Thursday makes it harder to figure out how to pay for tax cuts. The border adjustment tax would have brought in $1 trillion over the next decade, according to the Tax Foundation, a think tank. Now Republicans don't even have that revenue to help out.
Balancing the budget while cutting taxes is hard. Republicans reiterated Thursday that that's what they want to do, but they are no closer to figuring out how to achieve it. Without the extra money from a border adjustment tax, the task just got harder.