As House Republicans turn their attention toward a sweeping overhaul of the tax code, they’re struggling with two things: how much the package will cost and how much of that expense should be covered up front.
The answers will drive how deep rate cuts can go and whether they carry an expiration date or remain embedded in a newly streamlined tax code. The debate over how to get there exposes a long-simmering tension in the Republican Party over which deserves higher priority — lower taxes or a balanced budget.
For now, House Republicans leading the process say they are committed to an overhaul package that doesn’t add to the deficit. They intend to cover the price of lower individual and corporate rates by raising revenue from a new levy on imports and eliminating costly deductions. “We’re going for the greatest growth for the greatest number of years,” House Ways and Means Committee Chairman Kevin Brady (R-Tex.) said Thursday. “That happens when tax reform is bold, when it is balanced within the budget, counting on economic growth, and when it’s built to last.”
That puts the tax-writing committee at odds with the White House, which rolled out a plan in late April that relies on slashed tax rates unleashing explosive — and, most economists say, unachievable — economic growth to largely pay for themselves. The Committee for a Responsible Federal Budget estimated the proposal would drain federal coffers by $5.5 trillion over 10 years.
To meet Brady’s goal of permanence, Republicans would need to find a way to compensate for the revenue they’d lose from lowering tax rates. That’s because party leaders in both chambers want to use a budget tool called reconciliation that allows them to pass the package with a simple majority — and without Democratic support. But under the strategy, Senate rules require lawmakers pay for the cuts if they add to the deficit, typically after 10 years, or make them temporary.
Big businesses, which prize predictability for planning purposes, likewise want Congress to make the tax cuts lasting. “We agree with Chairman Brady that tax reform needs to be permanent to have the best impact on the economy and offer the greatest certainty to businesses,” said Caroline Harris, vice president for tax policy and chief tax counsel at the U.S. Chamber of Commerce.
Some key Republicans disagree, arguing that Congress should focus on driving rates as low as possible without worrying first about the price tag. Paying for the package up front “doesn’t have to be the top priority,” said Rep. Mark Meadows (R-N.C.), chairman of the hard-line House Freedom Caucus. “Deficits do matter, but we’re willing to consider growing the deficit in the short run, hopefully to be outweighed with strong GDP growth in the long run.”
That theory — that lower rates encourage businesses to invest and hire, thereby expanding the tax base and returning a growing pile of money to the government — has been a bedrock of the supply-side economic model that many conservative policymakers have embraced for decades. “I’m a big believer that tax cuts don’t have to be paid for because they pay for themselves,” said Sen. Tim Scott (R-S.C.), a member of the tax-writing Senate Finance Committee.
Most experts, however, are skeptical. Out of 42 top economists surveyed by the Initiative on Global Markets at the University of Chicago Booth School of Business, 37 said Trump’s proposal would not pay for itself through added growth. The other five did not answer the question.
The administration’s plan calls for cutting the corporate tax rate to 15 percent from 35 percent and collapsing the seven personal income tax brackets into three, with rates of 10 percent, 25 percent and 35 percent. Firms that pay taxes through the individual side of the code would also see their rate slashed to 15 percent.
House Republicans have proposed slightly less ambitious though still aggressive targets: A 20 percent corporate rate; individual rates of 12 percent, 25 percent and 33 percent; and a 25 percent rate for “pass through” businesses. Each percentage-point cut from the corporate rate alone costs the federal government $100 billion over a decade in lost revenue, according to estimates by the Joint Committee on Taxation.
Brady said Thursday that he wants to iron out those differences before introducing legislation. But Republicans on and off Capitol Hill aren’t waiting for a bill to start gaming out how they could pass the biggest possible tax cut with bare majorities in Congress. Sen. Patrick J. Toomey (R-Pa.), in a Bloomberg editorial Thursday, called for extending the traditional 10-year budgeting window to 20 or 30 years, to keep steep rate cuts on the books for that much longer.
And Grover Norquist, president of Americans for Tax Reform, said lawmakers should consider marrying paid-for, permanent cuts with temporary ones they could extend or pay for later. “This is the beginning of a marathon, not the end of a 100-yard dash,” he said in an interview.
In fact, House Republicans took their first crack at the tax code in the health-care reform bill they narrowly approved last week. The bill repeals about $600 billion in taxes on upper-income earners, insurers, drug companies and others that the Affordable Care Act imposed to fund expanded insurance coverage. The full deficit effect of the legislation isn’t known because the Congressional Budget Office hasn’t issued its final analysis yet.