House Republicans unexpectedly announced Tuesday evening that the tax reform bill they’d been promising to unveil the next morning would have to wait until Thursday. This wasn’t a question of handling a few finishing touches that had to be delayed at the last minute, either. As Politico reports in an article on the delay, “at the center of the problem were questions about how to pay for the proposed $5.5 trillion in tax cuts.”
Despite months (or, from a certain point of view, years) of work on tax reform, Republicans still haven’t actually gotten anything done in terms of building consensus on contentious issues at the heart of their bill.
And the core issue is that there’s a fundamental ambiguity in what Republicans are trying to do here. Kevin Brady, the Texas chair of the House Ways and Means Committee, has been pushing all year for big, permanent cuts in tax rates. To make that happen, he needs to offset the costs. House leadership has consistently backed him in this priority, and supported his various efforts to get it done. But it’s far from clear that other actors in the Republican Party really care about this priority and want any kind of offset.
Resolving these issues is key to whether they can actually get this done.
Senate procedure limits the GOP’s options
Like so much else in American politics, this ends up going back to the arcana of Senate procedure. Most bills can be filibustered in the Senate, and over the past decade or so, the norm has been established that any bill that can be filibustered will be filibustered. That means if you want to get some legislating done, you either need 60 votes — meaning Democratic votes — or you need to invoke the budget reconciliation procedure.
But while reconciliation is a powerful tool, there are limits on what you can and can’t do with it. Most importantly for our purposes, while a reconciliation bill can create a temporary budget deficit inside the Congressional Budget Office’s customary 10-year scoring window, it can’t open up a long-term budget deficit.
Consequently, to achieve Brady’s dream of a permanent reduction in tax rates, Republicans would need to offset their costs. The most straightforward way to do this from a conservative point of view would be to offset the cost of tax cuts by reducing federal spending. The problem with doing this, as Jason Furman and Greg Leiserson write elsewhere for Vox, is that pairing the tax cuts with the kind of giant spending cuts that would be needed to pay for them would make it clear that the Republican tax program will leave most Americans worse off. So Brady has been working with the concept of a “tax reform” in which the cost of rate reductions will be offset with tax increases elsewhere.
Republicans’ vision for reform is a tough sell politically
In general, Americans’ big idea about taxes is that they are open to someone else paying higher taxes but do not want to pay higher taxes personally.
But the conservative movement’s big idea about taxes is quite different. Conservatives think that tax cuts for the owners of financial capital are the key to unleashing economic growth, so they favor ideas like a big corporate income tax cut, repeal of the estate tax, and high-income owners of pass-through businesses paying a lower tax rate. These ideas are mostly unpopular on their own terms, though it’s certainly conceivable that you could make them popular by pairing them with other ideas.
And to an extent, the GOP tax framework does that. Republicans envision an increase in the standard deduction and an increase in the child tax credit, both of which would help many middle-class families.
The basic problem, though, is that if you want to do a big tax cut for business owners and heirs to multimillion-dollar estates, and you want to offset it with countervailing tax increases, then you are talking about raising taxes on the middle class in order to finance an unpopular tax cut for the rich. There’s no clear path out of this basic mathematical reality.
The rest is all details
For a year now, Republicans have been tossing out ideas and then abandoning them.
First and most grandly, there was the notion of a destination-based cash flow tax — a very conceptually ambitious plan to raise a bunch of revenue that would, among other things, have functioned as a tax on middle-class senior citizens. More recently, there’s been a lot of discussion about eliminating the state and local tax deduction, which would function as a big tax hike on middle-class and wealthy residents of high-tax states. There’s also been talk about limited 401(k) deductions, which would function as a broad across-the-board tax hike on the upper middle class.
All these ideas have in common the fact that judged in isolation, they are probably progressive changes — meaning they raise a lot more revenue from the rich than from the middle class, and almost no revenue from the poor — and arguably amount to good public policy. But they’re not being contemplated as ways to shore up the long-term sustainability of Social Security or to extend health insurance coverage to those in need. They’re being contemplated as ways to finance a tax cut for capital owners, and thus, on net, it amounts to a deeply regressive change.
From the standpoint of Brady and his allies, that’s the wrong way to look at it. Cutting taxes for business owners and heirs to large estates will unleash so much economic growth in the long run that middle-class people won’t mind. But both normal voters and reelection-minded politicians are less certain.