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The Republican tax plan’s original sin

A giant, unpopular, unworkable business tax cut.

Speaker Ryan And House GOP Leadership Address The Media After Their Weekly Conference Meeting Mark Wilson/Getty Images

Paul Ryan, speaking to CNN about the tax overhaul bill the passed earlier this month, says “the whole purpose of this is a middle-class tax cut.” That’s in line with the rhetoric Donald Trump deployed on the campaign trail, in line with public opinion polling about what voters want, and reflects a kind of common sense conservatism on economic policy that says what typical Americans could most use from the government is to keep more of their hard-earned cash rather than some big new government programs.

Ryan and his team have even cooked up a model family — a mom, dad, and two kids getting by on the national median household income — who stand to reap a windfall of $1,182 per year from the plan.

Unfortunately for the American middle class, Ryan is lying. The hypothetical family his top spokesperson AshLee Strong described would get a tax cut of almost $1,200 — for one year. It gets smaller in year two, smaller still in year three, smaller still in year four, and smaller still in year five. It nearly vanishes in the sixth year of the Ryan tax plan, and in years seven, eight, nine, and 10 the family would be paying higher taxes than under current law. That tax hike is not only permanent, it actually grows over time because of a change to the inflation indexing of tax brackets.

On average, over the entire 10-year scoring window, the family would get a total tax cut of $3,550. Yet over the same time period, the national debt would grow by $4,644 per person — or about $18,500 for a family of four.

There’s nothing wrong with running a budget deficit if you’re accomplishing something worthwhile. But to go $18,500 in debt in order to secure a $3,550 tax cut is preposterous. And yet something like that is an inevitable consequence of the Republican tax plan’s original decision — an unpopular and unworkable scheme to reduce the corporate income tax rate from 35 percent to 20 percent.

Real corporate tax reform is a reasonable idea

The basic story with the corporate income tax in the United States is that the statutory rate of 35 percent is one of the highest of any rich country, but there are so many corporate tax loopholes that companies on average only actually pay in the mid-to-high 20s.

Under the circumstances, there’s a strong case for corporate income tax reform. By eliminating a bunch of deductions you should able to significantly reduce corporate tax rates without increasing the budget deficit. That would make the conduct of business in the United States both fairer and more efficient by treating all forms of business activity more equally. That, in turn, should provide a modest boost to economic growth as well as eliminating some hassles and wasted time in terms of tax compliance.

The Obama administration looked at this and concluded that there was a reasonable reform path to cutting from 35 percent to 28 percent while raising some revenue.

Mitt Romney’s presidential campaign in 2012 looked at it and concluded more aggressively that there was a reform path to cutting from 35 percent to 25 percent while probably losing some revenue.

Republicans copied a number from another plan

But House Republicans looked at Romney’s plan and decided to cut 5 percentage points lower — all the way down to 20 percent — even though there’s no way to make that work. Remember, the effective corporate income tax rate paid in the United States is somewhere in the high 20s, varying a bit from year to year. Even if you closed every single deduction you couldn’t get down to 20. And nobody really wants to close every single deduction anyway. So in the long run, the 20 percent target simply isn’t workable without raising taxes on individuals — which is why Strong’s favorite family’s tax cut eventually goes away and becomes a tax hike.

I’ve been following this process for a while, and am honestly a bit confused as to how Republicans wound up in this position.

A year ago, the people involved in drafting the plan were completely aware of the mathematical realities. That’s why they weren’t proposing a 20 percent corporate income tax rate. Instead, they proposed eliminating the corporate income tax as we know it altogether and replacing it instead with a destination-based cash flow tax (DBCFT).

This was basically a broad 20 percent national consumption tax — similar to a retail sales tax except levied on services as well as goods — partially offset by a big payroll tax cut. The result, on net, would be a tax on consumption that was financed out of past savings. This was an idea with some merit that ended up being derailed by public and congressional confusion about its border adjustment provisions, though I think it would have died anyway once members of Congress understood its implications for non-poor retirees. The key point, however, is that the 20 percent DBCFT was not the same thing as a 20 percent corporate income tax.

Indeed, I assume that if Republicans had thought they were the same thing, they wouldn’t have gone through the trouble of inventing a whole new kind of tax! But having dropped the DBCFT idea, Republicans didn’t rethink the rest of their plan. They just copied the number “20” over from one tax plan to another and tried to make the math work based on a 20 percent corporate income tax rate.

But the math doesn’t work. The business tax cuts in the GOP plan add $1 trillion to the deficit over 10 years, accounting for two-thirds of the total net tax cutting. And with plenty of tax cuts for rich people also in the plan, that leaves Republicans raising taxes on many families and increasing the deficit.

Now they’re stuck with an unpopular, unworkable nightmare

There are at least two big problems with the approach House Republicans ended up taking. One is that it’s ridiculously unpopular. Only 24 percent of the public says we should have a corporate tax cut, and that’s without considering any tradeoffs.

A lot of the individual contentious measures in the GOP plan are defensible in at least some contexts. But to eliminate a tax credit for adopting a child while raising taxes on PhD programs and curtailing the homebuilding industry is a tough sell if the purpose of it all is to pass a big unpopular corporate tax cut.

But it gets worse. Even with a bunch of popular tax breaks going away, and even with Strong’s sample family eventually facing a future of endlessly escalating tax increases, the corporate tax cut is so huge that it blows a hole in the long-term budget deficit in a way that violates Senate rules. So the House bill not only has a profoundly unpopular trade-off at its heart — it literally cannot pass the Senate without substantial changes. Which means if they’re smart, House Republicans will stop and make some serious changes of their own rather than just plowing ahead.