In advance of a bipartisan meeting with legislators on Wednesday, President Trump told the press that “the rich will not be gaining at all” with the tax reform plan he intends to release later this month. Since lower taxes on the rich is a core agenda item for Republicans, Trump lies constantly, and all of the various tax reform drafts he released during the campaign involved big tax cuts for the rich, the smart money is that Trump was just bullshitting.
I am not making a value judgment about whether high-income people should get tax cuts. But in every plan we've seen thus far, they are.— Richard Rubin (@RichardRubinDC) September 14, 2017
That said, later that same day Trump had Chuck Schumer and Nancy Pelosi over for Chinese food, and they apparently struck some kind of deal to protect DREAMers in exchange for extra border security money.
Protecting DREAMers is popular, border security is popular, and bipartisan deals are popular — so why not? By the same token, the reason Trump keeps lying about his tax plan is that cutting taxes on the rich is unpopular. But while lying is one way to address the unpopularity of this idea, an even better way would be to actually do what Trump is pretending he’s going to do and deliver a bipartisan middle-class tax cut.
What a deal might look like
The good news for rich people is that dating back to Barack Obama’s promise to roll back George W. Bush’s tax cuts for the rich, “middle-class tax cuts” have been defined for political purposes in such a way that rich people’s taxes fall a lot when they happen. That’s because under America’s progressive income tax rate structure, there are some brackets that only rich people pay into (the top bracket only impacts families earning more than $450,000 a year), but there are also brackets that rich and middle-class families alike pay.
Collapsing the 15 percent bracket down to 10 percent and lowering the 25 percent rate down to 20 percent may not be the super windfall that America’s multimillionaires have been hoping for. But their taxes would, in fact, fall, even as elected officials from both parties have agreed to characterize such a cut as a “middle-class tax cut.”
By the same token, while the child care tax benefits program associated with Ivanka Trump helps rich people a lot and poor people not at all, it definitely helps middle-class parents.
So the centerpiece of a deal would be something like the Ivanka plan, plus some kind of cut in the middle-class brackets, plus something on the corporate side, with no change in the 35 or 39.6 percent rates. As with anything else in legislative life, you’d need to fill out a lot of details, and the details would matter. But if Trump started with a plan that was capable of securing bipartisan buy-in, he’d have enormous flexibility in how to work out those details.
Rich people’s total tax burden would probably fall in this scenario, but there would be no “tax cuts for the rich,” per se — just broad income tax cuts that a lot of people benefit from.
Pay for it or don’t — it’s all gravy
Attempting to pass an enormous tax cut for the rich requires Republicans to attempt to pass a purely partisan tax bill. Passing a purely partisan tax bill forces them to use the Senate’s budget reconciliation procedure. And that forces them to deal with the intricacies of the Byrd Rule — in particular, they can’t increase the budget deficit more than 10 years into the future. This has had the tax reform process tied up in knots ever since the heyday of the destination-based cash flow tax.
Dropping the rate cuts for the rich completely changes the game in that regard.
A deal struck by Democrats could get 60 votes in the Senate and wouldn’t need to comply with reconciliation rules. And with interest rates still low, there’s no particular objective economic policy need to avoid increases in the budget deficit.
That doesn’t eliminate all hard questions. If there are going to be permanent cuts in tax rates, it would probably be prudent to pay for at least some of the cost by closing loopholes and deductions — especially on the corporate side. Different members of Congress will have different views about the merits of various deductions and the relative importance of lower rates versus smaller deficits. The work of negotiating a deal would still have to be done. But with big cuts for rich families off the table, the dealmaking landscape is wide open. Trump could do a modest rate cut with no pay-fors, a modest deficit-neutral tax reform, a giant rate cut that’s partially paid for, or whatever else members want to agree to.
Republican leaders wouldn’t be happy about this approach. But at the end of the day, are they really going to vote against a Trump-endorsed tax cut simply because it doesn’t cut taxes on rich people as much as they might prefer?