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March 28, 2017

Six Challenges Facing Tax Reform

 

It’s too soon to know if Obamacare repeal and replace is dead or just wounded, but it does appear that President Donald Trump and a number of Republicans are ready to begin focusing on tax reform—and understandably so.
 
Tax reform is long overdue, especially corporate income tax reform. But it will face some of the same challenges that IPI noted would bedevil the health care fight.
 
Here are six of them:
 
Republicans and Democrats have different tax reform goals. President Obama claimed he wanted corporate tax reform, but his real goal was to extract more money from corporations. Republicans, by contrast, believe tax reform should encourage private investment, which would create jobs and jumpstart the economy.
 
The two goals aren’t necessarily incompatible. Tax reform could lead to more federal revenue. But very few Democrats—and the Congressional Budget Office—understand that.
 
The federal debt problem. But tax reform could also lead to a revenue reduction, especially in the early years. That’s a problem since Obama’s spending spree nearly doubled the federal debt—to more than $20 trillion. And both Republicans and Trump campaigned hard on reducing the federal debt.
 
Republicans may need the reconciliation process again. Given their different visions for how to create jobs and grow the economy, Democrats may oppose anything Republicans propose—as they’ve done with health care reform and a Supreme Court nominee.
 
In that case, Republicans will once again have to turn to the reconciliation process that allows them to avoid a Senate filibuster. And as we saw with health care reform, operating within the confines of reconciliation makes the Republicans’ legislative task much trickier.
 
Democrats and the media will fan class-warfare flames. Take it to the bank: Democrats will claim anything Republicans propose is a bailout for the rich that will hurt the poor—and the media will amen those assertions. A number of Republicans will run for cover from those attacks—and some may even believe them.
 
Everyone is affected by taxes. Like health care, everybody has a stake in tax reform. But again like health care, very few people actually understand the economic complexities of tax policy—and that will be a huge political challenge.
 
Take corporate taxes, for example. Most economists believe corporations don’t pay taxes, people do. Corporations just pass taxes along to consumers in the form of higher prices.
 
Thus, as business historian John Steel Gordon wrote in the Wall Street Journal, the right corporate income tax rate is zero. But any attempt to significantly lower the corporate income tax rate will be endlessly demagogued.
 
Comprehensive legislation is harder to pass. The more comprehensive the legislation, the harder it is to pass. Republicans claimed that was one of Obamacare’s problems, and then tried to pass a repeal and replace bill that, while not as long as Obamacare, was nearly as comprehensive.
 
Better to take a step at time. And with respect to tax reform, that means corporate tax reform first.


 

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