5 Big Questions Raised by the Republican Tax Bill

5 Big Questions Raised by the Republican Tax Bill

Jonathan Ernst

In a landmark political achievement, House Republicans on Wednesday again passed the most sweeping rewrite of the tax code in more than three decades. 

The 224-201 vote sends the bill to President Trump, who is expected to sign it into law soon — though exactly when remains unclear. The president may wait until January, according to White House National Economic Council Director Gary Cohn. The timing is likely to be determined by whether Congress can pass a separate provision waving automatic spending cuts as part of a year-end spending bill to avoid a government shutdown after Friday.

Those automatic cuts, triggered under the 2010 “pay-as-you-go” law by the new tax bill’s projected deficit increases, would include $25 billion from Medicare and billions more from other programs. Signing the tax bill in January would likely delay those cuts for a year, giving lawmakers more time to find a workaround.

Meanwhile, Republicans are celebrating a major victory after a 48-day sprint — and looking forward to reaping the political rewards from a bill that will deliver some kind of tax cut to 80 percent of households next year, according to the Tax Policy Center. At the same time, though, the tax rewrite will have consequences beyond its pocketbook effects, and those ripples could complicate GOP efforts to sustain and extend their big win:

1. The bill may only lead to modest economic growth – but a big jump in debt. The Tax Policy Center released a macroeconomic analysis of the Tax Cuts and Jobs Act Wednesday, finding only a modest boost to economic growth in the wake of the tax overhaul: “We find the legislation would boost US gross domestic product (GDP) 0.8 percent in 2018 and would have little effect on GDP in 2027 or 2037.” The growth in debt is another matter: “Including macroeconomic effects and interest costs, the legislation is projected to increase debt as a share of GDP over 5 percentage points in 2027 to 97 percent of GDP, and almost 4 percentage points in 2037 to 117 percent of GDP.”

2. That rising debt will require some difficult decisions. The cost of the tax bill makes future tax increases or spending cuts more likely, potentially setting up a serious national debate about the proper size of government and how it should be paid for, says Heather Long of The Washington Post.

As deficits rise sharply in the coming years, Republicans are expected to press for substantial cuts in social programs, a move that will be fiercely resisted by Democrats. “The debate could touch on some of the most value-laden questions facing the nation — what type of financial security to provide the elderly, what safety net services should be offered to the poor, and how much the government should try to shrink economic inequality,” Long writes.

There’s no guarantee that small government conservatives will win this debate, especially as the population ages and more and more Americans rely on Social Security and Medicare.

3. Unless everybody abandons the idea of fiscal restraint. “Republicans have rightly spent the last decade warning about the dangers of debt. That they would push an agenda to balloon the debt now is nuts,” writes Marc Goldwein, the head of policy for the Committee for a Responsible Federal Budget, a deficit watchdog group. Will politicians of all stripes now feel empowered to push for their legislative priorities without concern for the cost?

While some, like Vox’s Matthew Yglesias, have argued that’s just what smart policymaking requires, Goldwein suggests such a turn would carry significant risks. “Without concern over debt, the floodgates would open for policymakers to put forward expensive policy after expensive policy without regard to its need, its effectiveness, or its long-term consequences,” he writes in a piece for NBC Think, adding that “we need to carefully think about what tax breaks and spending programs are worth the cost. Otherwise, our economy, our budget and our posterity will all suffer.”

4. The political fight over the next few years is now set. Republicans are betting that the public’s negative perceptions of the tax bill will turn once people start seeing more money in their paychecks. It’s a risky bet. “Republicans are making impossibly high promises, and if anything goes wrong — if the economy doesn’t boom, wages don’t soar and the middle class doesn’t rebound — it will be the fault of this legislation, soon to be labeled ‘the Trump Tax’ by Democrats,” writes Washington Post columnist Dana Milbank. And the tax plan has less public support than Obamacare did when it passed — and less than any other major piece of legislation enacted in the last three decades, for that matter.

On the other hand, the economy’s growth may work out in the GOP’s favor. “GOPers will credit corporate America's anticipation of the Trump economic agenda for igniting faster growth and then actual passage of the tax bill for its continuation,” James Pethokoukis writes at The Week. “Many voters might just believe the GOP line given that the upturn is happening at the same time their taxes are being cut.”

Either way, party polarization may get worse in the coming years, resulting in extreme swings in policy as the two sides fight for ultimate control.

5. And larger economic trends like globalization aren’t going away. Although President Trump won the White House in part by railing against the forces of globalization — and though he argued Wednesday that the tax bill means more companies will be staying in the U.S. — some international tax experts think the Republican bill will do little to stem the movement of jobs and capital overseas, and could actually make the situation worse. In particular, the new rules for how foreign profits are calculated and taxed will make it more profitable for many companies to build factories and hire employees outside the U.S. “Critics, even those who favor lower corporate rates, fear this bill will increase existing incentives for companies to employ tax havens,” writes Quartz’s Tim Fernholz. And even if those rules can be tweaked, the bill helps drive a “global race to the bottom” among multinationals looking for the lowest tax rates, a race that the U.S. is unlikely to win, Fernholz warns.