Republican Hopes for Tax Reform Hinge on a Trillion-Dollar Gimmick

Republican Hopes for Tax Reform Hinge on a Trillion-Dollar Gimmick


Republicans are not so much a political party as a loose affiliation of people interested in giving tax breaks to the wealthy. Grover Norquist genetically manufactured the entire caucus in a lab to robotically give speeches about how tax cuts spawn economic growth. So why are Republicans having such a tough time coming up with a viable tax cut plan?

The answer lies with the Republican’s inability to say no to anyone. They have played Santa Claus for so long, promising to pull an endless supply of free money out of their white sack, they cannot comprehend the very concept of a trade-off.

The House Republican tax rewrite looks very familiar. A full 99.6 percent of its benefits flow to the wealthy, according to analysis from the Tax Policy Center. It would cut individual, corporate and capital gains rates, and eliminate the tax on inheritances. It would increase the deficit by more than $3 trillion in the first decade. That sounds like a re-run of George W. Bush’s 2001 and 2003 tax cuts, which failed to stimulate much growth but made the very wealthy very happy.

There’s a new wrinkle this time: a controversial measure called a border adjustment tax, which exempts exports from taxation while effectively imposing a 20 percent tax on imports.

Related: Why Ryan’s ‘Border Adjustment’ Import Tax Is So Controversial

Anyone claiming they know the consequences of this isn’t telling the truth. Many assume raising taxes on imports and lowering them on exports will boost domestic manufacturing and reverse the trade deficit. But some economists believe that the dollar would grow stronger in reaction, making domestic products more expensive and wiping out the benefit, while also straining emerging markets that carry debt based in dollars. Others disagree that the effects on trade would cancel out, because countries would act to prevent the strong dollar impacts. In that scenario, consumer-facing importers like retailers and gas companies could pass on the tax in the form of higher prices, shifting the burden to their customers. Or, by simplifying the collection of tax, the real losers could be companies that manipulate the system.  Oh yeah, the whole thing might also be illegal under global trade rules.

This uncertainty has created political enemies for the border tax, particularly among powerful businesses that import a lot of goods. They aren’t buying the argument that exchange rates will save their business model, or that they could quickly shift production to the U.S. to compensate. So retailers have formed anti-border tax lobbying coalitions, using the potential for higher consumer prices as a key talking point. Retail executives met with Trump to express their dismay last week.  Koch Industries, a major oil importer, has also pushed hard against the provision. Domestic manufacturers, meanwhile, are supporting the border tax with their own front groups, signaling a lobbyist battle royale in which Congress simply tries to negotiate between competing corporate interests.

Retailers have found success among Republican senators, who aren’t as wedded to the tax plan. Utah’s Orrin Hatch, who chairs the tax-writing Senate Finance Committee, isn’t taking a position on border adjustment yet. But Georgia Sen. David Perdue stated flatly that the tax “is a bad idea and should not become a permanent part of the tax code.” Perdue was the longtime CEO of Dollar General, a low-margin retailer that imports almost everything, precisely the type of company worried by this idea.

Related: The $1 Trillion Border Tax Could Sink Paul Ryan’s Fiscal Plan

After House Speaker Paul Ryan tried to calm nerves in a closed-door Senate meeting, Sen. Tom Cotton, who represents Walmart’s home state of Arkansas, defied him on the Senate floor. Cotton said he and his colleagues “will not keep our powder dry and see working Americans railroaded with a precooked deal that raises their taxes and increases the prices of the stuff they buy every single day.” President Trump’s economic advisers are split on the idea, and when his tax blueprint is released in a couple weeks, it may or may not include border adjustment.

If this import tax causes so much strain among Republicans and their corporate benefactors, why are they bothering with it? The biggest reason is that, because of our current trade deficit, a tax on imports looks like it raises over a trillion dollars, allowing Republicans to plow more money into tax cuts for the rich. I say “looks like” because again, we don’t know how border adjustment will play out. But the way budget scoring works, with its focus on the current baseline, ensures that border adjustment appears to raise money. It’s a gimmick, but one Republicans need to make their plan work.

Offsetting the tax cuts satisfies an anti-deficit Tea Party faction, while helping solve the biggest problem with avoiding a Democratic filibuster. Under budget reconciliation, Republicans can pass big tax cuts with only 50 Senate votes. However, under reconciliation rules they cannot pass a plan that increases the deficit after the first 10 years. The Bush tax cuts, also passed under reconciliation, simply phased out after 10 years to meet this obligation. But offsetting tax cuts with revenue-raisers in the out years can also be part of the solution.

Related: Dueling Trump and GOP Tax Plans Would Cause Much Larger Deficits

Republicans don’t have a Plan B for raising a trillion dollars. A previous tax code rewrite included a bank tax; Wall Street opposed it. Another lengthened the time for depreciation of assets for write-offs; multinational corporations with major equipment investments opposed it. There’s always the option of not offsetting any of the tax cuts and claiming that massive economic growth will pay for everything. But Congress’ budget scorers can’t fully comply with this directive, making that trillion dollars critical to building a revenue-neutral plan that can be made permanent in reconciliation.

This is where Republicans run into an uncomfortable fact: They don’t want to say no to anyone. In a very real sense they don’t believe they have to.

Conservative economic theory has become so corrupted by the idea that tax cuts solve everything that an overhaul of the tax code creating winners and losers does not compute. Republicans don’t want to upset the retailers or the manufacturers, the wealthy or the middle class, the budget hawks or the military spenders. So they’ve concocted an elaborate fantasy world, where nobody has to be damaged by radical shifts in the tax code that transfer wealth upwards.

Related: Trump’s Budget Cuts Distract from Nation’s Much Larger Fiscal Problems

This problem has spilled over into the Obamacare replacement as well. Republicans want to repeal the taxes that fund Obamacare — all of which fall on the wealthy — in part to create a lower revenue baseline for their tax plan. But they still have to find some money to fund a replacement. The biggest funding source available comes from limiting the tax break on employer-based health insurance, which cost $216 billion just last year. But that would hit workers with huge taxes on their health care and a likely loss of coverage for many.

Without Obamacare repeal resetting the revenue base, tax reform is really in peril. Republicans may go from two huge legislative victories to none. And that’s because they have no interest in legislating, particularly in navigating the often painful compromises that necessarily result. It’s a funny thing about running the government — you have to govern.