The Tax Reform Damage The GOP health debacle makes pro-growth reform more important but also much harder.
https://www.wsj.com/articles/the-tax-reform-damage-1490559521
Republicans are consoling themselves that after their health-care failure they can move on to tax reform, and they have little choice. The large complication is that the Freedom Caucus’s ObamaCare preservation act has also made a tax bill much harder politically even as it makes reform more essential to salvaging the Trump Presidency and GOP majorities in 2018.
President Trump campaigned on breaking Washington gridlock, increasing economic growth and lifting American incomes. The health collapse undermines those pledges. The legislative failure is obvious, but less appreciated is that House Speaker Paul Ryan’s reform included a pro-growth tax cut and major improvements in work incentives. The 3.8-percentage-point cut in taxes on capital income would have been a substantial increase in after-tax return on investment, nearly half of the eight-point cut in the capital-gains tax rate that helped propel growth after 1997.
This lost opportunity now makes tax reform even more important as a growth driver, but the health-reform failure also hurt tax reform in another major way. The Ryan bill would have reduced the budget baseline for tax reform by some $1 trillion over 10 years. This means that suddenly Republicans will have to find $1 trillion more in loopholes to close or taxes to raise if they want their reduction in tax rates to be budget neutral.
That means picking more fights with industries that fear they’ll be tax-reform losers. Take the irony of Senator Tom Cotton of Arkansas. He trashed the House health bill far and wide, but he also represents Wal-Mart, which hates the House GOP’s border-adjustment tax proposal that would raise some $1 trillion in revenue to pay for lower tax rates. By helping to kill the Ryan health bill, Mr. Cotton has now killed $1 trillion in tax and spending cuts that would have made it easier to pass a tax reform without the border-adjustment fee. We look forward to seeing the Senator’s revenue substitute.
Some Republicans think the health failure will concentrate GOP minds on taxes as a political necessity, but then they said the same about repealing ObamaCare after seven years of promising to do so. They flopped even though it’s unheard of for a new President to lose on his top priority so early in his term. That’s when his political capital is highest and his own party has the most incentive to deliver on its promises.
The risk now is that the health failure will make the GOP Congress even less cohesive and less likely to follow its leaders. Freedom Caucus Members sit in safe seats and don’t need achievements to win re-election. They are almost happier in the minority where they can more easily vote no on everything.
But 23 Republicans hold seats in districts that Hillary Clinton carried, another 10 where she narrowly lost, and that’s where the GOP majority is vulnerable. Those Members will want some record of accomplishment in 2018, but they also won’t want Wal-Mart or industries protecting tax preferences to spend millions for their Democratic opponents. They will now take fewer risks than if they had been able to point to a health-care victory.
The other big risk is that Republicans will now settle for a modest tax cut without a fundamental reform that clears out special-interest favors. That is better than nothing but would diminish the effect on economic growth and incomes. Treasury Secretary Steve Mnuchin is already saying that he wants only a token cut in the tax rate on individual wages and salaries, and some in the White House are tempted by Democratic income-redistribution schemes.
Mr. Trump lacks the political base of most Presidents, so he is hostage more than most to performance. Above all that means presiding over faster growth, which is the only real way to help Trump voters. If the GOP can’t deliver on tax reform, the Freedom Caucus will have done far more harm than saving ObamaCare.
Comments are closed.
