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Financial Planning > Tax Planning > Tax Reform

Republicans Won't Stop Fighting With Each Other

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(Bloomberg View) — The ruling Republicans are trying to defy Washington’s political gravity: pushing through massive health care and tax overhauls crafted largely in secret, on a partisan basis, brushing aside congressional expertise and overcoming the policy ignorance of President Donald Trump with products of dubious quality, at best.

They want to do it twice, starting with the Senate’s struggle to change the Affordable Care Act this month. Senate Majority Leader Mitch McConnell sees this as a nuisance that must be resolved to get to the real priority: tax cuts, especially for the wealthy.

(Related: GOP Health Plan Has Insurer Fund Once Criticized as `Bailout’)

It’s doubtful that Republicans will succeed and send a health care bill to the White House. If they do, it will be a jerry-built political patchwork that few defend as good policy. It would fulfill a promise to the party’s base to repeal Obama’s signature law, though at the political cost of denying coverage to many supporters.

For Republican leaders, disposing of their health care problem, even unsuccessfully, would clear the decks for taxes. They will argue then that a big tax bill must be passed or the entire year will be a failure. If a 2018 budget is approved, they’d be able to consider taxes under a procedure that would only require Republican votes.

Passage of even a flawed health care measure might make it easier, however. Slashing spending for Medicaid, which principally helps the poor, the elderly and people with disabilities, would allow tax cuts of about $1 trillion over 10 years. That would mostly help the affluent, especially if Republicans eliminate the 3.8% tax on investment income over $250,000 imposed by the Affordable Care Act.

Then Republican tax cutters could slash deeper into corporate and individual taxes.

But while McConnell and House Speaker Paul Ryan insist that tax legislation will be easier for Republicans to pass than a health care overhaul, party schisms are already emerging. The small band of moderate Republicans is objecting to the substance and optics of giving goodies to the rich while slicing social programs. Fiscal hawks are fretting over spiraling deficits even as supply-side colleagues and those representing special interests believe most any tax cut is good.

“The tax bill will be a mirror reflection of what’s happening on health care,” said Rep. Richard Neal of Massachusetts, the ranking Democrat on the House Ways and Means Committee. “They are divided over everything.”

Ryan promises sweeping tax-reform legislation that won’t reduce government revenues, balancing reductions in tax rates with elimination of deductions and other preferences.

But he starts by vowing to eliminate the estate tax, a source of revenue that involves only the most affluent taxpayers.

Fewer than one in 500 estates are affected because assets up to almost $11 million are exempted for couples filing jointly. Eliminating the tax would be a $225 billion gift, over 10 years, to heirs of the richest Americans. There’s little evidence that it would help the economy, though it would certainly comfort campaign contributors.

All the Republican stabs at offsetting revenue-raisers are collapsing. The result, as Brookings Institution economist Bill Gale says, is “there will be tax cuts but very little tax reform.”

Even that has problems. The budget rules require that tax cuts that add to the deficit must expire after 10 years. Some Republicans talk about forcing tax-policy analysts to craft a “dynamic scoring” system that would make cuts appear to pay for themselves by means of unrealistically optimistic forecasting of economic growth.

Or tax cutters might try to ignore any credible scorekeeping on the cost, as they’re trying to do by discrediting the Congressional Budget Office analysis that shows 22 million fewer people with coverage under the Senate health care plan. Sen. Pat Toomey, a Pennsylvania Republican, wants to change the rules, from a 10-year deficit window to 20 or 30 years.

That should give genuine deficit hawks heartburn. The CBO estimates that under current policies the federal deficit will rise sharply in a decade to 5.2% of the gross domestic product (it’s 3.6% now) and overall debt will soar to 91% of GDP. That’s before any tax cut that would add trillions to these numbers.

As Trump’s Goldman Sachs alums and Washington newcomers, White House economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin, try to assemble a real proposal for this fall, his populist bomb thrower Steve Bannon floats the idea of a tax increase on the wealthy and bigger tax cuts for the middle class.

That’s not going anywhere; Ryan and McConnell would join the resistance movement and Trump would want to know how it affects his financial interests. But it underscores how politically dicey the tax issue may be this time for Republicans.

The final red flag: Virtually without exception, any big legislation that doesn’t enjoy some bipartisan support turns into a substantive or political disaster. That’s even more certain if done with little transparency.

— Read Corker Says GOP to Scrap Health Bill’s Investment Tax Repeal on ThinkAdvisor.


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