Now that Trump’s initial gesture at Obamacare replacement has moved forward, he might want to go beyond gestures and offer the country a more comprehensive and coherent economic policy line. With it, he could place something more persuasive before Congress and genuinely brighten the nation’s economic prospects. Something comprehensive might even improve the country’s political culture as well. Such an effort would require reform on three interrelated fronts: taxes, regulatory relief, and entitlements. Sweeping as this effort seems, a potential for success exists. It remains an open question whether this administration is up to the task. This discussion will take up the first of these, tax reform. Subsequent blogs in coming weeks will in turn take up entitlements control and regulatory relief.
On this subject, Trump has already put forward a series of proposals. Many in response point out, either in glee or despair, that Trump hardly compares to the last great tax reformer, Ronald Reagan. If that fact remains indisputable, Trump actually faces a less difficult battle than Reagan did in the 1980s. Not only did that Republican administration face Democratic majorities in both houses of Congress, but the supply-side ideas Reagan embraced were less well accepted than they are now. Trump, whatever his personal inadequacies and vices, faces a Congress where his party holds comfortable majorities. Today’s policy elite, both Democratic and Republican, agrees on the need for the simpler, less intrusive tax code that Reagan introduced and that Trump has also proposed. Such general agreement on principles makes success now a much lower hurdle to jump than Reagan faced in the 1980s.
Agreement on reform contours is remarkably uniform. Almost all in Washington, as well as in business and academia, have called for reforms that would simplify both the corporate and individual code by ridding them of the maze of breaks, credits, and deductions that currently exist and use the additional revenue flows to reduce statutory rates generally. Such reforms have gathered bipartisan support at least as far back as 2010, early in Obama’s first term. His National Committee on Fiscal Responsibility, colloquially called the Simpson-Bowles Commission after its leadership, former Senator Alan Simpson and former White House Chief of Staff Erskin Bowles, recommended the elimination of some 150 special credits and deductions in the individual code and an expansion of the standard deduction to the benefit of all tax payers. It suggested a further simplification by conflating the six individual tax brackets prevailing at the time into three. The additional flow of tax monies expected from the elimination of breaks enabled Simpson-Bowles to recommend a reduction of statutory rates for individuals at each level. A similar closing of loopholes in the corporate code allowed a proposed reduction in that statutory rate from 35 to 28 percent.
Simpson-Bowles justified such changes in terms of fairness and economic efficiency. The closing of loopholes would make the code more equitable, they argued, by making those who had used them pay their fair share. The confusion imposed by the code’s complexity, they argued further, stymied economic growth by making the tax consequences of any action less predictable and by inducing people and businesses to make decisions less for economic reasons than to take advantage of the political preferences built into the code. The general reduction in statutory rates would further enhance growth prospects by encouraging individuals to work and business to invest more for the future. Lower statutory corporate rates would offer still one more benefit by encouraging U.S. companies to repatriate the accumulated earnings they held overseas, giving the economy a welcome cash infusion for investment. Simpson-Bowles could have argued, though it did not, that better economic prospects, welcome in themselves, would also tend to ease social tension, as would the elimination of preferences in the code by lifting the sense that the system is rigged for a favored few.
Almost all reform proposed over the years has shared these goals, measures, and, to a degree, this reasoning. President Obama several times pressed Congress to adopt all or parts of these proposed reforms. For all the media’s complaints about reflexive resistance throughout that time, Republicans offered very similar proposals. Only a few years after Simpson-Bowles, Chair of the House Ways and Means Committee Rep. David Comp (R-Mich) proposed the elimination of or capping of tax breaks and exclusions and a similar, though slightly more robust cut in statutory rates. President Obama revisited such reforms in his 2015 budget, though with a modest net tax hike. The following year, Paul Ryan (R-Wisc.), then chair of the House Ways and Means Committee, put forward his version of a “better way,” which, though it had different figures from either Camp or the president, embraced the same principles of simplification and statutory tax reductions. The present reform plan from the House’s Republican majority also embraces these principles and, if anything, goes further than these others in eliminating deductions, credits, and complications.
Trump’s plan is of a piece with these. According to both his campaign literature and the current White House website, he would eliminate most tax breaks and credits on the individual side, cap those that remain, and seek greater equity by expanding the standard deduction for all households. He would reduce the number of individual tax brackets from seven presently to three and reduce the statutory rate at each level. The present White House plan would also strip away all the breaks in the corporate code and reduce the statutory rate from 35 percent presently to 15. To bring home the monies held overseas, estimated recently at some $2.4 trillion, the president plans a one-time opportunity for companies to repatriate earnings at only a 10 percent tax rate. With low statutory rate of 15 percent, he has argued convincingly, companies would no longer have much incentive to accumulate earnings overseas.
Such similarities to previous plans, both Republican and Democratic, would seem to position this White House well to push the tax reform through Congress. To be sure, disagreements over detail have stymied past reform efforts. Just about everyone in Congress has a favorite break targeted for a preferred constituent group. The parties differ on how the tax burden should net out after simplification. Democrats generally have pushed for a net tax increase, while Republicans have sought a net tax cut. But since all seem to agree on the basic principles of reform, an energetic White House would seem capable of bridging such differences. Had President Obama worked more energetically, some would say at all, the country probably would have enjoyed similar tax reforms some time ago. If Trump is half the deal maker he claims to be, he should have little difficulty with the kind of arrangements that would permit the clear general agreement on principles to carry reform into law.
That deal making seems to have already begun. Not only has Trump started the process with his proposals, but others have leaked out of the White House, some labeled “unorthodox.” Much of the commentary has suggested that the White House’s trial balloons reveal a kind of desperation or willingness to dispense with previous reform proposals. Media stories along these lines have pointed to a White House, in addition to its list of goals, has offered to cut payroll taxes. The fact is that such behavior very probably suggests the exact opposite, that the White House has begun a productive process of give and take. On the payroll tax suggestion, for instance, Trump knows that Democrats resist tax reductions that help high earners more than others. He also knows that many at the low end of the income distribution pay no income tax but do pay payroll taxes. It is only reasonable then to try to sweeten the deal for Democrats by including such a break. Meanwhile, House Speaker Paul Ryan has already offered to bridge the divide over whether the final deal will include net tax increases or decreases by seeking a revenue-neutral solution. The process will no doubt provide still more grist for the media’s speculation and skepticism. But the back and forth is hardly a sign of trouble.