A Coherent Plan for Trump

Now that Trump’s effort at Obamacare replacement has failed, 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 encourage a sincere policy debate that could in turn improve the country’s political culture as well.  Such an effort would require reform on four interrelated fronts: tax reform, a plan to refurbish the nation’s infrastructure, entitlements reform, and regulatory relief.  Sweeping and difficult as this effort seems, a potential for success exists, if not an outright likelihood.  It remains an open question whether this administration is up to the task.

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When it comes to tax reform, many 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.  That Republican administration faced Democratic majorities in both houses of Congress, whereas Trump, whatever his personal inadequacies, faces a Congress where his party holds comfortable majorities in both houses.  The supply-side ideas Reagan embraced, a simpler, less intrusive tax code, were less well accepted then than they are now, when just about all in the nation’s policy elite, both Democrats and Republicans, agrees on the virtues of such goals.

In contrast to the 1980s, today almost all in Washington, as well as in business and academia, have called for remarkably similar simplifications, in particular ridding both the corporate and individual codes of the maze of breaks, credits, and deductions that currently exist.  There is also remarkable agreement that the best use the additional revenue flows would reduce statutory rates generally.  Reforms along these lines have in fact gathered bipartisan support for years, going back at least as far as 2010, early in Obama’s first term when his National Committee on Fiscal Responsibility put them forward.  Colloquially called the Simpson-Bowles Commission after its leadership, former Senator Alan Simpson and former White House Chief of Staff Erskin Bowles, it 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 the breaks pay their fair share.  The confusion imposed by the code’s complexity, they argued further, had 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 since has shared these positions and their reasoning.  President Obama pressed Congress several times 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 Camp (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 reform plan advanced by House Republicans earlier this year also embraced these principles and, if anything, went further than these others in eliminating deductions, credits, and complications.

Trump’s plan is of a piece with these.  To be sure, the sketchy proposals he advanced some weeks ago, focused more on tax cutting than simplification and loophole closing, but the White House never characterized them as complete.  Meanwhile, he campaigned on a plan very much like these others, one that would have eliminated most tax breaks and credits on the individual side, caped those that remained, and sought 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 White House plan, as described, would also strip away breaks in the corporate code and reduce the statutory rate from 35 percent presently to 15.  To bring home the monies held overseas by American firms, estimated recently at some $2.4 trillion, the president indicated that he would allow 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 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 worked at all on the matter, the country probably would have enjoyed similar tax reforms years ago.  If Trump is half the dealmaker 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.  The limited and incomplete nature of the recent White House power point all but announced that it was an initial bargaining position.  So, too, other White House proposals, such as reductions in payroll taxes on lower incomes, what the media has described as “unorthodox,” suggests a trial balloon aimed at future compromise. Trump, after all, knows that Democrats resist tax reductions that help high earners more than others. Since he also knows that many at the low end of the income distribution pay no income tax but do pay payroll taxes, this proposal might well serve as a future bargaining chip.  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 media speculation and skepticism.  But the back and forth is hardly a sign of trouble.

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Effective tax reform could begin to address the financing problem that is surely the biggest stumbling block to needed infrastructure spending.  Even if the net effect of tax reform were revenue neutral the proposal to bring accumulated overseas earnings home would offer the Treasury a one-time boon that would go a long way in this regard.  If all of these monies were to flow back to the country, the 10 percent rate would give the Treasury an added revenue flow of $240 billion.  If only half were to flow home, the Treasury would receive an extra $120 billion, still a sizable part of the $500 billion infrastructure plan to which the White House has alluded.  Since tax reform would likely accelerate the pace of economic activity, it, even in the absence of such flows, would add to the funds available for infrastructure spending.  More than tax reform, however, entitlements reform would clear the way for this agenda item.

It, too, has a chance of success.  Though it presents more intractable political problems than tax reform and infrastructure spending, it has urgent financial realities driving it.  Spending by government on Social Security, Medicare, and Medicaid has for years outpaced just about everything else so that such outlays have begun to swallow the entire federal budget.  Obamacare promises to accelerate the pace.  So far such spending has grown from about half of all federal spending in 1980 to about three quarters in the most recent budget.  Congress exercises no control over this growth, at least the way budgeting is done now.  The only reason entitlements spending has failed to impose more on most other government programs is that defense outlays have grown at an exceptionally slow pace, falling from just under a quarter of the budget in 1980 to about 15 percent presently, despite all the strains from the country’s Middle East adventures.  Effectively, relative Pentagon cuts have shielded much of the rest of the government from this relentless growth in entitlements.  In so doing, it has allowed various politicians, including President Trump, to kid themselves and try to fool the people about what they might do with federal dollars that, without entitlements reform, are simply not there.

Since major tax hikes and deeper budget deficits are politically unpalatable, as is a continued shrinking in defense spending, at least to the extent done in the past, Washington will soon have its proverbial back to the wall.  At current rates of relative growth, entitlements promise to absorb 80 percent of the budget in less than ten years and 85 percent by 2035.  Even if defense spending shrinks further to a 10 percent share of the total, only 5 percent of the budget would remain for everything else.  Matters are probably more urgent, since this simple extension of past trends ignores how Obamacare will accelerate entitlements spending as will the retirement of the baby boomers.  The window that allows the president and Congress to ignore the matter is closing fast.

This is pressure even a politician might feel, especially since the public clearly has grown aware of this reality.  To be sure, the average citizen cannot quote chapter and verse from the budget or measure past trends.  Nonetheless, voters have shown conclusively that they know how little budgetary viability remains.  According to a recent Rasmussen poll, only 19 percent of voters are confident that they will receive their full federal retirement benefits.  A Bloomberg national poll showed an even smaller 15 percent are so confident.  A Roper poll found that only 29 percent of American believe that their federal benefits will last through their retirement, down from some 35 percent only six years ago.  Such feelings will or should drive politicians to action no matter how much they would prefer to ignore such matters.

It may well be that objections to the largely cosmetic Obamacare reform bill reflected sensitivity to this need.  To be sure, the Freedom Caucus fought Republican leadership and President Trump on social as well as economic issues.  It nonetheless also showed sensitivity to the legislation’s lack of economic viability.  The proposal for instance, might have used tax credits to individuals in place of Obamacare’s more direct subsidies for health insurers, but the net effect would still have burdened the budget.  Objections to community ratings also showed a recognition of actuarial reality.  The replacement legislation did loosen Obamacare’s insistence that premiums for all, regardless of age and health, must remain largely equal.  But it failed to loosen them enough to offer the system sustainability.  It would seem, then, that any future efforts to replace Obamacare will receive a warmer welcome if they consider broader budgetary ramifications and would receive still more support if they aimed to deal with the more general entitlements problem.

Nor would reformers lack for proposals.  On the contrary, there is much on offer to move this critical process forward.  This is hardly the place to itemize, much less assess the many schemes that would control the growth of entitlements spending, but a sketch might indicate how many options exist.  Social Security’s trustees have placed their own on the system’s website.  Among them is the suggestion to raise the age for full retirement benefits.  A shift from 67 years presently to 70 would do much to make Social Security actuarially sound and hence lift its burden on the rest of the budget.  It would also reflect a national demographic reality in which people live longer than in the past and remain vital to older ages.  Other reforms advocated by the trustees and others would, for instance, change how the system calculates cost of living adjustments or alternatively how it determines the benefits paid to high-income beneficiaries.

With healthcare, whether Medicare, Medicaid, or, for the time being, Obamacare, matters are less clear cut.  Nonetheless, here, too, prospective reformers have much material with which to work.  Allowing insurers to sell across state lines, for instance, would introduce new levels of competition that should hold down premiums.  Of course, such a move would force Washington from its clear preference to care more for the bottom lines of insurers than for those paying premiums, but the option exists.  Reforming the way that the Federal Drug Administration tests new drugs offers a way to reduce prescription costs.  Block greats to states for Medicaid could unleash a raft of cost saving schemes that would slow spending with no loss of services.  Already, state efforts have yielded more effective ways to deliver health services, the use of clinics, for instance, instead of emergency room calls have not only cut immediate costs but, by improving prevention, have held down costs over time.  Similarly, if employers simply offered employees block payments for premiums, they would introduce further competition into insurance markets, impose spending disciplines, and hold down premiums accordingly.

Legislation might make progress if Congress would change the terms of debate.  A tedious moralistic posing has interfered with rational discussion for a long time.  A more technical approach would allow representative and senators much more room to compromise.  So-called budget hawks could then seek expense relief for the public at large without having to fend off accusations of heartlessness.  Those who worry from the other side about the quality of life among those less capable can embrace the virtue of putting support systems on more secure and durable footings.  Though a portion of the moralizing, and the animosity it fosters, would inevitably remain, it might find fewer platforms from which to create bad feelings in Washington and among the public generally.  At the same time, a turn to honesty by representatives and senators about matters of budget viability, something the public already sees quite clearly, might well defuse the ever-growing distrust of Washington.  Difficult as the initial effort at such reform no doubt will be, it is essential and promises to pay considerable dividends.

* * *

On the final part of this program, regulatory relief, Trump has promised to lift many of the burdens imposed by the Obama administration.  They, he claims reasonably, needlessly interfere with business and daily life, slowing the pace of economic growth and unreasonably infringing on private decisions.  To the extent that Trump proceeds judiciously, he will improve the country’s economic prospects and remove some major irritants among large groups in society.  He could, however, do more along these lines by altering the culture of U.S. regulatory bodies or at least beginning to do so.  Aside from an aggressive presidential agenda, much of the economic harm done by regulators in this country stems from their legalistic and adversarial approach.  These, if they serve public interests at all, do so inefficiently and in a way that creates considerable animosity toward government and distrust as well.  There is an alternative approach open to this administration.  It could follow the manner used in Canada and Australia, where regulators see themselves less as the adversaries of those they regulate and more as partners who bring to decision making the needs of stakeholders otherwise neglected by markets and common practice.

Since Washington is the land of lawyers, the country’s regulatory approach should hardly come as a surprise.  The people who created it have grown up in the law’s adversarial culture.  They can hardly think in other ways.  In their scheme, regulators write reams of rules that aim at the impossible job of covering every eventuality.  They then approach those they regulate with the presumption that they are evading those rules.  The regulated naturally become wary of their would-be prosecutors, stick strictly to the letter of the law, and withhold as much information as they can, worried that the regulators will somehow use it against them.  Meanwhile, those who would uncover wrongdoing are loath to expose their objectives, lest the regulated use that knowledge to conceal their evasions.  This hid-and-seek approach creates considerable unnecessary expense.  It can cause regulators, eager to punish wrongdoing, to lose sight of the original purpose of their oversight and sometimes lead them to destroy or downsize industries, needlessly throwing people out of work, and do so even though managements might willingly have cooperated with cost-effective means to accommodate public interests.

Because few firms and people actually seek to break laws, a more cooperative approach should work.  Take, for example, the matter of pollution.  Since the market charges the polluter nothing, the public interest in clean air and water would seem to demand a government presence.  Firms have long since reconciled themselves to this need.  Understandably, they would prefer to comply at the lowest possible cost.  But they have little means to work with regulators on such solutions.  Instead they have reams of explicit rules that seldom consider cost and anyway cannot take every possible situation into account.  A more cooperative interaction could do both.  Similarly, those who would protect minority rights, such as the LGBT community, might do better at lower cost and with less animosity if they were to work with schools, parks, and the like to protect the safety and dignity of that community while also considering the needs and dignity of others.  Such efforts multiplied across business and daily life would save money and ease tension.

Glimmers of such desired arrangements have appeared.  The Consumer Financial Protection Bureau (CFPB) for one, has come to recognize that rules have stifled desirable technological innovation in the financial industry.  Firms simply will not take the risk of spending millions on systems and practices that the CFPB or some other regulator will not only summarily disallow but also penalize them for even trying to implement.  In an uncharacteristically cooperative move, CFPB regulators have promised to issue what they call a “no-action letter” that will allow firms to experiment with new practices without risk of regulatory retaliation.  It does not save managements from possibly squandering resources on business models that fail in the marketplace.  That is a risk any business takes with any new approach.  Nor does a no-action letter offer a guarantee of regulatory approval.  It does, however, save firms from incurring penalties just for making the effort.  It is a small step.  But it does show a willingness to set aside the adversarial culture, albeit in a very narrow way.

There is no reason that the CFPB or other agencies could not build on such steps to work with the regulated.  Business then could proceed aware what public objectives are and offer ways to accomplish them at minimum cost to all involved.  Such a system would, of course, dispense with today’s legalistic reliance on rules and trust regulators’ judgments of what best serves public needs.  There is, admittedly, a risk here of what is called regulatory capture, when regulators, instead of focusing on public interest, become the allies of those they otherwise oversee.  If that remains a risk, it is not as if the present adversarial approach has stopped regulatory capture.  Indeed, the reliance on regulator judgments and objectives instead of voluminous rules might do a better job of guarding against regulatory capture than today’s system where the regulated are often the only people with detailed enough industry knowledge to write the rules to which the regulatory lawyers will then hold them.

No doubt such an approach would require a way to review regulatory judgments.  That review would inevitably have a political aspect.  The entire effort to develop an effective review process and alter the culture among the regulatory bodies in this country would take a long time.  Initial efforts by the Trump administration could at most start this long process.  But it would pay handsome dividends in lower costs, both in the regulatory process and to the economy, and by disarming hostility to government, in business certainly but also with the general public.  It would certainly make Washington look less ridiculous than it does with rules demanding, for instance, wheelchair access to the fire brigade’s sleeping quarters.  Combined with tax and entitlements reform as well as improvements in the nation’s infrastructure, the entire effort would create a more responsive and responsible policy environment that would promote economic growth and relieve much of the bitterness between the public and the government as well as political tensions generally.

 

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