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The GOP’s tax reform Bermuda Triangle

President Donald Trump gestures as he descends the stairs of Air Force One.
Mike Theiler | Reuters
President Donald Trump gestures as he descends the stairs of Air Force One.

Cutting taxes sounds like an easy win for a Republican Party enjoying unified control of the federal government. But at the moment, they're struggling. Not just struggling to scrounge up concurrent majorities for a tax bill but struggling to reach any kind of consensus about what their tax bill is supposed to look like.

And while the details of this are complicated, the broad strokes of why they're struggling are pretty simple — the party has united around three big principles that are incompatible:

  • They want to deliver big cuts to the taxation of investment income. This is something conservatives strongly believe will boost economic growth as well as reduce the unfairness inherent in the idea of a society in which the government redistributes economic resources from the haves to the have nots.
  • They want to deliver meaningful tax cuts to the middle class — the core of the GOP's electoral pitch since at least the days of Ronald Reagan.
  • Then there's the impossible third goal: They want to avoid increasing the budget deficit — or at least keep the deficit increase limited to something they can plausibly waive away with dynamic scoring.

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The problem is that this is impossible. No amount of fussing around with the details or filling in the extensive blank spots in the existing GOP tax framework will change that. To get something done, Republicans will have to go back to square one and decide what it is they're trying to do.

Republicans' original tax plan collapsed months ago

The critical context for the current tax reform impasse is that House Republicans' originalvision for tax reform relied on ideas that have long since been abandoned.

Step one in that process was to repeal and replace the Affordable Care Act in a manner that featured huge tax cuts for the rich while also offering long-term deficit reduction in the form of steep cuts to Medicaid. Step two was to replace the corporate income tax with a destination-based cash flow tax (DBCFT), essentially a form of broad-based consumption tax that Republicans thought could be marketed to the public as a kind of tax on business.

With those two elements in place, it would have been relatively straightforward to structure the rest of tax reform as something resembling a middle-class tax cut.

In effect, you'd be counting on Medicaid cuts and the new consumption tax to finance the whole thing. But this high-wire act collapsed long ago. Even before Obamacare repeal failed altogether, Senate Republicans removed most of the tax cuts for the rich from their legislative packages — recognizing that the politics of bundling controversial health care legislation with an unpopular giveaway to high-income families weren't viable. And the DBCFT didn't survive the slightest contact with political reality — provoking immediate opposition from retail chains and oil refiners.

But having abandoned these ideas, Republicans didn't revise their basic premises. They even kept the 20 percent tax rate from the DBCFT plan and just carried it over to the new corporate income tax plan, even though all the deduction closing in the world won't pay for cutting the corporate tax rate all the way down to 20 percent.

Does anyone really care about the deficit?

Back when George W. Bush was president, the GOP handled this problem in a straightforward way — pair huge, unpopular tax cuts for rich people with smaller, more popular tax cuts for the middle class.

The result was a large increase in the federal budget deficit, which meant that in order to qualify for the Senate's filibuster-defeating budget reconciliation process, the tax cuts had to be structured to sunset after 10 years. During the 2012 lame-duck session, the cuts ended up mostly being made permanent after all — with a bipartisan vote large enough to overcome the filibuster — but the top income tax rate reset to its pre-Bush level of 39.6 percent.

For months, liberals have been expecting Republicans to eventually go back to this well and put forward a big, temporary, deficit-increasing tax bill that simply lowers everyone's taxes. But the reasons to think this would be a smart strategy have been apparent since Election Day, and GOP leaders keep not choosing it — out of some form of hubris, genuine deficit aversion, or a mix of the two. So for now they keep tying themselves into pretzels of trying to come up with a tax reform formula that will reconcile the political imperative to cut middle-class taxes with their firm policy commitment to a tax cut for the rich. And it's not going very well.