A Trigger Warning on Taxes
Senate Republicans made considerable tax-reform progress Tuesday by passing a bill through the Budget Committee, though not without another nick. The reform would still help the economy and lift incomes, but the trillion-dollar question is whether Republicans can put the American people and prosperity ahead of this or that pet demand—or if they’ll continue to dent the product.
The bill passed 12-11 after drama over whether Senators Ron Johnson (Wisconsin) and Bob Corker (Tennessee) would vote no amid assorted objections. Both voted yes.
Mr. Corker is worried about the federal deficit, and we hear he has struck a deal “in principle” with Senate leadership for a “trigger” that snaps back some of the cuts if revenues six years from now are below what the budget gnomes predict today. We’re told this would set off $350 billion in tax increases over the next 10 years, details on which taxes would rise to come later this week. This appears to be the price of Mr. Corker’s vote, and it may also assuage James Lankford (Oklahoma) and Jeff Flake (Arizona).
The extent of the potential trigger damage will depend on the fine print, and the priority ought to be preserving the business cuts that produce the most economic growth. Corporations won’t relocate to America at a 20% tax rate with a threat of a much higher rate in a couple years. In particular Republicans shouldn’t reverse course after making tough political choices to make the 20% rate and other business tax cuts permanent. They don’t want fear of a trigger to crimp the investment and growth that produces more revenue—and lower deficits—for Treasury.
By the way, the Senate bill already includes other trigger dates: One is the end of 2025 when the cuts for individuals expire, and many of those provisions are budget blowouts, including the expanded child tax credit. Another trigger is the 10-year budget window. Oh, and Nov. 6, 2018. It’s called an election, and Americans hold one every two years. There is zero chance the tax code runs on autopilot without political intervention for six years.
The pony in this pile is that the budget forecasts rely on a lame 1.9% growth on average for the next decade. The GOP’s bill could restore growth to a 3% historical norm and gin up more than enough money to avoid the trigger. Perhaps the GOP should add a reverse trigger? If revenue exceeds projections, plow the cash into lowering the top marginal rate on individuals to 35%.
That won’t happen, but we’ve supported the GOP tax bill despite its imperfections because it represents an improvement over the status quo that could also attract a majority. The hope is that the GOP accepts this reality, but then there are other holdouts: Senator Johnson and Steve Daines (Montana) want something more for “pass through” businesses that pay taxes on personal returns. The Senate allows a 17.4% deduction for such business income.
Mr. Daines calls these entities “Main Street” businesses, though this is a tilt: Most small businesses don’t pay the top rate, which is why the small-business lobby is on board with the Senate plan to give everyone relief. This is a fight over tax breaks for a small pool of relatively large companies that compete with corporations, which are taxed a second time on dividends.
A key feature of a pass-through reform needs to be crafting rules that prevent lawyers and accountants from gaming the system to pay a lower rate than other individuals. But pass throughs are going to get a major tax break, and no sane Republican should kill a tax bill over these details. An expanded 20% deduction (from 17.4%) would cost about $60 billion, which the GOP should be able to accommodate within its budget parameters. Messrs. Johnson and Daines should accept this concession and call it victory.
Any Member who isn’t thrilled with the final product can also follow the standard procedure of the Senate: Offer an amendment on the floor and see if it commands a majority. For all the drama, the real news is that the GOP is moving toward the most pro-growth tax reform in 30 years, developed in an open process under regular order. This is no time to go wobbly.
Appeared in the November 29, 2017, print edition.