The Republican Tax Plan Better Be Audacious

If the GOP proposal isn’t aimed at helping workers, Trump will ask Democrats for a counteroffer.

 
 

PHOTO: GLOW IMAGES
 

The big question on tax reform is President Trump : Can Republicans really trust him, in the end, to go along with their plan? Or will he pivot at the last minute and play nice with “Nancy” and “Chuck,” his two new friends on Capitol Hill? The answer might depend on whether the GOP plan does enough to help average workers.

So far the effort on tax reform seems off kilter. Yes, reducing the corporate tax rate to improve American competitiveness makes sense. So does inducing companies to repatriate—and then put to work—the $2.5 trillion they have sitting idle offshore. Still, on tax policy the GOP has become like a boxer leading with his chin. Republicans appear a bit too concerned with CEOs and not enough with the wage earners who have been the big losers of the 21st century.

Since the financial crisis, American companies have fared well. Leveraging the Federal Reserve’s low interest rates, they have bought back their own stock at an extraordinary clip. Since hitting bottom in March 2009, the Standard & Poor’s 500 index has risen 265%. Meanwhile, wage earners haven’t had a meaningful raise in real terms in decades.

 
Although Congress could help, the quirky way financial legislation is normally passed in the Senate—via reconciliation, which requires only 51 votes—means it probably won’t. Imagine that President Trump announces, as promised, a “beautiful” plan that includes a permanent “big league” tax cut for middle-class families. The GOP’s razor-thin Senate margin and the vagaries of reconciliation mean the Trump plan would have little chance of becoming long-term policy. At best, working families would get a temporary tax cut. More likely would be a repeat of what happened with the attempt to replace ObamaCare: A small group of Republican outliers in the Senate would say “no.”

Fearing this outcome, Republican leaders are being tempted to play small ball. They might suggest modestly lowering the corporate tax rate. They might propose allowing full expensing of business investment, to be scaled back after several years. To help the middle class? They’ll throw in a modest hike to the standard deduction. Anything to get something done.

Which brings us back to President Trump. After watching the country tear itself apart politically, economically and socially during more than a decade of mediocre GDP growth, can the GOP trust the president to play small ball? Or will the transactional Mr. Trump try to “triangulate” and undermine the Republican position? If the GOP plan is not bold enough in helping the little guy, my bet is the latter.

This is a unique moment in America’s economic history. Wage earners are being held back by a combination of globalization and technological advancement. A tax reform geared toward middle-class families would help, but Republicans would do well to explore a third cause of the problem: Large multinational corporations, the institutions Washington favors most, are chilling wage gains in their relentless drive to lower consumer prices and grab market share.

Republican reformers are quick to counter that any corporate tax cut will include the “pass throughs,” those smaller enterprises—including partnerships, LLCs and S-Corps—that use the personal tax code. What they don’t say is how difficult it would be to cut the “pass through” rate for legitimate small businesses without opening the tax system to widespread abuse. Every billionaire could declare himself a one-man S-Corp, hoping to be taxed at the lower rate. That’s why Congress needs a mini-Manhattan Project of tax specialists to figure out quickly how to help mom-and-pop businesses without inviting abuse and creating a revenue-losing free-for-all.

Ultimately, Republicans are being forced to play small ball because a group of GOP deficit hawks worry that a big tax reform would undermine the budget. This fear seems out of proportion. Since 2000, under a Republican president and then a Democratic one, the national debt has soared from $5 trillion to nearly $20 trillion. The fiscal situation will only worsen with the coming entitlement-funding nightmare. Fretting about the deficit now is like worrying about a flickering candle in the front parlor when the entire house is on fire and the roof is about to cave in. Besides, true tax reform would eliminate deductions just as boldly as it slashes rates, achieving revenue neutrality.

Republicans shouldn’t play small ball. Their goal should be a tax-reform plan that will create robust economic growth, which in turn will help heal a bitterly divided nation. What would such a plan look like? Helping wage earners via tax policy is not a simple matter. People who earn less than $50,000 a year pay an average effective income-tax rate of 4.3%. What’s killing them is the payroll tax combined with the rising cost of health care. At minimum, the standard deduction should be tripled. But reformers also need to think creatively. Tax reform, entitlement reform and health-care reform cannot be considered in isolation. Working families need relief across the board.

That requires a bigger play than what some on Capitol Hill have in mind. But in the end, growth is everything. As he was preparing to run for president in 1980, Ronald Reagan was warned in a strategy meeting I attended about John Connally, a fellow candidate in the Republican primary. Connally, a former Texas governor, was raising big bucks from big business. By comparison, Reagan’s campaign coffers were lean. The future president’s response was aggressive. “Let him have the Fortune 500,” Reagan shouted. “I’ll take Main Street over Wall Street.”

This kind of “lunch pail” capitalism won Reagan the election and transformed the GOP—and the country. Isn’t it time for more “lunch pail” policy-making from Washington?

Mr. Smick’s latest book is “The Great Equalizer: How Main Street Capitalism Can Create an Economy for Everyone” (Public Affairs, 2017). He was chief of staff to Rep. Jack Kemp from 1979-84 and advised on both the 1981 and 1986 tax reforms.

Appeared in the September 13, 2017, print edition.

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