The White House Rejects Tax Reform for the Old Tax Cut Formula

The system would remain complicated, unfair and inefficient. But the richest would pay much less.


National Economic Director Gary Cohn (left) with Treasury Secretary Steve Mnuchin, April 26.

National Economic Director Gary Cohn (left) with Treasury Secretary Steve Mnuchin, April 26. PHOTO: CAROLYN KASTER/ASSOCIATED PRESS

When America elects a new Republican president, nothing is as certain as debt and tax cuts. So it is again.

Many of us wondered, though, what sort of tax proposal we’d get from the highly unconventional Donald Trump. The answer came last Wednesday—sort of—and it sticks reasonably close to both Mr. Trump’s campaign proposal and standard Republican fare.

Look back at history. The tax cuts championed by Ronald Reagan in 1981 and George W. Bush in 2001 shared four elements—call it the Republican Tax Cut Formula. First, they were remarkably generous to the rich. Second, they blew large holes in the federal budget. Third, their backers denied they would do so. Fourth, they were sold as rocket fuel for the economy—but they weren’t. 

Presidents Reagan and Bush were re-elected, of course. President George H.W. Bush, in contrast, deviated from the formula, became a pariah within his own party, and was defeated in 1992.

President Trump’s one-pager—that’s all the proposal is—follows the GOP formula. The “plan” is remarkably regressive. Yes, doubling the standard deduction would help the middle class, as the administration claims. But look at the rest. The top individual tax rate would drop substantially, to 35%. Corporations would pay a superlow rate of 15%. That same 15% rate would apply to pass-through operations like hedge funds, law firms and real-estate developers. The estate tax, which only the richest Americans pay, would be abolished. Draw your own conclusions.

You may recall that Treasury Secretary Steven Mnuchin once assured the public that “there will be no absolute tax cut for the upper class.” That would have been a departure from the Republican Tax Cut Formula. But we now see it isn’t true. If the plan ever gets fleshed out and priced, we may learn that, in dollar terms, it gives more new loopholes to the rich than it takes away.

Think, especially, about the 15% tax rate for business income from partnerships, S-corps and other pass-throughs. This is a huge revenue loser per se. But it’s also an invitation to millions of people to create faux businesses as a way of transforming ordinary income like salaries, taxed at 35%, into business income, taxed at 15%.

Then there is budget busting. The one-pager carries no price tag. But the revenue loss presumably would be huge—perhaps $5 trillion to $6 trillion over 10 years. How would the administration pay for it? With smoke and mirrors, it appears. The White House wants to leave that little “detail” to Congress, which will find the task both unpalatable and impossible.

There is a big difference between tax reform and tax cuts. The essence of reform is raising some people’s taxes (typically by closing loopholes) while cutting other people’s, with little net effect on total revenue. That necessarily creates many winners and losers, and the losers and their lobbyists raise a ruckus.

The essence of tax cutting is throwing a party at the budget’s expense. Which is why tax cuts sail through Congress so easily. A few deficit scolds may scold, but once a tax-cutting party gets going, it’s hard to stop.

My guess is that the bill that ultimately emerges from Congress will be light on tax reform, heavy on tax cuts. Legislators know they can mask the creation of future deficits in at least three ways. If you see any being used, it’s a sign that a con is taking place. 

The simplest method is unscrupulous use of “dynamic scoring” to claim that tax cuts will boost economic growth so much that revenue will come pouring into the Treasury. This effect is real, but small. Scrupulous dynamic scoring gets you much less revenue. Secretary Mnuchin has made it clear that the administration will rely heavily on this technique. The question is: Will the Congressional Budget Office buy into the magical thinking? The answer is almost certainly no.

A second method is to “sunset” some of the tax cuts after nine or 10 years, even though the majority party neither expects nor wants that to happen. Such legerdemain helps whittle an overweight tax cut down to manageable size within the 10-year budget window—and to zero thereafter. This makes the bill eligible for the Senate’s “reconciliation,” process, allowing it to bypass a filibuster and pass with only 51 votes.

If those two gimmicks don’t suffice, Congress can resort to what’s called “directed scorekeeping,” a polite term for telling the Joint Committee on Taxation and the CBO to buzz off and let lawmakers do the calculating. In now-familiar words, it means using alternative facts.

After all is said and done, Americans will most likely still face a complicated, unfair, inefficient tax code. But the richest will pay much less, President Trump will declare it the greatest tax reform ever, and his supporters will have been suckered once again.

Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.

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