The corporate tax cut is just too big.
Republican senators concerned about the potential impact of the GOP tax plan on the accumulation of federal debt — including James Lankford, Bob Corker, and Jeff Flake — are talking with leadership about creating some form of trigger mechanism whereby tax cuts would be wholly or partially rolled back if optimistic deficit forecasts prove to be inaccurate.
It’s an idea that makes a certain amount of superficial sense. Many Republicans believe that conventional budget models underrate the power of tax cuts to “pay for themselves” via economic growth.
A trigger would, in essence, ask those ardent supply-siders to put their money where their mouth is and insert a legislative provision stipulating that if growth doesn’t come in as strongly as tax cutters anticipate, the cuts themselves will be rolled back to prevent an out-of-control deficit. That approach successfully reconciles the stated GOP debt concern with the stated GOP belief in the growth-boosting magic of tax cuts.
The problem is, the trigger proposal is sharply at odds with the conventional economic wisdom that a period of disappointing growth is the worst possible time for tighter fiscal policy. The deficit hawks may not care, though. Republicans at least sometimes profess to not believe in Keynesian models that say bigger deficits are better during recessions, so they may shrug at this warning.
In practice, the economic impact of some kind of backstop provision is going to hinge on the implementation details — what would trigger the backstop and what would it look like — and at the moment, it’s far from clear exactly what’s under consideration.
More broadly, the lesson is that it’s hard to take an inherently flawed concept like a large regressive tax cut enacted at a time of low unemployment, rising interest rates, and high debt, and then tack on extra provisions that make it workable.
Deficit triggers, explained
Way back in the salad days of 2001, with budget surpluses projected as far as the eye could see, George W. Bush proposed a tax cut on the theory that the surplus essentially meant Americans were being overtaxed. Collecting more revenue than the government intended to spend was, Republicans argued, simply an invitation for big-government liberals to blow the money on new government programs.
And then-Federal Reserve Chair Alan Greenspan, who held near-iconic status at the time, argued in testimony before Congress that endless surpluses were an economic danger. After all, he said, soon enough the government would retire the national debt and need to start socking away the extra money by buying private sector financial assets — socialism!
Liberals at the time warned, accurately, that Bush’s budget math was nonsense and his tax bill would cause the deficit to balloon. Then-Sen. Olympia Snowe (R-ME) proposed including a trigger mechanism in the tax bill so that, in her words, “in the event the surpluses don’t materialize … we have the ability to take the next step and delay the tax cut.”
The proposal ultimately failed, Bush’s tax plan sailed through the Senate with 12 Democratic “yes” votes (though John McCain and Lincoln Chafee voted “no” from the GOP side), the surpluses did not materialize, and the tax cuts — though originally scheduled to expire after 10 years — were fully extended for two years and then made partially permanent in the winter of 2012-’13.
Now, 16 years later, America’s debt-to-GDP ratio is much higher, and forecasts call for steadily growing deficits whether taxes are cut or not, so Snowe-esque fiscal concerns are much more pressing. A natural way for members of Congress to express concern about the budget deficit would be to not vote for large, deficit-increasing tax cuts. But GOP senators are also facing intense pressure to “get to yes” on the bill rather than leaving town without a signature 2017 legislative accomplishment, so the old trigger idea is making a comeback despite significant conceptual flaws.
The problem with triggers
Looking back to the 2000s, it’s a bit hard to see what problem Snowe’s trigger proposal would have helped with.
Actual revenue forecasts started falling short of Congressional Budget Office projections almost immediately, because the economy tumbled into recession in 2001. The Bush tax cuts were not a well-designed or well-targeted fiscal stimulus measure, but even so, simply canceling them would have made the recession worse, not better. That’s one reason the Obama administration later found itself agreeing to a two-year tax cut extension while the economy was in the depths of an even bigger, later recession.
Trigger proponents want a mechanism that will cancel tax cuts if the fanciful growth forecasts of ardent supply-siders turn out to be wrong, but it’s difficult to design a mechanism that accomplishes that without also introducing an “automatic destabilizer” that delivers a hefty dose of anti-stimulus to the economy if it falls into recession.
The best solution is for Congress to actually manage the budget in a responsible way, enacting stimulus if the economy is in recession but aiming for deficit-neutral tax reform.
Republicans are making a lot of contradictory promises
The reality, however, is that the problems with adding a trigger mechanism to the Senate GOP tax bill go beyond the finer points of Keynesian macroeconomic management. Simply put, the party’s leaders are promising different things to different people in a way that can’t be reconciled.
The basic structure of the bill, at least on paper, is to create a large tax cut for various classes of rich business owners (the exact details depend on whether you own stock in publicly traded companies, own slices of closely held businesses, or simply stand to inherit millions of dollars in financial assets) that’s paid for with a broad increase in taxes on the middle class plus billions in cuts to the poor.
This idea is so morally shocking that GOP leadership is attempting to sell people on the idea that it’s inappropriate to discuss the actual provisions of the legislation. Instead, we’re supposed to assume that a subsequent Congress will pass a new bill to extend middle-class tax cuts that their bill says will expire. New York Times deputy Washington editor Jonathan Weisman endorsed this line of thinking.
If that happens, of course, then the increase in the deficit will be much larger than the $1.4 trillion headline figure in current CBO estimates. What’s more, the bill will automatically trigger various PAYGO spending cuts — including a $25 billion cut to Medicare — unless Congress takes subsequent action to suspend them. Republicans are assuring people that Congress will, in fact, suspend PAYGO rules, but that, again, means the deficit will be even bigger than advertised.
At the same time, Republicans are telling deficit hawks that the dynamic growth effects of tax cuts will make the deficit problem go away. But Republican tax wonks’ own case for the growth-boosting power of tax cuts hinges on the cuts being paid for with spending cuts. This is exactly what the Bush Treasury Department found when it studied dynamic scoring, and it probably explains why the Trump Treasury Department has mysteriously failed to produced its often-promised dynamic study of the tax plan.
Just do a smaller tax cut
But while deficit triggers can’t fix the profound conceptual problems with the Senate GOP tax bill, there is something that could: Instead of cutting the corporate tax rate from 35 percent to 20 percent, cut it to some different number that is lower than 35 but higher than 20.
Mitt Romney’s 2012 campaign proposal was a corporate tax reform that would cut the rate to 25 percent, and congressional Republicans seemed perfectly happy with it. House Speaker Paul Ryan was even the VP nominee on that ticket. Ryan and Ways and Means Committee Chair Kevin Brady later hatched a conceptually ambitious scheme to replace the corporate income tax with a 20 percent destination-based cash flow tax. That was an intriguing idea, but it died almost immediately upon contact with legislative reality. The original sin of the GOP tax plan then became copying the 20 percent number over to an entirely different tax proposal.
If you plugged in a 25 percent rate rather than a 20 percent one, the whole plan would suddenly become much more affordable even with much less reliance on phaseout gimmicks. Business owners wouldn’t get as big a tax cut, but they’d still get a big tax cut, and there’d be no need to rely on potentially counterproductive triggers. The winners would simply have to agree to accept a smaller win.
Nov 28, 2017, 1:00pm EST