Update 185 — Ryan, GOP Tax Hopes
Still Spring Eternal as Summer Starts
This afternoon, Speaker Ryan delivered a widely anticipated speech on tax reform before the National Association of Manufacturers. Ryan maintained that 2017 is the year for comprehensive tax reform based on principles of simplification, territoriality, and permanence. He decried America’s relatively high statutory corporate rate, the top rate for “passthrough” businesses, and the distortions caused by the current U.S. international tax system.
Ryan’s themes and solutions today were all familiar GOP desiderata and rationales. The speech gives us a chance to reprise these briefly and consider the state of play for comprehensive tax reform before polls close in GA6. Fingers crossed…
Ryan’s Tax Policy Vision
Ryan specifically called for the elimination of the Estate Tax and the Alternative Minimum Tax (AMT), the slashing of the corporate rate, reduction of the top rate for non-corporate businesses (“passthroughs”), and the elimination of corporate inversions. To offset the cost of rate cuts, Ryan’s plan would end ”special interest carve outs and excessive deductions.” He did not specify provisions to be eliminated but indicated that incentives for home ownership, retirement savings, and charitable giving incentives would be retained.
Ryan made this speech amidst a cloud of uncertainty about GOP coordination across the legislative and executive branches. Reports have indicated Ryan and House Ways and Means Chair Brady realize the border adjustment tax may not be the cards. They have yet to give up on the BAT entirely, but may soon come to their senses.
Tax Reform vs. Tax Cuts
Despite some lip service for revenue neutral reform, simple deficit-increasing tax rate reductions are much more likely. For true tax reform, the GOP would need to offset tax cuts by eliminating deductions or otherwise broadening the tax base. GOP Senators seem keener on offsetting tax cuts with spending cuts, or in not offsetting them at all.
Absent Democratic votes, the Senate would need to pass tax changes through reconciliation, which can protect tax bills from being filibustered. Under reconciliation, per the Byrd Rule, legislation cannot increase the deficit outside of the budget window, typically 10 years. There has been discussion among the GOP about increasing this time window from 10 years to 20 or 30 years. This suggests the GOP is maneuvering to pass rate reductions by bypassing procedural norms. Pressure the business community is evidently mounting.
It is unclear how Speaker Ryan figures the elimination of deductions would make up for such dramatic rate cuts for the wealthy. Take the AMT: 5 million households — the vast majority earning over $200,000 annually — pay more each year under the AMT. Eliminating that measure would cut off a sizeable revenue source. Combined with cutting corporate rates and pass-through rates by 15-25 percent, these losses can not be offset by ending hitherto unspecified deductions.
After his speech, Ryan said in an interview on CNBC that tax reform is necessary to achieve three percent economic growth, over a percentage point higher than CBO’s baseline forecast. But almost no accredited economist would agree that tax reform would have that result.
Contrary to the White House’s trickle-down view that dramatic reductions would boost growth to three or four percent, studies uniformly predict tax reductions would have a negligible fiscal at best and must likely yield yuge deficits. Ryan’s bold growth assumptions in the absence of evidence beg the question: does the Speaker believe deficits matter?
The State/Local Deduction
Although not mentioned in his speech today, a notable part of Ryan’s tax proposal in the past was getting rid of state and local tax deductions. The Speaker reaffirmed this position on CNBC. The Trump administration issue on board with this idea.
In response, a bipartisan group of house lawmakers wrote a letter to Steve Mnuchin yesterday asking him to reconsider ending these deductions. Although the group was majority Democrat, there were a significant amount of Republican signees, including Leonard Lance, Tom MacArthur, Rodney Frelinghuysen, and Chris Smith of New Jersey signed and Peter King and Claudia Tenney of New York. New York and New Jersey have among the highest state tax rates (8.82 percent, even without New York City, and 8.97 percent).
The letter signals that this and perhaps other provisions of Ryan’s tax reform may be legislatively vulnerable.
The International Tax Regime
The GOP has long held that the US international tax regime discourages investment in American businesses and workers. Currently, the US taxes businesses on their worldwide income, but the U.S. tax on foreign-source income is deferred until the earnings are brought back to the United States, at which point the corporation pays the U.S. rate minus what it has paid in foreign taxes.
Paul Ryan supports a territorial tax system, under which the US would not tax U.S. multinationals on their non-U.S. earnings. Companies wouldn’t pay any additional tax on active income when moving money from overseas back into America. Trump, who argued during the campaign that US companies should be taxed at the same rate on both domestic and foreign income, now supports a territorial system as well.
He and Ryan believe this system would encourage investment in America and aid the American worker and point out that it is one of the only major developed countries that doesn’t already use this system. The main criticism of it is that it would further encourage U.S. companies to shift profits to low-tax countries. Some argue that countries should begin to move away from this type of system, because corporations in territorial systems have proven adept at shifting their profits to exploit differentials in tax rates.
A Look at the 8-Ball
Speaker Ryan said today he hopes to have a bill by the end of the year. Gary Cohn confirmed this when he told tech executives today that he did not expect a tax reform bill before September at the earliest. The White House is working with the Senate and Orrin Hatch in particular to achieve this goal.
Although chances of tax reform this year are much lower than usual given the level of legislative success in Washington thus far in 2017, the GOP has to try anyway. After all, tax reform is the lifeblood of the party. With its track record to date, the odds of comprehensive tax reform coming to fruition are not looking grand for the Grand ol’ Party.