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This is the crazy tax math Trump must master, fast

Bloomberg logo Bloomberg 9/14/2017 Sahil Kapur and Peter Coy

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President Trump vows to cut the corporate tax rate from 35 percent to 15 percent. Suppose Republicans could raise $2 trillion to pay for cuts (not an easy task). That would require hiking other taxes or ending popular deductions. And it can’t all go to corporate giants, so let’s say $1 trillion goes to individuals and $500 billion goes to business owners taxed as individuals. That leaves $500 billion, enough to slash the corporate rate all the way to … 30 percent.

The math makes clear that Trump’s 15 percent rate is impossible. But by putting out an extreme number, the president has shifted the terms of the debate, making everyone proposing smaller cuts look timid. At the same time, he’s reaching out to Democrats; on Sept. 12, he invited three key senators to dinner at the White House. It’s the art of the deal as Trump prepares to embark on a multicity tour to sell a tax plan that doesn’t exist yet.

The president, who once said taxes “are going to be so easy” in comparison to health care, probably won’t achieve fundamental tax reform in 2017. But he never did show much enthusiasm for making the painful compromises that true reform requires. What he might come away with is a package of voter-pleasing tax cuts that expand the federal deficit while requiring Congress to bend the budget-balancing rules it set for itself.

The tax fight, like the one over health care, will pit Republican against Republican. Some, like Trump, want big tax cuts; others, like Speaker of the House Paul Ryan, want any revenue reductions offset by increases to keep budget deficits from growing. Some stress cutting the corporate rate; others want to make sure that the middle class gets a big piece of the action. Some say tax reductions must be permanent; others don’t consider that essential. Some want to cut a deal with Democrats; others say the GOP should rely solely on its fragile majorities in the House and Senate. And the fight over which prized tax loopholes to limit is bound to get ugly.

Making matters worse, the government’s need for revenue is increasing. Emergency federal aid to hurricane victims in Texas and Florida tops the list of new priorities. Defense hawks want more money for the Pentagon. The quid pro quo could be more spending on nondefense items. “The deficit’s going to go up. The question is how much,” predicts Jim Dyer, a defense lobbyist at Podesta Group Inc. who was deputy assistant for legislative affairs for Presidents Ronald Reagan and George H.W. Bush.

Douglas Holtz-Eakin, a Republican economist and president of the American Action Forum, worries that Congress will end up just tinkering with the tax code instead of initiating an overhaul. “It needs to be disruptive change,” he says. “If it’s not, we’ll continue to do the same things, and we’ll get the same results.”

Like a dieter guarding against an eating binge, Congress over the years has imposed constraints on itself to make sure it doesn’t succumb to the urge to undertax, overspend, or both. Those rules are coming under strain as lawmakers cast around for a way to fulfill the sometimes unrealistic promises they’ve made. One key rule prohibits Congress from enacting laws that would increase the deficit after 10 years. (That’s why the George W. Bush tax cuts of 2001 were originally set to expire after 2010. As it happened, Congress made most of those permanent.) An easy fix, pushed by Senator Pat Toomey, a Pennsylvania Republican: Vote to extend that horizon to 25 or 30 years, which is tantamount to forever inside the Beltway.

Congress could also scrap or relax rules intended to control deficits within the 10-year window. With the House’s OK, the Senate could defang its pay-as-you-go rule—which states that any deficit-increasing measures must be matched with deficit-reducing measures—by including in the 2018 joint budget resolution a line that exempts tax legislation from the requirement.

Some lawmakers would rather not use such obvious budgetary shenanigans. There’s a move afoot to do something more subtle by changing how the Congressional Budget Office scores some tax cuts to make the resulting deficits essentially disappear. The concept is to switch from “current law” to “current policy” as the basis for evaluating how much a piece of legislation would cost. Using current law, the CBO is required to take Congress at its word that a temporary tax cut will expire on schedule, so making that temporary tax cut permanent increases the deficit. If Congress switches to the current policy standard, the CBO would be required to assume that whatever tax rates are in place now are the baseline. Under that approach, making a temporary tax cut permanent does not add to the deficit.

Not pretty, but the sleight of hand could have a powerful impact. Because there are temporary tax cuts now in effect, changing the rules could allow Congress to make about $440 billion in 10-year budget deficits disappear, estimates Harry Stein, director of fiscal policy at the Center for American Progress. Chief House tax writer Kevin Brady, a Texas Republican, has endorsed the idea.

That gambit still wouldn’t get Congress around a second pay-go provision that’s a law, not just a rule. And the law, from 2010, has teeth. It holds back funds for mandatory spending programs, such as Medicare, student loans, and farm aid, if the net effect of legislation enacted by Congress during a calendar year increases the deficit. But Congress could neutralize that one, too, by passing legislation before the end of 2017 that stops the sequester. Republicans could attach such a measure to must-pass legislation or simply dare Democrats to vote no, says Ed Lorenzen, senior adviser to the Committee for a Responsible Federal Budget. Not that he likes the idea. “It is very troubling” that Congress might change its own spending rules, he says. “It would be very irresponsible and contrary to any expressions of concern about the debt.”

Republicans may end up settling for a temporary cut in the corporate tax rate to 30 percent that they could describe as a starting point, says Henrietta Treyz, a former Senate tax staffer who’s spoken with Republican and Democratic aides about the prospect. They could couple that with an extension of several expiring tax breaks, expansion of the child and earned income tax credits, and potentially a cut in the payroll tax that could even be retroactive for 2017, she says. She says that package could cost $450 billion to $750 billion over a decade.

If Trump’s tax cuts do blow out the budget deficit, it might be awkward for Republicans who castigated President Obama for his red ink. But Republicans complain more about deficits when a Democrat is president, and their inability to cut spending hasn’t dimmed their ardor to cut taxes. At a breakfast in Bloomberg’s Washington offices, Ohio Republican Jim Jordan of the House’s conservative Freedom Caucus rejected the idea of making tax changes revenue-neutral, as Ryan wants. Said Jordan: “That’s Washington-speak for the tax burden stays the same and you just shift around who pays what.” 

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