Make or Break: Republican Tax Reform

Brandon Colligan, Pushing Forward

There is little doubt that the American tax system is in need of serious reform. The U.S government is losing out on over $1 trillion in tax revenues abroad. Regaining that lost revenue is surprisingly an area of sustained bipartisanship in Congress. This might be the only thing that our Representatives, specifically Republicans, can agree on in Congress. Taking on the biggest tax reform effort since the 1980’s, Republicans are doubling down on their efforts to pass a tax reform bill that will affect practically every private citizen in the nation. The implications would be considerable, particularly for American businesses. It could prove to be costly, not only for taxpayers, but also for the political prospects of the majority party.

While the Congressional tax reform bill follows traditional Republican orthodoxy by slashing taxes for corporations and the wealthy, President Trump and Republican lawmakers have been heralding their bill as a win-win for hardworking Americans. In reality, this is a weak political talking point at best. According to a report published by the Congressional Joint Committee on Taxation, the tax bill would raise taxes on middle-class Americans over the next decade while dramatically lowering taxes for the wealthy. This report gives the general public increased reason to be skeptical of such a bill, particularly after failed attempts by the GOP to repeal the Affordable Care Act (ACA). The bad news for Republicans continues as public pressure mounts, incumbents withdraw, and their governing legitimacy crumbles. This may be the last opportunity for the governing majority to pass major legislation before their shareholders, and the general public, lose their patience waiting for a substantive policy change.

Tax reform began with mixed approval, but has steadily lost steam as Donald Trump’s immensely low approval ratings are tied to the bill. Even with declining approval there was probably enough support in both houses of Congress to pass it. That was until news broke that the Senate version would include a provision to repeal the individual mandate of the ACA. Mixing in the politics of Obamacare with tax reform seems unwise given the numerous failures by the Republican-led Congress to repeal the ACA. Considering the mediocre support the tax bill began with, bringing in the ACA repeal (which was politically unpopular and ultimately unsuccessful) could prove to be tactically shortsighted. This element of the bill wasn’t present in the House version, and was probably a factor in why it passed on Friday. There are increased signs that the Senate version will face greater resistance. The distribution of tax benefits, healthcare approval, along with the broader electoral consequences of the bill are all major concerns for Senate Republicans.

The window of opportunity to pass tax reform is small considering the falling public opinion of incumbent Republicans as we near the 2018 midterm elections. This puts pressure on the GOP which is increasingly desperate to pass a (any) major reform to tout during election season. Many Congressional Republicans are doubling down their efforts for reelection or are resigning altogether. Not only is public approval of the GOP in decline, but its own donors are becoming extremely frustrated with inaction. The lack of a major legislative achievement by the GOP, particularly when it has majority in both houses of Congress and occupies the White House, is not helping them appease their donor base. To add insult to injury, many major Republican shareholders are increasingly concerned and are applying pressure to lawmakers in response. The business community also has a naturally vested interest in reform. The overall satisfaction with the current proposal has been generally mixed. While certain interest groups are satisfied with a big deduction in the corporate tax rate, others are dissatisfied by the elimination of certain deductions. This contention within the greater business community only adds to the risk of failing to pass adequate reform poses to Republicans. This seems to be a make-or-break moment for a party that is looking for a major legislative achievement following the election of Donald Trump.

The tax reform bill has been falsely compared to that of the Tax Reform Act of 1986 passed during the Reagan administration. Those that drafted the 1986 package should be disappointed by the current attempt. This bill only temporarily stops tax increases on middle earners while slashing taxes for corporations permanently. This is due mainly to the Family Flex Credit which is proposed in the reform package. The family credit would expire after five years and will ultimately raise taxes on middle-income earners in a decade. At odds with the talking points of Republicans, it may ultimately lead to the failure of the bill. The Senate’s willingness to tie an already difficult-to-market tax reform package to the individual mandate of Obamacare may prove to be a significant political miscalculation. I wrote about this during the Affordable Care Act repeal effort, and the small but significant details that lead to resistance during the repeal process. The same may remain true when passing such a consequential tax bill. While Congressional Republicans share a similar ideology on lowering taxes on corporations, they also disagree on which exemptions should remain. Small differences in opinion could disrupt the already fragile amount of votes needed to pass the bill.

Quality and simplification rarely go hand in hand, particularly in major reform efforts. Seemingly wanting both, the Republican Party may end up chasing two rabbits and catching neither. While a well-intentioned effort to reform the American tax system is needed, the current proposal leaves some beneficiaries with too little and the vast majority of taxpayers by the wayside. The debate will continue in the Senate, where they may determine the fate of the American tax system if the House were to pass their version of the bill. Should the GOP decide to ignore the flaws of their proposed reform package, the political credibility of the Republican Party may ultimately see a deduction in upcoming elections.

 

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