TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, January 6, 2017

Kysar:  Republicans’ Dangerous Tax Reform Plan

Slate op-ed:   Republicans’ Dangerous Tax Reform Plan, by Rebecca Kysar (Brooklyn):

Fundamental tax reform has always been a bipartisan undertaking. Until now.

All eyes are on Congress this week, as its Republican majorities seek to make good on long-standing promises to repeal the Affordable Care Act. They may finally get the job done, using a contentious legislative tool, known as reconciliation—the same tool the Obama administration used to pass elements of the law. Less discussed is the Republican plan to use reconciliation to overhaul the tax code as well, which would allow the party to pass its sweeping tax reforms without a single Democratic vote. Unlike in the health care reform context, however, the move would be unprecedented. It would also produce extreme and unstable tax policy.

Reconciliation allows certain budget-related legislation to circumvent the filibuster, which Democrats, despite their minority, could otherwise use—or threaten to use—in order to exert some control over Republican tax reform measures. Reconciliation was conceived in the Budget Act of 1974 as an obscure device to help balance the budget, but it has since morphed into a powerful political weapon. Republicans are eager to brandish it now that a presidential veto does not stand in their way.

In June, House Republicans released an ambitious tax reform blueprint, which shares many goals with the proposal Donald Trump issued as a candidate. The blueprint includes long-desired priorities for conservative tax reformers: deep rate reductions, broadening the tax base by eliminating special tax benefits, business tax reform, and repeal of the estate tax and the alternative minimum tax. Reconciliation would be a quick means to enact this plan, or something similar, without having to address legitimate objections from across the aisle.

Reconciliation has been used in the past to enact simple changes in the tax code, but it has never been used for complex tax reform. In fact, the past three tax reform acts were passed with wide bipartisan support. During the Nixon years, tax reform drew upon proposals from the prior, Democratic Treasury Department. Ford-era tax reform was a partnership between the Republican administration and a Democratic Congress. And the Tax Reform Act of 1986 occurred during an era of divided government through bipartisan compromise.

Republicans will contend that reconciliation is appropriate in an era of heightened partisanship because it functions as a necessary release valve for the pressure of Senate supermajority requirements. In reality, however, a rare consensus has formed when it comes to tax reform. Both parties agree that corporate tax rates are too high, foreign income too easily escapes taxation, and there are too many special breaks for both individuals and businesses. The parties may be closer on tax issues in 2017 than at any other time in recent memory. A bipartisan bill is not only possible but preferable to produce comprehensive reform.

As it stands, however, the House blueprint contains dangerous positions. The plan awards three-quarters of its tax cuts to earners in the top 1 percent. The repeal of the estate tax and the reduction of rates for the wealthy, in particular, would serve to exacerbate inequality. Even factoring in favorable macroeconomic effects, the plan would also add trillions to the country’s debt, creating an unsustainable fiscal chasm. ...

Reconciliation destabilizes tax policy in particular because its rules of process bar increases to the deficit beyond the 10-year budget window. Given the enormous costs of the House blueprint, Republicans can sunset the revenue-losing tax cuts before the 10 years are up to get around this rule, a tactic employed to pass the Bush tax cuts and again likely to create uncertainty and instability. Republicans may attempt to avoid the sunset problem by relying on dynamic scores, which incorporate an estimated effect on the overall economy—thereby lowering the impact on deficits. This has historically been a controversial practice, as economic feedback is difficult to predict with accuracy. And even under dynamic scoring, the current GOP proposals are so costly that they would still likely require sunset provisions in order to utilize reconciliation.

It is not realistic to expect the tax code to be set in stone. But the pillars of tax reform should be stable enough to form the basis of long-term investment and growth. Radical, partisan tax reform will prove short-lived and ineffective. Reform that gives the lion’s share of its benefits to the wealthy and adds trillions to the debt runs the risk of exacerbating inequality within and between generations, perhaps alienating Trump voters who elevated him to the White House based on his populist rhetoric. Tax reform jammed through using reconciliation may not only fail to achieve Republican policymakers’ goals. It may ultimately leave them without a job.

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The main objections seem to be that a lot of the benefit goes to higher taxpayers, and also the procedural question. But tax cuts nearly always benefit high taxpayers, and Democrats have used the same procedural moves. Is this really worse, or is it just Trump?

Posted by: mike livingston | Jan 6, 2017 7:04:28 AM

I'm old enough to remember when enacting major tax changes without one vote from the other party was a good thing. What did the "R" stand for in OBRA-93? I forget...

Is it OK to use reconciliation to reverse a major tax reform, just not to enact one? Or is it like the filibuster: approved for use only by one party?

Posted by: AMTbuff | Jan 6, 2017 7:21:43 AM

This: "Reconciliation destabilizes tax policy in particular because its rules of process bar increases to the deficit beyond the 10-year budget window"' is not true. The window can be set to other lengths. In fact, quite recently we operated under a 5 year convention. We could do 20 or 50 if we wished.

Posted by: TheTurk | Jan 6, 2017 7:39:20 AM