TaxProf Blog

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

Thursday, December 28, 2017

Tax Reform’s Growth Whisperer

ToomeyWall Street Journal, Tax Reform’s Growth Whisperer:

President Trump signed tax reform into law Friday, but in late November it almost had a heart attack in committee. Sens. Ron Johnson of Wisconsin and Bob Corker of Tennessee were balking, the former over the details of business taxation and the latter over the deficit. The GOP has a bare 12-11 majority on the Senate Budget Committee, and Democrats were united in opposition, so a single Republican dissenter would have stalled the bill. But Messrs. Corker and Johnson voted aye, and it advanced.

Much of the behind-the-scenes credit for tax reform belongs to Sen. Pat Toomey of Pennsylvania, who as a member of both the Budget and Finance committees helped persuade a rotating cast of Republican critics. When the GOP celebrated its victory at the White House this week, Nevada’s Dean Heller mugged for the cameras toward the front. Mr. Toomey stood less conspicuously a row back. He’s the player who doesn’t dance in the end zone but stays up watching game film.

It was Mr. Toomey who laid the groundwork for tax reform by brokering a September budget deal that called for $1.5 trillion in tax cuts over the next 10 years. He had started to worry about tax reform months earlier, during the failed effort to repeal ObamaCare. He found himself “increasingly concerned that we are going to have a huge problem if we don’t sort of socialize, among Republican senators, the idea that it’s OK to have tax reform that will score as a net tax cut,” he tells me this week at his Capitol Hill office.

Mr. Toomey recalls that Majority Leader Mitch McConnell said, “Well, I think the two polar extremes in the conference are Pat Toomey, who is very bullish on the prospects of a growth feedback, and Bob Corker, who is more skeptical and very, very much a deficit hawk.” If they could agree, the rest of the caucus probably could, too. After some back-and-forth they settled on a net tax cut of $1.5 trillion over 10 years. The budget deal passed the Senate in October. That was crucial because the House budget was revenue neutral without room for a net tax cut. Mr. Toomey had worked with Speaker Paul Ryan and the House acceded to the Senate budget number.

The tax-reform debate marks the coming-out party for Mr. Toomey as the Senate’s leading intellectual force for growth economics, to the public and off camera with his fellow Senators. It’s a role once held by Texas’ Phil Gramm, whom Mr. Toomey cites as one lawmaker he admires. “We’ve got arguably the worst tax code in the world,” Mr. Toomey says. “It should be possible for us to make the kinds of reforms that would very plausibly generate the growth you need to offset lost revenue within reasonable parameters.” ...

The press and the left complained about the deficit and mocked Republicans for thinking tax cuts will “pay for themselves.” Many of these critics insist that a return to the U.S. historical norm of 3% annual growth is impossible—that “secular stagnation” means 2% growth as far as the eye can see.

What the deficit hawks miss, Mr. Toomey says, is how “tiny” the growth bump needs to be to offset the lost revenue. Here he gets a bit into the weeds. He explains that the revenue estimates from the Congressional Budget Office and Joint Committee on Taxation are based on the assumption that various popular tax breaks will expire as scheduled, even though Congress invariably extends them. That accounts for more than $400 billion of the $1.5 trillion to be added to the deficit. Thus the actual tax cut in the new law is closer to $1 trillion over a decade. That “sounds like a ginormous number,” Mr. Toomey allows—but compare it to the $43 trillion the Congressional Budget Office expects the Treasury to collect over the next decade.

"You have to ask yourself a simple question,” he says, “and it’s just arithmetic: How much extra GDP growth does it take, such that the taxes applied to that bigger economy fully offset that lost trillion dollars?” Even invoking the weak assumptions of the Washington budget gnomes, he says the range is 0.2 to 0.4 percentage point, “per year, on average, for 10 years.” ...

What about the Democrats? They might have saved progressive priorities like the deduction for state and local taxes, which largely serves as a subsidy for blue states—if they had showed up to negotiate. (The new law limits the SALT deduction to $10,000.)

Some 45 Senate Democrats earlier this year sent a letter to Republicans offering to come to come to the table. It was mere pretense, Mr. Toomey says: “The conditions were obviously designed to take them out of the room.” One of the demands was “veto power” for Democrats. “We have to reserve to them the right to kill it by filibuster.” Another: “There can be no net tax relief for the people who pay 40% of all of the taxes”—namely the top 1% of American taxpayers.

Democrats might respond that Republicans preferred to pass the bill on a party-line vote. Mr. Toomey counters that Republicans “would have absolutely had that conversation,” because with “Democrats joining us, we wouldn’t have had all of these constraints” from the Senate’s arcane “reconciliation” procedure, which allowed the GOP to pass the bill with a simple majority. Among those restraints is the stipulation that a bill can lose revenue in the first decade, but not a penny in the years after—“an absurd requirement,” he says, and a distinction with no relation to good policy.

More to the point, he says there are “no Bill Bradleys left in the Senate,” referring to the New Jersey Democrat who helped pass Ronald Reagan’s bipartisan tax reform in 1986. The left rolled out the stock response that the GOP bill is a windfall for the wealthy, even as the initial Senate bill lowered the top rate on individuals a tiny 1.1 percentage points. The House left the top rate untouched at 39.6% and included a “bubble bracket” of 45.6% for some high earners.

That backfired in at least one way. Mr. Toomey says that the prepackaged liberal attacks “absolutely” made it easier to lower the top rate on individuals to 37% when the House and Senate reconciled their bills in conference. That’s good news for high-income earners in high-tax states like New York and California, who will be hardest hit by the limits on deductibility for state and local taxes.

“My theory is that when a Republican gets up in the morning and pours himself a cup of coffee, the Democrats accuse him of tax cuts for the rich,” Mr. Toomey says. “That’s all it takes. It is absolutely going to happen, every time, no matter what. So do the right thing and explain what you’ve done.”

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