The Big Tax Questions Trump and Republicans Can't Answer

By Nick Timiraos and Richard Rubin Features Dow Jones Newswires

President Donald Trump and Republicans, hoping to advance a major tax overhaul through Congress, are laboring to answer two elementary questions about what kind of tax rewrite to champion: Are they seeking simple cuts in corporate and individual rates or a sweeping, comprehensive revamp of the entire tax code? And should any changes be temporary or permanent?

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Policy goals and procedural hurdles will shape the answers, and history offers different guideposts. President Ronald Reagan secured permanent cuts in 1981 and a broader overhaul in 1986, while President George W. Bush delivered temporary tax cuts -- most of which were later made permanent -- in 2001 and 2003. Nearly 100 days into Mr. Trump's presidency, it isn't clear which, if any, is Mr. Trump's model.

What he and Republicans deliver will have important implications for household income, corporate profits, budget deficits and economic growth.

Some analysts worry the process will be muddied because the broader goals haven't been clearly defined.

"How do you write a tax bill when these basic questions are unanswered? It's not possible," said Andy Laperriere, an analyst at research firm Cornerstone Macro LP. It is easy for Republicans to agree on tax cuts, he said, but much harder to figure out "how to make the numbers add up."

Treasury Secretary Steven Mnuchin said this week the White House would seek both the largest cuts ever and the most comprehensive reordering of the tax code but provided few specifics about how to get there.

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Administration officials also have tried to frame the effort as a big reduction in middle-class taxes. Still, they struggled Thursday to answer basic questions, including how much in taxes a family of four earning $70,000 would pay under the overhaul.

If tax-code changes are to be permanent, the Trump administration needs enough Democratic support in the Senate, where Republicans control 52 seats, to overcome the filibuster rule, which requires 60 votes. Alternately, it could advance a tax bill using a procedural tool that isn't subject to a filibuster, called reconciliation, but it can only be used if legislation doesn't add to deficits beyond a budget window that is typically 10 years.

On Wednesday, Mr. Mnuchin said the administration would prefer any changes to be permanent. But in a nod to the political challenges that loom, he added, "if we have them for 10 years, that's better than nothing."

Under that path, the changes could look more like the Bush tax cuts, which were set to expire after 2010. Congress ultimately made many of the provisions permanent, but a 35% tax rate on top earners lapsed after 2012 when it rose to 39.6%.

The comparison with the Bush tax cuts isn't perfect because the Trump administration is focused heavily on cutting corporate-tax rates and not just individual rates. Officials say reducing the corporate-tax rate from its current level of 35% will make U.S. businesses more competitive internationally and therefore more likely to boost investment and hiring.

To make corporate tax cuts permanent without Democrats supporting them, Republicans will need to make some difficult trade-offs to pay for them. But divisions exist even within the Republican party about which trade-offs to make. House Republicans, for example, want to include a new border adjustment to corporate taxes that would tax imports and exempt exports. It would raise $1 trillion to help fund a reduction in rates, but the White House is cool to the idea.

Top economic officials in the Trump administration concede the alternative -- temporary tax changes for businesses -- might be less desirable because they won't do much to alter investment patterns, a key prong of the administration's calculus that it can deliver sustained 3% economic growth.

"If it's a temporary proposal, will businesses and even individuals change their behavior in order to get you the economic growth?" asked White House budget chief Mick Mulvaney in an interview last week. "That's what we're going through right now."

A temporary cut in the corporate tax rate as short as three years might reduce government revenue enough to make it impossible to pass under current reconciliation rules, according to an analysis by the Joint Committee on Taxation, the official nonpartisan scorekeeper for tax legislation.

House Republican leaders favor a plan that is permanent and that seeks to bring in as much revenue as the current tax code does. A permanent plan "gives us the greatest growth for the greatest number of years," said Kevin Brady (R., Texas), chairman of the House Ways and Means Committee.

Corporate tax code changes that are temporary would be "worse than nothing," said Doug Holtz-Eakin, a conservative economist and former director of the Congressional Budget Office. His views echoed those of some GOP congressional aides. "A temporary [corporate] tax cut is not even a thing," he said.

The 1986 and 1981 Reagan models were bipartisan and thus more lasting. In the case of 1986, it included tough trade-offs that removed an array of deductions and tax shelters.

Historical illustrations highlight other potential hurdles. The 1986 overhaul, for example, took more than three years of work and began with the Reagan Treasury releasing a 500-page set of recommendations. GOP lawmakers on tax-writing committees have worked over the past few years to lay similar groundwork but haven't yet put pen to paper.

The 1981 cuts, meanwhile, led to such a large increase in the budget deficit that Congress partially rolled them back in 1982 and 1984.

--Janet Hook contributed to this article.

(END) Dow Jones Newswires

April 27, 2017 17:38 ET (21:38 GMT)