The Politics Of Tax Reform Are Driving Republicans, Not The Policy

Just how badly does Corporate America need a tax cut right now?

WASHINGTON ― Republicans on Capitol Hill are desperate to pass tax reform. But are GOP lawmakers mainly motivated by the desire to provide tax relief, or fear they’ll get thrown out of Congress if they don’t?

With President Donald Trump’s approval ratings at historic lows, Republicans want to have something ― anything ― to point to come next November. And having already failed to repeal and replace Obamacare, GOP lawmakers seem to think it’s a political necessity that they provide tax cuts.

“Our base is expecting us to get this done. We promised we’d get it done,” Rep. Chris Collins (R-N.Y.) told HuffPost on Wednesday, noting that his party “didn’t deliver” on health care.

“This is critical for us maintaining our majorities,” Collins said, echoing similar recent statements by other Republicans, fundraisers, pundits, rich guys and House Minority Leader Nancy Pelosi (D-Calif.).

At this point, the political need for tax cuts may have have superseded the ostensible policy need. When Republicans assumed control of both Congress and the White House this year, they said acting on taxes would boost a sluggish economy.

“I don’t think we can get 3 percent growth without tax reform,” House Speaker Paul Ryan (R-Wis.) said in July. “That is why this is so important.”

But the Commerce Department announced on Friday that the economy has grown at a 3 percent annual rate for the past two quarters. White House budget director Mick Mulvaney has made it clear that the administration’s goal is sustained 3 percent growth, not just a couple of quarters (gross domestic product has averaged 2.2 percent since the Great Recession ended in 2009.)

Still, other economic data suggest the tax code isn’t exactly strangling businesses. Earlier this month the Dow Jones Industrial Average, a stock market index, closed above 23,000 for the first time in its history. And the unemployment rate in September fell to 4.2 percent, the lowest in 17 years.

White House Spokeswoman Sarah Huckabee Sanders suggested Friday that the good economic news would only continue so long as tax reform happens.

“America can continue this momentum if Congress adopts our framework for major tax cuts and other key agenda items that will allow Americans to keep more of their money, make our businesses more competitive, and build an economy that works better for everyone,” she said.

Republicans also argue that the good economic news itself is caused in part by business leaders and investors anticipating a huge tax cut.

“The business community’s expecting this,” Collins said. “If we don’t get this done we’re going to see the market react.”

The core of the Republican tax plan, which they are formally unveiling on Thursday, is a sharp reduction in taxes on corporations, small businesses and high-income individuals. In an analysis of a summary of the plan released in September, the nonpartisan Tax Policy Center said the various business provisions would cost $2.6 trillion in lost revenue over 10 years.

The September framework partially offset that lost revenue with individual income tax reforms that the TPC estimated would raise $471 billion over that time ― potentially from tax increases on a significant number of middle class households, which undercut Republican talking points about cutting taxes for the middle class and has made some GOP lawmakers antsy about the plan.

“This is critical for us maintaining our majorities.”

- Rep. Chris Collins (R-N.Y.)

In their rush to get a “legislative win” this year, the Republicans in charge of the legislation haven’t yet figured out how to get their whole conference on board. Still, even hesitant members brush off any suggestion that maybe corporate America isn’t starving for a tax break right now.

Rep. Tom MacArthur (R-N.J.), who has so far withheld his support from the tax plan over its proposed limit to the tax deduction for state and local taxes, pointed to the slow recovery from the Great Recession as a reason not to be complacent about economic growth.

“Sure, it’s been great that we’ve had two quarters of 3 percent-plus growth but we just finished eight years where we didn’t break 1.8 percent economic growth,” MacArthur said. “So to keep it moving we’ve got to think about how to get businesses and people investing more of their money and doing their own spending, and not government.”

“You can’t just take the stock market in a one-year vacuum or two-year vacuum,” Rep. Jim Renacci (R-Ohio), a member of the tax-writing Ways and Means Committee, told HuffPost.

“This is a great time for all ships to rise,” another Ways and Means member, Rep. Jackie Walorski (R-Ind.), said.

The main argument that Trump and other Republicans have made in favor of lower tax rates for businesses is that the U.S. has higher statutory tax rates than other countries, making it less competitive. Although the U.S. does have one of the highest nominal rates, thanks to deductions most companies pay a much lower effective rate.

The Congressional Research Service in 2014 analyzed data from the Organization for Economic Cooperation and Development and found that the effective rate is comparable what companies pay in other developed countries. The CRS estimated that a lower corporate tax rate would boost output by less than 0.2 percent, and not on a continuous basis.

Most economists consider 3 percent growth to be a farfetched goal in the long-term thanks in large part to an aging workforce. The Congressional Budget Office, for instance, has projected that annual growth will sag beneath 2 percent over the next 10 years. And there isn’t a clear historical relationship between tax cuts and economic growth, despite Republican claims otherwise.

Cutting the high statutory corporate tax rate would be good for competitiveness and growth, said Marc Goldwein, a policy expert with the conservative Committee for a Responsible Federal Budget. But adding an extra trillion dollars to the national debt, as Republicans have indicated they’re willing to do, would be unhelpful over the long term, he said. (The Committee for a Responsible Federal Budget does not endorse massive budget deficits.)

“There’s no scenario where the tax plan by itself is getting us a percentage point of growth a year,” Goldwein said.

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