Homepage / Currency / Trump wants to reproduce Reagan's tax reform win, but he's missing all the key ingredients
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Currency

Trump wants to reproduce Reagan's tax reform win, but he's missing all the key ingredients

Tax reform is never easy, which is why it hasn’t happened since 1986. But it’s harder in 2017 for two fundamental reasons.

The political foundation for the current GOP effort is weaker than it was three decades ago. And so is the economic foundation.

In 1986, President Ronald Reagan governed with an approval rating of at least 60 percent, a Republican Senate and a Democratic House. He needed bipartisan support and got it, because proponents such as Democratic Sen. Bill Bradley and Republican Rep. Jack Kemp had paved the way with years of advocacy.

They produced genuine tax reform, designed to raise the same amount of money without widening budget deficits. It reflected broad consensus among economists that lower tax rates, applied to a broader tax base, would make the economy grow more efficiently.

The law they enacted also had guaranteed crowdpleasers for American voters. It cut taxes on individuals, while raising them an equivalent amount on corporations. It taxed laborers at lower rates than shareholders.

Today’s push by the Trump White House and GOP-controlled Congress enjoys none of those advantages. That helps explain why Goldman Sachs analysts put the chances that it will collapse at 1 in 3, “and recent developments lean slightly further in that direction.”

President Donald Trump suffers from sub-40 percent approval ratings. GOP leaders seek to pass their plan with only Republican votes, even as the party wages fierce internal battles. They don’t seek compromise with Democrats.

As Trump repeatedly proclaims, the GOP tax framework so far resembles a straightforward tax cut more than tax reform. It would slash government revenues just as millions of baby boomers enroll in Social Security and Medicare, which Trump vows not to cut, pointing to the need for more revenue.

A Tax Policy Center analysis shows it would actually raise taxes on individuals overall, while cutting them dramatically on businesses and the wealthiest Americans. It would tax individuals at a far higher top rate (35 percent) than corporations (20 percent).

That defies public opinion. A recent NBC News/Wall Street Journal poll shows solid majorities favoring higher taxes on corporations and the rich.

Republicans enjoy more public support for arguments about growth. In the NBC/WSJ poll, 54 percent say tax cuts would encourage corporations to expand and create jobs.

Yet the administration’s optimistic projections — on growth, deficits, and business investment — draw nothing close to consensus support among economists.

Top Trump advisor Kevin Hassett argues the plan would sustain a boost to economic growth of “much more than 1 percent.” That matches claims by Trump that he can produce annual growth of 3 percent or more, up from current 2 percent projections.

Other forecasters find that improbably rosy. Goldman Sachs, the former employer of Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, projects a growth boost of no more than 0.2 percent in the next two years, and less after that.

The Penn-Wharton forecasting model, directed by former George W. Bush administration economist Kent Smetters, projected that an earlier outline of the GOP plan would actually reduce long-term growth. That’s because of adverse effects from the higher deficits it would create.

Mnuchin insists tax cuts would stimulate sufficient growth to more than replace potential revenue losses — shrinking deficits rather than increasing them. That level of “dynamic scoring” conflicts with mainstream economists in both parties.

Columbia’s Glenn Hubbard and Harvard’s Greg Mankiw, both of whom advised the elder Bush, say growth can recoup 25 percent to 30 percent of individual rate cuts and 50 percent of corporate rate cuts. The Republican-led Senate’s planned budget resolution contemplates a tax cut that could increase the deficit by $1.5 trillion over 10 years.

The Tax Policy Center calculates that the top 1 percent of earners would receive 80 percent of all benefits from the GOP plan through provisions reducing the top rate, ending the alternative minimum tax and abolishing the estate tax, among others.

Cohn maintains that the wealthy won’t benefit at all.

That’s partly because the administration contends lower corporate taxes benefit workers most of all. Some Republican economists, such as Hubbard and Mankiw, agree that corporate taxes cost workers more in lost wages and jobs than corporate shareholders in lost profits.

But other economists dispute that view. Jane Gravelle of the Congressional Research Service recently concluded workers bear 40 percent or less of the corporate tax burden.

In 2012, career Treasury economists calculated that workers bear about a fifth of the burden. The Trump administration recently removed that analysis, which undercuts its argument, from the Treasury website.

Hassett contends provisions for repatriating corporate profits held overseas will benefit American workers by increasing domestic investment and wages. His argument is vulnerable on two counts.

One is current conditions. Companies already have plenty of domestically held cash and access to low-interest-rate borrowing. That casts doubt on whether sluggish corporate investment now has much to do with profits “stranded” overseas.

The other is recent history. A 2004 repatriation “holiday” increased payouts to shareholders rather than investment. At least one Bush administration veteran expects the same this time.

“In the short run, it would likely be more about accounting and profit-taking,” Smetters predicted.

He believes a well-designed repatriation plan could have big long-run benefits. But the current GOP proposal, he added, “does not create a real long-term plan.”

Economists ultimately concluded the 1986 tax reform made the economy more efficient, but had little effect on overall growth. Lawrence Summers, Treasury secretary under President Bill Clinton, says loopholes it closed helped subsequent 1991 and 1993 tax increases reduce budget deficits.

When Clinton sought the 1993 tax increase, Republicans warned it would kill jobs and tip the economy into recession. That did not happen.

Source: cnbc economy
Trump wants to reproduce Reagan's tax reform win, but he's missing all the key ingredients

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