Good morning.
After meeting with President Trump on Thursday, Dow CEO Andrew Liveris called this “the most pro-business administration since the Founding Fathers.” The next day, Trump told the Conservative Political Action Conference that he would transform the GOP into the “party of the American Worker.”
Can Trump’s GOP be both the party of business and of workers? In theory, the answer is yes—that is the ultimate promise of capitalism. And Trump has already achieved an impressive move in that direction. Using the prospect of tax and regulatory relief and the powers of his Twitter bully pulpit, he has convinced American businesses to shift their focus to creating jobs at home, rather than outsourcing them overseas.
But now comes the hard part. Repealing the Affordable Care Act threatens to impose considerable pain on the working class, who stand to lose their new health benefits. That’s the reason Republicans now face protests at town hall meetings.
And tax reform will be even more difficult. The President has promised to cut taxes for both business and the middle class—huzzahs all around. But how will he pay for that largesse? The New York Times highlighted the difficulties in a front page piece Saturday.
The leading “pay for” candidate is the House’s proposal for a border adjustment tax, which would raise taxes on imports. But that will be a heavy blow to Walmart shoppers—and they will have Walmart executives by their side. Other money raisers—further limiting the real estate tax deduction, limiting the high-end health plan tax deduction, limiting the state income tax deduction—all will cause sharp cries of pain from affected constituencies. About the only pro-business, pro-worker tax increase being talked about is the elimination of the carried interest capital gains tax break for private equity and hedge funds—a needed change, but one that raises a minuscule amount of money in the tax reform scheme of things.
Moreover, as veterans of the 1986 tax reform can tell you (for background, pardon the plug, please read Showdown at Gucci Gulch), beating back the special interests that fight for every tax break is hard work, and requires coalitions that cut across parties. But cross-party cooperation has become all but impossible in today’s Congress.
So how will this play out? It’s still too early to say for certain, but the general drift seems to be toward tax cuts that are paid for by 1) the temporary revenue that comes from a one-time return of repatriated earnings now parked overseas because of high tax rates, and 2) likely-to-be-exaggerated projections of growth that will result from the tax changes.
In that scenario, business gets the tax changes it wants, workers get to keep their benefits, and everyone wins—except, of course, the poor souls in the future who will have to pay for our profligate deficit financing.
