President Trump continues to tease that a big announcement on tax reform is imminent. “Big TAX REFORM AND TAX REDUCTION will be announced this week” he tweeted Saturday morning. Separate reports indicate the Treasury Department is still far from a detailed plan, but an announcement this week could provide a general outline.
Tax reform, of course, is one of the two big drivers of business optimism sparked by Trump’s election—the other being deregulation. The election of Republican majorities in both the House and Senate meant Trump came into office with the best opportunity to pass pro-business tax legislation in more than a decade.
But as the year drags on, the prospects are dwindling. The first problem is Trump has shown no ability to win Democratic votes in Congress—and his continued refusal to release his tax return has exacerbated partisan opposition. That means a tax bill likely has to pass on a party-line vote, making it increasingly complicated.
Below are the three basic scenarios for tax reform:
1) A 1986 Reagan-style tax reform. The problem with this option is that in addition to cutting tax rates, you have to offset the revenue loss. And getting solid Republican support for any of the big “offset” proposals—creating a new border adjustment tax; eliminating deductions for business interest, state and local taxes, or charitable deductions; or taking a flyer on a carbon tax or value-added tax—seems highly unlikely.
2) A 1981 Reagan-style tax cut. Note the words “tax reduction” in Trump’s tweet. Treasury Secretary Mnuchin said in an interview Saturday that his department is now looking for reforms “that will pay for themselves with growth”—a clear sign that it is losing the battle to find offsets. Tax cuts certainly can increase growth, but only in limited cases will they do so enough to pay for themselves. Whether the administration can get the congressional Joint Committee on Taxation to agree to such a plan, or avoid making its tax cut temporary to meet the requirements of the budget act, is far from clear.
3) A modest repatriation/infrastructure tax plan. A temporary tax cut on repatriated earnings may be the one tax cut that would actually pay for itself—since right now companies have some $2 trillion squirreled away overseas that they aren’t paying any U.S. taxes on. If tied to infrastructure spending, it could even win some Democratic support.
I continue to bet option 3 is the most likely to emerge from this process, although I suspect any announcement this week will sound more like option 2. Option 1 is probably off the table, unless the President is willing to take a bold new tack to change the political dynamic—perhaps by releasing his tax return, or by accepting a limit on interest tax reductions that would hurt his real estate business.