Friday, September 1, 2017

The Republican dilemma on taxes

As I keep writing, the Republicans won't do tax reform.  They will pass tax cuts.  Tax reform means simplifying the tax code.  The tax code is long and complicated because of deductions and loopholes that have been put into it, year after year, mostly as electoral ploys by legislators appealing to minor constituencies so that reelection-seeking legislators can "claim credit" for helping their constituents (see:  David Mayhew's Congress: The Electoral Connection).  As I have written before, there is a technocratic case for simplifying the code by eliminating those loopholes and reducing the tax rate to shift business expenditures away from exploitation of the tax code, for example.  But, that won't happen because tax reform is hard, and involves making tradeoffs.  Each closed loophole alienates a constituency.  An organized, frequently business-oriented constituency.  In other words, people that the current Republican Party won't be willing to alienate.  Tax reform won't happen.  They'll just cut taxes.  It's all they care about doing, and all that unites the party.

The dilemma is the constraint imposed by "the Byrd rule."  The Byrd rule limits the application of budget reconciliation rules in the Senate, which allows the majority to bypass the filibuster and do everything on a majority vote rather than the 60 vote threshold for cloture.  The Byrd rule requires that budget reconciliation bills either remain deficit-neutral (or reduce the deficit), or increase the deficit for no more than 10 years.  True tax reform would obviously meet this requirement.  It would be deficit-neutral.

Tax cuts?  If you are deep into Arthur Laffter territory, you can tell yourself you'll be fine, and if you are way over on that curve, like at the 95% tax rate territory, you probably will be, but... we're not.  So, Republicans can either pass some small tax cuts that are offset by whatever small spending cuts they can find and stomach, keeping in mind that the majority of spending is either defense, Social Security, Medicare, and bond payments, or they can pass some big tax cuts that expire in 10 years.

The last time they did tax cuts was in 2001.  They went for option B.

So, they'll go option B again, right?  Well...  Here's the thing.  Democrats could have clawed back a whole lot more of the 2001 tax cuts than they did.  Why?  The cuts were set to expire in January, 2011.  Democrats were in power in 2010.  They wanted to keep the "middle class" tax cuts (yeah, that fuckin' term...), but they were stupid, and waited until after the 2010 election to start negotiating with the Republicans on how to handle the expiring tax cuts rather than just doing it on their own when they had the power, thereby giving the GOP a lot of leverage.  The Dems decided to extend all cuts for two years, giving the GOP a total victory for two years, and then two years later, they went way higher than they wanted for the income that kept the Bush tax cuts.  They could have acted when they had more power and done whatever the hell they wanted on taxes, though.

If the GOP goes for big tax cuts that expire in 10 years, they are counting on Democrats to either not be in power in 10 years, or to make those same mistakes again.  Maybe they will.  Then again, maybe the GOP will prefer to lock in smaller cuts made permanent in a deficit-neutral bill.

Personally, I'd bet on big cuts.  There is no way to know who will be in power ten years later, and even if Democrats did have power ten years later, the chances of them doing the kinds of stupid things that they did in the 2009-10 session are pretty high.  That's just how the Democrats operate.  So, yes, it would be a gamble, but have you noticed the GOP playing it safe lately?

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