Fecteau: Will Trump’s Tax Reform Plan be Another Epic Fail?
Wednesday, March 29, 2017
Even though Republicans control Congress, their health-care bill could not amass enough support to become law, and House Speaker Paul Ryan pulled it before there could be an embarrassing repudiation on the house floor. This was a staggering defeat, and an epic fail for the Republican Party. Trump now says he will focus on tax reform (at least at this moment), but faces significant obstacles.
Trump’s modus operandi in the private sector was simply to use intimidation and strong-arm tactics to make deals, but that is not how the game is played in Washington D.C. Congress is a co-equal branch of government, and if it wants to block the President, Trump’s threats are meaningless. Trump told wavering Republican to support his health care reform or there will be dire consequences. That threat was ignored.
Trump tried to blame Democrats for this health care defeat, but the reality is much more complex. Trump didn’t have the mandate his predecessor had. Trump didn’t even win the popular vote, nor did the GOP speak with one cogent voice. There are many voices in their party, including unbending ideologues that merely dubbed his proposal ObamaCare lite. Those hardliners, who are mostly concentrated in the Freedom Caucus, have now shown they are willing to stand up to the President.
Even past successes show maintaining those reforms will be difficult. The most significant tax reform was introduced in 1986 by President Ronald Reagan. This was lauded as a victory for tax reform advocates, a simplified, easy to understand tax code. It lowered tax rates, but also eliminated loopholes to pay for those rates. Reagan worked with both Republicans and Democrats to get this historic bill signed into law. This was considered a scarce moment of bipartisan cooperation that seems almost impossible today.
However, this was merely a short-term, rare two-party victory. This is the political equivalent of calling the maiden voyage of the Titanic a success story. Even after Reagan’s tax reform, our tax system became ever more byzantine with the pervasive influence of lobbyists, and special and corporate interests. These respective interests carved special perks in the tax code far more generous than even before the tax reform legislation. One example is what is known as tax inversion where companies simply relocated overseas through mergers, avoiding taxes in the process.
This does not bode well for Trump’s tax reform plan. The complexity of the tax code already favors the haves over the have-nots. Take for instance, the corporate tax rate, critics properly point out that the statutory corporate is highest in the world – correct. But the average effective corporate tax rate drops considerably, relatively insignificant compared to the global average. Also, some companies such as GE received billions in refunds. For all the talk of a simplified tax system, the status quo likes the system the way it is now. In fact, the average effective corporate tax rate is far more competitive compared to other tax rates in the world.
Political reality is catching up with President Trump. His failed health care reform efforts are simply a precursor to his failure to pass substantive tax reform. Trump considers himself a skilled negotiator, but even he is coming to understand our government isn’t a business, and there are intractable influences that make change more difficult to implement; no matter the skill of the negotiator.
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