Wednesday, April 26, 2017

Trump Tax Plan - What Does It Mean? And Other News

Today's buzz is the pre-announcement of the Trump tax plan.  Let's call it "Candy for Everyone". Federal corporate rates for C Corps and S Corps alike (and other pass through entities) would be reduced to 15%.  Each percentage reduction in the corporate rate supposedly costs the Federal government $100 Billion in revenue over ten years.  This kind of chop is thus expected to create HUGE deficits for as far as the eye can see.

The Trump White House response to this is the Laffer Curve, namely the lower rates are paid for with growth.  So nothing to worry about.  Yup.

The presence of the BAT in this proposal is in dispute. The New York Times says "no", while CNBC says "yes" as a placeholder, whatever that means.  Actually, the placeholder concept is an acknowledgement that they will need to raise revenue to make this work.

So much of this makes no sense to me.  First of all, tax reductions on this scale must be matched not by reallocation of tax burden (the revenue loss is too massive to recoup simply by shifting burden from one group of taxpayers to another) but instead by spending cuts.  This Congress and today's American public is not prepared to ignore the deficit and risk ruining America's future to throw a really great party right now.  But no one seems prepared to cut spending or meaningfully reduce the size of government. The Freedom Caucus won't support a massive expansion of the deficit (or allow borrowings to support it), and many other more moderate Republicans will also oppose it as fiscal conservatives.  One wonders where Mick Mulvaney is on the plan.  Democrats will never support it.

Trump's gambit seems to be a form of bribery - make the tax reduction so ridiculously large that no one will oppose it.  Pure greed will create the necessary support, by this reasoning.  I cannot see this working, as nice as a massive tax reduction might be.  Such massive deficit generation is irresponsible and not called for at a time of peacetime high employment.

Second, the process to get a bill passed without Democrat support (a given, in my book) is via reconciliation.  The "candy" proposal seems particularly ill-suited to this approach, if not utterly impossible.

IF something like the Trump plan gets any traction, the need to find revenue will be overwhelming. No one apparently wants to face the music on entitlements so that means tax increases somewhere must be included to offset the tax reductions (this is reallocation, not a reduction in tax revenue).  I would like to think this is an impossible scenario but there is no indication yet that anyone plans to make it impossible.  So IF this happens, the BAT comes back to the table.  In this chess game, it again seems like checkmate for Ryan and Trump.  The Senate is still not likely to go along with the BAT. In the House, the recent opposition by Rep. Marsha Blackburn (of Freedom Caucus and Trump Transition Team fame) suggests that Ryan needs to anticipate a fatal challenge to 216 Republican votes for a BAT plan.

So what on Earth are Trump, Ryan and Brady thinking?  I would love to say "nothing" but no one knows.  This is just more Trump-era chaos in my book.  His zigzagging and belligerence with Canada this week is a harsh reminder of how unpredictable his policies are and the great difficulty in predicting his next move on . . . anything.

We will all have to stay tuned.

And in other BAT news, the House Ways and Means Tax Policy subcommittee hearing on the BAT scheduled for Thursday of this week has been postponed, perhaps to May 3rd.  In light of the Trump plan announcement scheduled for tomorrow, the timing and nature of the hearing may change yet again.

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