Government & Politics

Trump's Tax Challenge

The GOP is facing the reality that lowering taxes must include spending cuts.

Lewis Morris · Feb. 3, 2017

President Donald Trump and congressional Republicans have sounded off in recent weeks with their thoughts on what tax reform will look like, but they’re having trouble finding common ground on some key issues.

Trump has referred to placing import tariffs to offset the revenue lost by lowering business and income taxes. House Republicans are wary of this idea, and with good reason. It could create a trade imbalance and damage the fragile economy just when things might be turning around.

The House Republicans’ plan, however, might not be much better. They’re toying with the idea of taxing imports more aggressively while exempting exports completely. At the same time, they’re calling for a 20% drop in the corporate tax rate, with the tax revenue lost by this rate cut to be made up by what is euphemistically called a border adjustment — the taxing of imported goods but not exported goods.

Trump says the border adjustment is too complicated; that it relies on a lot of variables all moving in the right direction, including foreign exchange rates, the strength of the dollar relative to other currencies, foreign market behavior, trade, and American production and consumer purchasing.

Which path to choose now becomes the big question. Both proposals have big “ifs” attached to them. And there is concern that either plan runs the risk of not boosting middle American workers, which is where the real sustained tax crunch remains.

Sen. Mike Lee (R-UT) has gone so far as to suggest that the corporate tax rate be wiped out completely. According to Lee, the money freed from the repeal of the corporate tax would stay in the country and be pushed back into the company or into workers’ pockets. Or some combination of the two.

Lee suggests that the lost revenue could be offset by categorizing capital gains as income and taxing it at the regular income tax rate, which would almost double the capital gains tax from its current 20%. He claims that “investors could still come out ahead, just not as much as workers will, and only if they invest in the United States [emphasis in original].”

“Thus, this tax reform would not advantage workers over investors,” said Lee. “It simply levels the playing field that globalization and current policy have tilted against them.”

Lee’s plan is well-intentioned, but it carries its own set of risks. He believes that the capital gains hike will have a favorable effect on investments and won’t force that money overseas. But that’s still a theory.

Veronique de Rugy has made perhaps the best point in this current debate over tax plans:

“Some Republicans have apparently accepted the Left’s premise that pro-growth tax cuts are something that must be ‘paid for’ through increases in other taxes instead of with spending cuts or by simply letting the economy grow and bring overall tax revenue up along with it.”

The problem with the GOP plans is that they don’t involve real cuts. The federal government for too long has neutralized the widespread economic benefits of a set of tax cuts because they’re always counterbalanced by new taxes or fees elsewhere. Cutting one tax and raising another isn’t tax reform; it’s a shell game. The outcome of any substantive tax cut is going to mean spending cuts. Which is why the liberals fight them so vigorously.

Whatever plan the GOP develops for tax reform, it will need to stimulate business and put more money in workers’ paychecks — both of which must happen to get the economy rolling.

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