The Swamp Will See You Now

Why Trump’s at­tempt to change the tax code may wind up drown­ing in par­ti­san muck

Newsweek - - NEWS - BY MATTHEW COOPER @mat­tiz­coop

IT WAS A rare mo­ment of op­ti­mism in Wash­ing­ton—and one that both par­ties could en­joy.

On a crisp fall day in 1986, Pres­i­dent Ron­ald Rea­gan sat at a desk on a stage on the White House’s South Lawn and signed a his­toric bill that changed the Amer­i­can tax code. Among its big­gest back­ers: New Jersey Se­na­tor Bill Bradley, a Demo­crat, and New York Rep­re­sen­ta­tive Jack Kemp, a Repub­li­can. Re­mark­ably, the bi­par­ti­san law ac­com­plished what law­mak­ers on the left and right had long ad­vo­cated—elim­i­nat­ing crazy de­duc­tions and us­ing that money to lower tax rates. “Mil­lions of work­ing poor will be dropped from the tax rolls al­to­gether,” Rea­gan said. “We’re go­ing to make it eco­nom­i­cal to raise chil­dren again. Flat­ter rates will mean more re­ward for that ex­tra ef­fort, and van­ish­ing loop­holes and a min­i­mum tax will mean that ev­ery­body and ev­ery cor­po­ra­tion pay their fair share.”

More than 30 years later, Repub­li­cans and Democrats are try­ing to re­vive that bi­par­ti­san spirit, and some are op­ti­mistic—at least pub­licly— that a sweeping tax bill is pos­si­ble. “It is time to un­leash the full po­ten­tial of the Amer­i­can econ­omy by cre­at­ing a tax code that ac­tu­ally works for the mid­dle class,” says House Speaker Paul Ryan. Trea­sury Sec­re­tary Steve Mnuchin agrees: “This is about cre­at­ing a fair tax sys­tem that’s good for the av­er­age, mid­dle-class per­son.” Ear­lier this summer, dozens of Demo­cratic sen­a­tors of­fered to work with the GOP on a tax bill, pro­vided it didn’t hurt the mid­dle class.

Now for re­al­ity: The White House’s plan to change the Amer­i­can tax sys­tem will likely wind up like the GOP’S at­tempt to re­peal and re­place Oba­macare—a par­ti­san mess in which lit­tle or noth­ing gets done. If Pres­i­dent Don­ald Trump re­ally wants to change the tax sys­tem in any mean­ing­ful way, he’ll have to dive into the swamp­i­est part of the swamp: the place where special in­ter­ests guard their bot­tom lines.

The Trump team is prob­a­bly aware of what it’s up against, but that doesn’t make it any eas­ier. Mnuchin, for in­stance, says he’s de­ter­mined to

re­peal the fed­eral de­duc­tion for state and lo­cal in­come taxes. More than 88 per­cent of it goes to earners mak­ing over $100,000. (Mnuchin, who made over $1 bil­lion on Wall Street, has joked that his friends in New York and Connecticut will get hit the hard­est.) That’s over­stat­ing things, but this is the sixth-largest loop­hole, ac­cord­ing to the non­par­ti­san Tax Foun­da­tion; it costs the fed­eral gov­ern­ment nearly $100 bil­lion ev­ery year, which makes it a prime tar­get for a cut.

But leg­is­la­tors from those high-state-in­cometax states, not to men­tion their con­stituents, are go­ing to fight such a move. Al­ready, 70 House mem­bers have signed a let­ter to Mnuchin urg­ing him to leave it alone. Other big tax breaks likely to be tar­geted are re­tire­ment plans like 401(k) s, which run close to $200 bil­lion an­nu­ally. But these de­duc­tions have their back­ers too.

Tak­ing on special in­ter­ests will be even harder for the pres­i­dent. The tax code of­fers count­less breaks for every­thing from small in­surance com­pa­nies to teacher ex­penses. Pretty much ev­ery item must be scru­ti­nized if the White House hopes to slash rates. And these special in­ter­ests will fight back. The ethanol in­dus­try is gear­ing up to pro­tect its fa­vor­able treat­ment in the tax code. Na­tive Amer­i­can tribes are work­ing hard to make sure they pre­serve their ex­emp­tion from cer­tain kinds of fed­eral tax­a­tion. Many oth­ers are do­ing the same.

The big prob­lem is the numbers. The pres­i­dent wants to get the cor­po­rate in­come tax rate down to 15 per­cent from its cur­rent rate of 35, which, on its face, is among the high­est in the world. But do­ing that is in­cred­i­bly ex­pen­sive. Cut­ting rates to 15 per­cent would in­crease the fed­eral deficit by more than $2 tril­lion over a decade. That’s a lot of special in­ter­est de­duc­tions that would have to be cut. If Trump is go­ing to lower rates, he’ll at least have to take on some pop­u­lar items like the 401(k) loop­hole—just as law­mak­ers did in 1986. And even Trump’s al­lies in Congress have ques­tioned whether the cor­po­rate tax rate could fall to even 25 per­cent with­out dra­mat­i­cally ex­pand­ing the deficit.

Com­pli­cat­ing mat­ters is that Democrats in­sist that no mid­dle-class vot­ers get squeezed. They’ve also said any tax plan can’t re­duce or in­crease the over­all amount of tax rev­enue the fed­eral gov­ern­ment takes in. Both of those goals will be dif­fi­cult to achieve, given how the mid­dle class ben­e­fits from the tax breaks with­out even know­ing it. One of the largest give­aways is the ex­emp­tion of em­ployer con­tri­bu­tions to health in­surance. You don’t get taxed on your boss’s part of the bill, even though it’s essen­tially in­come by an­other name. That costs the gov­ern­ment $260 bil­lion an­nu­ally.

To Trump’s cha­grin, con­gres­sional lead­ers have al­ready scut­tled one way to po­ten­tially in­crease rev­enue. As late as July, law­mak­ers were con­sid­er­ing a bor­der ad­just­ment tax on goods man­u­fac­tured abroad, re­gard­less of whether they were made by an Amer­i­can com­pany. But con­gres­sional Repub­li­cans and the Trump ad­min­is­tra­tion couldn’t agree on the terms. Nix­ing this kind of tax is a win for the con­ser­va­tive bil­lion­aires Charles and David Koch (sev­eral of the con­ser­va­tive groups they fund fought it). It’s also a blow to Trump’s cam­paign prom­ise to slap tar­iffs on goods made abroad.

An­other big prob­lem for Trump is that he’s put so lit­tle work into de­vel­op­ing a plan. Part of the rea­son the 1986 bill suc­ceeded is be­cause the Trea­sury Depart­ment un­der Sec­re­taries James Baker and Don­ald Re­gan came up with de­tailed pro­pos­als that helped speed the process along. The Trump ad­min­is­tra­tion, how­ever, has been mired in chaos and con­tro­versy. This past spring, Trump sur­prised his eco­nomic team by say­ing he was go­ing to un­veil a tax plan very soon. Mnuchin and other top of­fi­cials scram­bled and then put out a laugh­ably vague state­ment that in­cluded things like “elim­i­nate tar­geted tax breaks that mainly ben­e­fit the wealth­i­est tax­pay­ers.” Call­ing for vague cuts with­out know­ing how to pay for them is like say­ing you’re go­ing to lose weight with­out diet and ex­er­cise.

To be fair, there are a few rea­sons for op­ti­mism. Plenty of lob­by­ing groups want to change the tax code. Amer­i­cans for Pros­per­ity, the Koch

CONGRESS WASN’T ALL HUGS AND SMOOCHES IN ’86, BUT IT WAS A MUCH LESS DI­VIDED PLACE.

broth­ers–backed group, has an elab­o­rate (and ex­pen­sive) plan for drum­ming up sup­port for a tax over­haul, in­clud­ing buy­ing tele­vi­sion ads in the home states and districts of Se­nate and House mem­bers who might be wa­ver­ing. It kicked off its cam­paign at an Au­gust 2 event at the New­seum in Wash­ing­ton. Mean­while, the Amer­i­can Ac­tion Net­work, a Repub­li­can-lean­ing group, is talk­ing about spend­ing $20 mil­lion to get a big tax bill passed. And main­stream busi­ness groups like the Cham­ber of Com­merce and the Busi­ness Round­table are push­ing es­pe­cially hard to lower the cor­po­rate rate, some­thing many Democrats fa­vor too.

Yet to get a tax plan through com­mit­tees and the House and Se­nate this fall, Congress must first re­solve a con­tentious bud­get battle. And that’s go­ing to be a par­ti­san mess. The fed­eral gov­ern­ment will need to raise the debt ceil­ing by Septem­ber 29 to avoid a po­ten­tially cat­a­strophic blow to the fi­nan­cial mar­kets, which would call into ques­tion the faith and credit of the U.S. to pay its debts. Like ad­min­is­tra­tions be­fore it, the Trump White House wants a “clean” debt limit hike—one with no pre­con­di­tions. But Repub­li­cans and Democrats have plenty in mind, espe- cially the GOP, which wants to use the debt ceil­ing to cut spend­ing and fund a bor­der wall. If the con­gres­sional cal­en­dar is too clut­tered, for­get about a new tax plan.

Congress wasn’t all hugs and smooches in ’86, but it was a much less di­vided place. Party lead­ers had far more con­trol over their un­ruly mem­bers. There were plenty of cen­trists will­ing to work with the other side. And even then, lob­by­ists nearly de­stroyed the bill, and they later suc­ceeded in clog­ging up the tax code with new de­duc­tions.

It’s go­ing to be much, much harder this time, and Don­ald Trump is no Ron­ald Rea­gan. In all like­li­hood, the best we can ex­pect is a re­duc­tion in the cor­po­rate rate. But real changes to the tax code for busi­nesses and in­di­vid­u­als? The swamp will pre­vail.

CHANG­ING THE TAX CODE IS GO­ING TO BE MUCH, MUCH HARDER THIS TIME, AND DON­ALD TRUMP IS NO RON­ALD REA­GAN.

THE DO-NOTH­ING CONGRESS: Repub­li­can Se­na­tor Bob Corker talks to re­porters at the U.S. Capi­tol in July. He and his GOP col­leagues failed to re­peal and re­place Oba­macare, de­spite years of prom­ises.

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