No Taxation Without Collaboration: Trump, Ryan Aim to Tackle the Tax Code

BY MILO KAHNEY

Then-President-elect Donald Trump with House Speaker Paul Ryan at the U.S. Capitol on Nov. 10, 2016.

Then-President-elect Donald Trump with House Speaker Paul Ryan at the U.S. Capitol on Nov. 10, 2016. (Zach Gibson/Getty Images)

After the embarrassing failure that was the American Health Care Act, Donald Trump learned that the legislative process is complicated and nuanced, and that he should not take partisan support for granted. Looking to prove his reputation as a world-class dealmaker, he wants to pass tax reform. The U.S. tax code is broken and people from both sides of the aisle agree that it needs to be fixed. Companies are exploiting loopholes by moving their headquarters abroad and avoiding corporate taxes. Tax reform is a huge and complicated issue. The government has not comprehensively changed the tax code since 1986. There have been changes to the tax code, such as the Bush tax cuts of 2001 and 2003, but nothing as detailed as the Tax Reform Act of 1986. Tax reform affects every industry, which means many lobbyists will be involved in the process. After the AHCA, Trump could decide to take the lead; Sean Spicer, after all, said that the White House is “driving the train” on tax reform. With the many nuances involved, can Donald Trump, the author of “The Art of the Deal,” pass comprehensive tax reform that closes loopholes and incentivises domestic production? Probably not. Major legislation requires huge political capital, effective leadership and compromise, none of which were seen in the AHCA debacle and are less likely to be seen in tax reform.

In 1986, the president and Congress pulled off a miracle. More than four years into his administration, Reagan announced his intention to reform the tax code, which was followed by support by the chair of the Ways and Means Committee Democrat Dan Rostenkowski. There was widespread support for reform too. During Rostenkowski’s address, he asked people who wanted tax reform to “write Rosty” on the letters because his last name was too hard to spell; 75,000 people did. The following year, the Democratic-controlled House passed their version of tax reform, after which the Republican-controlled Senate passed their bill, with help from their Democrat colleagues. The process also involved many lobbyists. By balancing opposing interests, Reagan was able to sign the Tax Reform Act of 1986.

That was 1986, however, and much has changed. By that point, Reagan had won reelection and had political capital. Trump, on the hand, has a dismal 40 percent approval rating. The failed health care overhaul also does not inspire confidence in his legislative ability. The nation has also grown increasingly partisan on almost every issue. His infant presidency is a mess and lacks the political capital to conquer tax reform.

Trump wants to put a simple tariff on imported goods; he has said that he would have tariffs as high as 35 percent. Paul Ryan, the current speaker of the House and the former chairman of the Ways and Means Committee, has his own plan. With the help of the chair of the Ways and Means Committee, Republican Kevin Brady of Texas, Ryan is looking at a border-adjustment tax, which would put a 20 percent tax on imported goods and reduce taxes on exported products. The border-adjustment tax makes it so that companies are taxed where they profit. It will also generate enough revenue so that corporate taxes and the tax rate for the upper-class can be slashed. The authors of the plan hope more expensive imports will incentivise businesses to produce more at home. The value of the dollar, however, must rise by 20 percent quickly in order to offset the price increase of imported products. If the value of the dollar does rise by 20 percent, the tax incentives to produce abroad will disappear. If it does not, the price of many products will rise substantially. The border-adjustment tax has some support among moderate Republicans and companies who export such as Dow Chemical and Boeing, while companies that primarily import goods, such as retailers and oil companies, oppose it. Like with healthcare, the Freedom Caucus also does not want the border-adjustment tax. They view it as just another tax and are staunchly against any new taxes. In the Senate, David Perdue and Tom Cotton oppose the new tax, while Senators John Boozman, Mike Rounds, John Cornyn, Tim Scott and Mike Lee have their reservations. Unless moderate Senate Republicans work with the Democrats, the tax will most likely fail. The resistance in the Senate could also lead more conservative House Republicans to vote against the tax.

After the House Freedom Caucus voted against the AHCA, Trump may have to turn to the Democrats to pass tax reform. Excluding the 36 members of the Freedom Caucus, the GOP has 211 seats in the house, which means that they need at least 18 Democrats to pass a bill without the Freedom Caucus getting in the way. Thus, those 18 votes carry a lot of value. Working with the Democrats may also force Trump to release his tax returns. Unless Trump releases his tax returns, Americans will not know how much he is getting from the changes.

The split in the GOP will cause tax reform to experience the same fate as the AHCA. With the Democrats refusing to work with Trump on tax reform until he releases his tax returns, the process may be delayed indefinitely. The prospect of comprehensive tax reform is slim.

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