President Donald Trump is set to deliver his speech to a joint session of Congress on Tuesday night, and tax reform is among the policy items he is expected to roll out.
For tax reform to be successful, Trump will need to (A) keep it simple, (B) move quickly, and (C) persuasively explain why tax reform matters to average Americans.
Democrats are already claiming he has “done nothing” his first month in office.
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“Trump needs a legislative victory,” says Stephen Moore of the Heritage Foundation, and, in this regard, “tax cuts should be a layup.”
Tax reform seems like an obvious area for President Trump to focus. But nothing comes easy. This is how he can do it:
Keep It Simple
Rather than tackling a landmark tax overhaul like the one Ronald Reagan passed in 1986, President Trump should focus on a simpler package as Reagan did in 1981, with the Kemp-Roth tax cut, which provided “for three years of reductions totaling [sic] 25 percent in individual tax rates and major reductions in taxes paid by business and by oil producers.”
The modern equivalent might include lowering both corporate and individual taxes and enacting repatriation (a lower tax to incentivize bringing foreign earnings back to the U.S.).
Trump would be well advised to avoid controversial proposals like interest deductions and border adjustment.
True, Speaker Paul Ryan wants a border-adjustment tax, but Senate Republicans worry that home state importers/retailers/consumers will face economic consequences—and the conservative Club for Growth strongly opposes the border-adjustment tax.
The benefit of Ryan’s plan is that it comports with Trump’s “America first” philosophy, but focusing solely on tax cuts across the board for business and consumers would be simpler and easier to achieve.
Move Quickly
In a recent Wall Street Journal op-ed, Moore and CNBC Senior Contributor Larry Kudlow said that President Trump “should urge lawmakers to pass a jobs bill, including a tax cut, during his first 100 days in office.”
Others emphasize the need for President Trump to set a deadline in Tuesday night’s speech. “Trump should tell us what is the date that the tax cuts take effect,” said Grover Norquist, president of Americans for Tax Reform (ATR). “We need to know that we can invest, earn, sell, and reap capital gains and know that we will get the benefit of the tax cut whenever it passes. Otherwise, we wait until the bill is enacted―maybe months longer than we should… that alone could slow growth.”
Treasury Secretary Steven Mnuchin has promised “very significant” tax reform by the August recess. Even assuming his deadline is met, Secretary Mnuchin estimates that the combined economic benefits of regulatory relief and tax cuts “won’t really impact the economy until next year when you begin to see changes in behavior. And it will take a couple years to get growth.”
Do the math. It might seem like we just had an election, but Republicans who are on the 2018 mid-term ballots will need to have something significant to show the voters.
“The ambitious timetable of getting a bill to the president’s desk by this fall is achievable,” says Pete Sepp, president of the National Taxpayers Union. “Politically, it also happens to be necessary.”
Explaining It
There is broad agreement that the most bang for the buck (so to speak) would likely be in cutting corporate taxes. According to the Tax Foundation, the United States has the highest corporate income tax rate in the developed world—and the third highest in the entire world.
So how can President Trump convince working-class Americans that cutting the corporate tax rate down to 20 percent is a good idea? “Show people a chart,” Moore says, that visually demonstrates America’s nearly 40 percent (if you include state and local taxes) corporate tax rate versus that of other countries.
“Most Americans understand that jobs come from businesses,” says Moore, “and if you want healthier jobs, you have to have healthier businesses.”
But do people really understand that jobs come from businesses? I’m less optimistic. For that reason, any proposed reform should pair a corporate tax cut with a cut on individual tax rates. “If they simply do corporate tax relief, it’s going to look like, ‘Oh the fix was in’” for corporations, warns McIntosh. I think he’s right.
In addition to pairing corporate tax cuts with individual ones, President Trump must convince the public that taxes on business really are linked to wages and employment. He excels at selling oversimplified, overzealous lines right over the media’s heads. And the good news is that he has data to back it up.
As President Trump’s new chief economist Kevin A. Hassett and Aparna Mathur of the American Enterprise Institute (AEI) have pointed out, numerous studies conclude that lower corporate taxes result in higher wages. Their own empirical study shows a “direct link between corporate taxes and manufacturing wages” (PDF).
Having already crafted his everyman image, President Trump can hardly morph into a policy wonk. He will need to explain this link in a way that is consistent with his rhetorical style and worldview.
“I think what he’ll need to do is be comfortable with the rhetoric,” says McIntosh. “So other people [normal Republican politicians] might be able to make the Kemp-like argument of how a rising tide lifts all boats. But what Trump is good at is making the fairness argument and putting America first.”
This is how populist nationalist rhetoric can lead to good old-fashioned conservative tax cuts.
