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Real Tax Reform Is Eluding Trump—Will He Go for the ‘Candy Option’?

Rob Garver
Real Tax Reform Is Eluding Trump—Will He Go for the ‘Candy Option’?

The prospects for comprehensive tax reform seem to be slipping further into an uncertain future, a dismal prospect for President Trump who promised to lower tax rates for both business and individuals during his first year in office.

A top Trump administration official concedes in an interview published today that tax reform will be a heavy lift this year, even as other reports indicate that members of Congress are considering a package of tax cuts and other benefits that would not be balanced by changes that would solidify the government’s revenue stream.

Related: Four Reasons Trump’s Promise of Tax Reform Is Fading Fast

Treasury Secretary Steve Mnuchin, in an interview with The Financial Times published on Monday, admitted that his original deadline of August to have a tax package through Congress is no longer realistic. In fact, many experts had warned that it was never realistic in the first place, but according to Mnuchin’s analysis, the failure to repeal and replace the Affordable Care Act has been the biggest problem. He did, however, stick to the promise that the tax system would be overhauled by the end of the year.

There is no fully formed plan for tax reform on the table yet in Congress or from the administration, but promises of tax cuts for both businesses and individuals have left experts wondering how Republicans designing the legislation will manage to make it deficit-neutral.

As many have done before him, Mnuchin fell back on promises of economic growth making up the difference. “Economic growth creates lots of revenues,” he told the FT. “When you calculate whether it is deficit-neutral or not, there are a bunch of different calculations and a bunch of models. I am just pointing out the magnitude of what economic growth does.”

Mnuchin also acknowledged that one of the key elements in a tax overhaul plan being developed in the House of Representatives, a border-adjustable tax on imports that would give preferential treatment to exporters and to retailers and manufacturers who source goods and raw materials within the US, is facing resistance from within the administration. (Economists argue that the effect of an adjustable border tax would be to drive up the value of the dollar, increasing the cost of US exports to offset the tax, and therefore doesn’t truly give preferential treatment to exporters.)

Related: Budget Chief Admits Trump Can’t Wipe Out $20 Trillion in Debt in 8 Years

A variation on the Value-added-tax that is common in Europe, the border tax has become increasingly controversial among congressional Republicans. On Monday, for example, Texas Sen. Ted Cruz, who personally proposed an adjustable border tax when he was running for president last year, walked back his position in an interview with a reporter from the Texas Tribune:

And while Mnuchin is at least promising to continue fighting for full-blown tax reform, reports are filtering out of Congress about abandoning all the hard work of reform and replacing it with deficit-financed tax cuts.

Jonathan Swan of Axios reported late Sunday on a new movement to just grab the low-hanging fruit and call it a win:

As full-blown tax reform looks more and more like an unreachable stretch, there's increasing conversation on the Hill about what's being called a “candy option” — all the goodies, with none of the pain.

That would mean lower personal and corporate rates, plus some limited repatriation, funded largely by deficit spending.

The case for: “It’s something they can pass,” said a Republican lobbyist who's deeply connected to all sides of the debate. “We need to junk our current tax code for one more suited to the modern economy. But the ability to accomplish that goal just isn't there.”

If lawmakers were to eat dessert first, in effect, by passing a package of tax cuts with no offsets, the prospects for real tax reform would vanish. The only way a major legislative effort like a tax code rewrite gets through Congress is when the pain of things like lost deductions and closing loopholes can be balanced by sweeteners like lower rates and greater simplicity. Take away the “candy” and there’s no incentive for everyone to eat their vegetables.

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