Ben Roback is a Senior Account Executive at Cicero Group and a member of the US Embassy’s Young Leader’s UK programme.
There is little doubt that the tax code in the United States is in dire need of reform. In the run-up to midterm elections in 2018, you will not find a single member of the House of Representatives or Senate giving a stump speech advocating maintaining the status quo or further complicating the tax code.
Businesses big and small share the same goals as individual citizens – a simpler, smaller tax code that is far less onerous and commands less time (much to the chagrin of America’s ever-booming tax planning advisory industry).
With a Republican in the White House and majorities in the House and Senate, the political climate is ripe for the Republican Party’s biggest legislative priority.
Given the tax code has been untouched on a comprehensive basis since President Reagan’s reforms in 1986, the White House and Congressional leadership have ambitiously set out creating what Steve Mnuchin, the Treasury Secretary, promised would be “the biggest tax cut and the largest tax reform in US history.”
Wake me up when September ends
The summer recess ended in Washington with an immense thud. Congress has a September schedule that would even make the UK Parliament’s Brexit-heavy legislative programme blush.
Congressional attention will be dominated by a list of must-do items including raising the debt limit, funding the government and avoiding a shutdown, providing funding assistance for the Hurricane Harvey relief effort, and initiating the process of ending the Deferred Action for Childhood Arrivals (DACA) program announced by Attorney General Jeff Sessions this week.
In the background, Special Prosecutor Bob Mueller’s investigation remains an ongoing distraction although General Kelly, White House Chief of Staff, has calmed down executive infighting for the moment at least.
The White House plans to be ambitious and aggressive, with the President selling the policy when the heavy lifting has been completed by Congressional leadership and tax-writing committees on the Hill. Both sides face a challenge finding the time to do so.
Broad principles, not fine details
Last week, President Trump gave his first major speech on tax reform. Republican Congressional leaders and the White House have yet to reach an agreement on the finer details of the tax plan, so the speech only offered broad principles.
These are: simplifying and creating a more competitive tax code, delivering tax relief for the middle class, and repatriating corporate profits being held offshore (the Institute on Taxation and Economic Policy estimates Fortune 500 Companies to be holding $2.6 trillion offshore, avoiding up to $767 billion in US federal income taxes).
The President and his party will need to articulate and sell a policy that gives big corporations some tax relief as an incentive to bring profits back to America. That polls poorly amongst the American people, and is far from the populist wave Donald Trump rode in his ascendancy to the White House.
While we know there will be a tax reform plan, we don’t know whose it will be – critical differences remain between the plan presented by Donald Trump on the campaign trail and Speaker Paul Ryan’s ‘Better Way’ plan, setting up a policy battle between Congress and the White House.
For example, the White House’s broad plan aims to bring the rate of corporation tax down to 15 per cent, a figure that has been met with resistance by congressional leaders who see it as too low. The Republican ‘Better Way’ plan commits to reducing corporation tax to 20 per cent. The Border Adjustment Tax that Paul Ryan has endorsed is seen to be politically dead within the White House, with little chance of revival.
The plan will be refined in meetings of the ‘Big Six’ – the leaders of the House and Senate, the chairmen of the congressional tax-writing committees, Gary Cohn, the National Economic Council Director, and Mnuchin, the Treasury Secretary.
With a blueprint to talk up, the President will target sitting red-state Democrats for stump speeches selling the reforms as a win for American workers and businesses. The White House sees its role as pressuring Congress into putting a Bill on the President’s desk for signing. This approach best exemplifies Trump’s role of CEO president, firing lower managers (Bannon, Priebus, Scaramucci, Gorka) who fail to deliver.
Pressure on Congressional Republicans is expected to increase, in what is expected to be a major push to get a detailed tax plan published by the end of 2017. Both sides share the need for a political win before the midterm elections in 2018, having failed to repeal and replace Obamacare and with no legislative successes to campaign on.
In order to pass legislation, the president needs more friends than enemies
This column has consistently outlined the need for this President – indeed, any president – to keep Members of Congress on side if there is to be any hope of passing a legislative programme. Lyndon Johnson once famously said that the first rule of politics is “being able to count”. Policy is pointless if there is insufficient support when Whips make their tallies.
Having isolated Republicans who failed to back attempts to repeal and replace Obamacare in stump speeches and on Twitter, the President has hardly created a path for loyalty. While Republican support in the House and Senate cannot be guaranteed for his legislative programme, tax reform could be the one exception.
The jewel in the crown of the GOP, it is the single most important policy area that has the capacity to unite a Republican party split on DACA and its support for the President. If packaged and sold well, there is a real chance of getting reform passed, even if the current time frame is aspirational and the scope of reforms fail to live up to current White House expectations.
Make no mistake, while tax reform is almost universally sought after it is incredibly difficult to achieve. In 2013, President Obama took aim at private jet owners, a group few American taxpayers would argue is in need of relief from the IRS. Closing the loophole was fiercely opposed by the National Business Aviation Administration on the grounds of jobs and economic activity generated. Further opposed by big donors that benefit both parties, the reform died.
Republicans in Washington want tax reform and the White House is flexible about the small print. When politics is the art of the possible, that could be a good thing. With a Bill set to be drafted by the end of 2017 and introduced in 2018, soon we will get a better idea of how Congress plans to reform a tax code in dire need of change.