Friday, September 22, 2017

The Battle Within The GOP Over Trump's Tax Plan

Donald Trump wants to pass the largest tax cut plan in US history.  His plan calls for tax cuts that amount to $1.5 trillion over the next ten years.  His plan is gathering support within the GOP but there are many issues within the GOP.  Conservatives love cutting taxes so that they can reduce the size of government.  They would like to reduce government spending by one dollar for every dollar that is cut from federal taxes.  They usually back this up by being deficit hawks.  They insist upon spending cuts in order to avoid federal budget deficits.  They like to run against their Democratic opponents in elections by proclaiming that the GOP is the fiscally responsible political party.

The Trump administration is more interested in cutting taxes than it is in fiscal responsibility.  It uses a trick that Paul Ryan has typically used to justify tax cuts for GOP donors.  Trump is following the Ryan example by using dynamic scoring to access the effect of tax cuts on the federal budget.  Dynamic scoring is based upon the premise that each tax cut dollar produces an additional dollar of tax revenue.  That happens because tax cuts stimulate economic growth which produces additional tax revenue.  That has not happened in the past when Republicans passed large tax cuts.  Most economists don't have much faith in "dynamic scoring" based upon historical evidence.

Ordinarily, Congress uses the CBO and other non-partisan government sources to evaluate the impact of tax cuts on the federal budget.  Donald Trump does not want an impartial analysis of his plan to deliver the "Huuuugest" tax cuts in US history.  He wants to use "experts" in the White House to use dynamic scoring magic to justify his tax cuts.  He will have to convince House conservatives to go along with his plan but he will get a lot of help from Paul Ryan in the House.  They may have to throw some spending cuts into the plan to please conservatives.  The Graham-Cassidy healthcare plan may serve that purpose.  It includes large cuts to Medicaid which may satisfy House conservatives.

Its also possible to pay for tax cuts by eliminating deductions that are used to reduce taxable income. This includes things like state income taxes, local property taxes, corporate interest taxes, charitable contributions etc. etc.  Each of these deductions has strong supporters.  Its much easier to rely upon dynamic scoring to defend tax cuts.  Its also easier to cut taxes for the super rich without reducing the top tax rate on ordinary income.  The Trump tax plan will probably include a way for LLC's like the Trump Organization to use a device that avoids taxing their profits at the higher personal income tax rate as they are under current law.


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