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Republicans Want to Cut Taxes, But Not the Size of Government

The tax reform effort is flailing because the GOP doesn't want to reckon with the consequences of tax reductions.

CreditPETE MAROVICH/UPI/NewscomCreditPETE MAROVICH/UPI/NewscomHouse Republicans passed a budget resolution yesterday, taking an early first step towards overhauling the nation's tax code. But the larger effort is already starting to look like it is in trouble.

A group of senior Republicans released a reform framework last week, but left out many key details that will have to be included in any plan. Overall, it doesn't look like there's been much progress since last year, when a group of influential Republicans released an ambitious but notably (and similarly) vague framework for tax reform.

One of the major pay-fors that Republicans had hoped to rely on going into the year, the protectionist border adjustment tax (BAT), has already been dropped. Republicans also appear to be backing off of a plan to repeal the state and local tax deduction, another major tax code carve out that would raise significant revenue if eliminated. In other words, the same sort of infighting that doomed the health care effort may doom tax reform too.

All of these specific disagreements, however, are just expressions of a more fundamental problem: Republicans want to cut tax rates on corporations and individuals, but they don't want to deal with the consequences of doing so. As a result, they run the risk of turning tax reform into an exercise in expanding government.

Cutting tax rates reduces the federal government's revenue. In a very basic sense, this is the entire point of the exercise. Private actors keep more of their money, and the public sector gets less. But simply reducing revenue, on its own, creates an imbalance between what is spent and what is collected. This is the deficit, which is what contributes to the federal debt. There are three main ways that policymakers can respond to the creation of this fiscal gap.

First, they can raise revenue elsewhere in the tax code. This is the theory behind tax reform: Cut tax rates, but eliminate enough deductions and exemptions so that total tax revenue collected remains the same. Most economists agree that this sort of tax code simplification, which ends distortions and also lowers overall rates, is fairer, more efficient, simpler to administer, and has some potential to improve the economy. In this scenario, taxes come down generally, though taxes for some individuals end up rising.

The problem, of course, is agreeing on which exemptions to eliminate. Each of those exemptions has a beneficiary and some sort of lobbying effort built to keep it in place. The bigger the carve out, generally speaking, the bigger to effort to keep it. Lawmakers whose constituents stand to lose tend to oppose these efforts. As Republicans are already discovering, this dynamic makes it hard to build meaningful consensus on which tax deductions to eliminate or scale back.

Alternatively, policymakers can offset the revenue lost by reducing tax rates by cutting spending. This approach has the advantage of making possible a net tax cut for everyone without raising the deficit. But the problems with this method are similar to those with eliminating deductions: Government spending has beneficiaries, many of whom have organized around keeping that spending in place. In any case, congressional Republicans have given no sign that they are contemplating the sort of spending reductions that would be necessary to offset the tax cuts they favor. The argument they are having right now is entirely about which deductions to cut, not which spending to eliminate.

Finally, policymakers can do nothing at all. This is, in some ways, the easiest course of action, at least from a political perspective. But there is a procedural obstacle to doing so: The reconciliation process that Senate Republicans are planning to use to pass tax legislation with a simple majority does not allow for a deficit increase outside of the 10 year budget window. (It is possible that Republicans will circumvent this restriction with a procedural workaround.)

And there is a bigger, related, downside as well: A tax cut now without corresponding offsets—either spending cuts or additional revenue raisers—is not really a tax cut. It defeats the purpose of the exercise, because it does not actually let people keep more of their money.

Instead, as the Mercatus Center's Tyler Cowen wrote earlier this week, it is merely a tax shift, moving revenue collection from today to years from now, and increasing the nation's debt burden in the process. Indeed, a tax cut today with no offset acts as a sort of subsidy, making government seem cheaper than it really is, while disguising and delaying the costs. It is likely to lead to a tax increase down the road, making it an economically risky proposition that will increase economic instability and extract a greater price on generations to come.

The GOP, however, appears to have chosen to respond by simply denying that it is necessary to fully offset tax reductions at all. White House Budget Director Mick Mulvaney, who until recently played the part of a deficit hawk warning about the consequences of a growing national debt, has recently taken to arguing that what the nation needs now are "new deficits" to spur growth.

Many elected Republicans still cling to the belief that tax cuts spur enough economic growth to pay for themselves. Although well-designed tax cuts can boost the economy somewhat, they do not create enough growth to fully or even mostly offset the lost revenue. As a recent study from the Committee for a Responsible Federal Budget finds, tax cuts do not raise enough revenue via growth to pay for themselves, and never have. Dynamic effects are real, but even in the most favorable circumstances, they do not come close to providing full offsets.

The Republican party, in other words, has chosen to deal with the fiscal consequences of its tax policies by pretending those consequences do not exist. The GOP's mistaken yet persistent belief in the overwhelming power of dynamic effects is politically convenient. But their stubborn fantasy presents a barrier to more stable fiscal policy, to a more streamlined tax code, and to more effective limits on government, because it hides the cost from view. It turns out that what Republicans really want is to cut taxes, but not the size of government.

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  • Charles Easterly||

    ... it does not actually let people keep more of their money.

    Freedom isn't free .

  • Eric Bana||

    The point, although not expressed well, is that increasing deficits mean higher taxes (or inflation) in the future. So tax cuts now which contribute to larger deficits do not really amount to tax cuts when taking into account the necessary tax hikes or inflation in the future.

    This seems important to keep in mind since lowering taxes and government revenue must be accompanied by reductions in government spending.

  • Robert||

    Brilliant placement!

  • D.Polemiker||

    Your point is short-term. Throughout history, no empire has survived the excesses of its sovereign. The U.S. will be no exception.

  • DajjaI||

    Just get rid of the Mortgage Interest Tax Deduction. It is responsible for the real estate bubble as well as the abomination known as the '30 year mortgage' which is impossible to value and resulted in the fiscal crisis of 2008.

  • Bubba Jones||

    Um, what?

    Killing the deduction is going to make my housing costs higher and encourage a longer mortgage term, not a shorter term.

    They do 40 year mortgages in California, and "interest only" loans.

  • Leo Kovalensky||

    You're assuming that you can afford to live in your home without a government tax break (subsidy). I think that was Dajjal's point.

  • HillTown Trader||

    Giving you a special borrower deduction discriminates against renters and those who save to put down larger down payments.

    Government should not be in the business of picking winners and losers. Under the current system, those who borrow a lot win. The rest lose.

  • JFree||

    Under the current system, those who borrow a lot win. The rest lose.

    That was actually the best consequence of the old Georgist Single Tax. That tax drives raw land prices to effectively zero - with no chance of inflationary appreciation over time. And since most property improvements depreciate over time, the combo would mean much less borrowing and shorter terms - and borrowers would have to prove the property itself generates sufficient return with no speculative/ponzi component to the borrowing.

    Course the original idea was too extreme - but every other tax idea since has been worse.

  • And you believe that why?||

    Killing the mortgage interest deduction will only harm you financially if you've allowed yourself to become dependent on that particular government subsidy. Based on the results from other nations(Specifically Blighty under Thatcher) the overall effect is cheaper housing. You'll have to explain to me why the rest of us should pay to maintain your lifestyle in an overvalued house.

    Note: Thanks to my ex-wife's stupidity, I was not able to take advantage of the 'free' money when I purchased my house. While this has left me in a bad position from a capital expansion standpoint, at least I can sleep at night. Stealing from others to pay for a lifestyle I couldn't afford on my own would have put me in a moral quandary. Instead, I am poor but honest.

  • tlapp||

    Actually if the deduction goes away house prices will decline. Also most of the subsidies go to high end houses. Why are we subsidizing someone buying 5-10k square foot homes?

  • MO_liberty||

    If they get rid of that deduction they better get rid of every other one there is too.

  • HillTown Trader||

    If the point of taxes is to fund government operation (NOT inflict social policy) then there should be no deductions or credits at all. None, with a lower rate.

  • BambiB||

    The problem with any proposal like that is that it screws people who relied on it. No, I don't mean people who don't even own a house... but people who bought a house thinking that the tax deduction was something they could depend on. Screwing over people who try to do the right thing - who think and plan and save - is a speciality of government. Just look at the entire welfare system. Piss away every dollar you make on drugs and booze? No problem. We'll get you medical care, free food, a free place to live... Stupid enough to rack up $150,000 in student debt while pursuing your degree in cranial proctology? No problem - let's just forgive the loan, right? We'll go fuck homeowners instead.

    Wait. Did you take out a student loan, eat Ramen 6 nights a week and hold down two jobs while in college, then paid off your student loan in three years? Sorry. You're fucked. We'll tax you to pay for dumb asses.

    Bottom line is this: Slash the entitlement system across the board. Take away tax deductions. But do it on a schedule that allows people to plan.

  • Johnimo||

    Excellent comment, BambiB. HOWEVER, I think you're missing a little of the whole point of this attempt to simplify the tax code AND reduce the tax rates. If both occur, the deduction for the home mortgage is not really lost, as it's somewhat of a "wash" with the lower tax rate.

  • Philadelphia Collins||

    Assuming that lower rates results in lower revenues.

  • timbo||

    This exactly how I run my house. I decided to lessen the amount off my income, then I run up enormous debts for the fun of spending on my friends. If I stop spending, they threaten to riot so wee are all in agreement. I also started a war with all of my neighbors to keep some of my friends happy.

    Visa does not even care. They just keep on extending me credit. When they have threatened to tighten the screws before, I went to the shadowy mega bank above their heads and got them to create money out of thin air to issue more cheap credit to visa so I could borrow more.

    See, everyone is happy.

  • Johnimo||

    timbo, you've learned "spendspeak" well. I think you're on the road to Nirvada, (a place just outside of Nirvana and close to heaven, but with gambling.)

  • Domestic Dissident||

    MacAdoodle, Gillespie, and many of the other phony libertarians here at Reason would "raise" your taxes if they had their way.

    But they won't just come straight out and say so because they're such dishonest, lying motherfuckers.

  • timbo||

    I don't think so. I don't think any libertarian agrees with raising taxes. I think their consistent point is the lunacy of it all.
    Cut spending is first and foremost the most important thing the government has to do.

    I think their points are to counter the ignorant arguments of the leftist and statist on the right as well. if you are going to spend like drunken sailors, you also cannot cut taxes.

    We should be doing both on a massive scale. Even more so on the spending side which would be part and parcel with shrinking govt,.

  • Domestic Dissident||

    I don't think any libertarian agrees with raising taxes.

    You're right, real libertarians don't.

    Don't forget that MacAdoodle was the dude going the most apeshit around here during the "government shutdown" incidents back a couple of years ago.

  • Citizen X - #6||

    REAL libertarians spend their time coming up with shitty nicknames. It is known.

  • Chipper Morning, Mean Girl||

    Mikey can't wait till the weekend when paid progressive infiltration agent Citizen Crusty takes some time off from posting seditious fake news and only real libertarians with full lives post comments on this commie site.

  • timbo||

    Wouldn't be awesome if the government shut down?

    Like going out of business, everything must go-shut down.

  • Citizen X - #6||

    +1 Snow Crash

  • Johnimo||

    I'm with you, DD. The liars and cowards here at "Reason" never, ever say just what they would cut. They're no better than the politicians.

  • Bronson, Missouri||

    The whole thing is fucked eventually no matter what happens. It would be nice if the government let us keep more of our own money in the meantime before the inevitable reckoning

    There is zero chance that our elected representatives turn this thing around, so we might as well be able to buy some stuff in the period before we die and/or the country collapses.

  • Johnimo||

    Oh! My! God! And honest man.

  • sarcasmic||

    Everyone wants to cut spending. Just not the spending that effects them. And since everyone is affected by cuts in spending, all cuts in spending are political suicide. Thus there will be no cuts in spending.

  • timbo||

    Yep. Its over when you really think about he size of this behemoth.

    No one votes for economic pain for themselves. As long as we are an ignorant population without the guts to make hard decisions, we are doomed.

    That is why the fiat gravy train is picking up speed. They are going for it until the music stops. They all know damn well this thing is careening towards a cliff. That is probably why all government agencies, to include NOAA for some reason, have huge stockpiles of guns and ammo.

  • eyeroller||

    The Republican attitude is the same as the population at large.

    We demand more spending, less taxes, and a balanced budget!

  • Episteme||

    Actually, no. The reason that they're considering backing down on the state tax issue is that about 15% of the GOP caucus represents red districts in blue states whose residents would be affected. The concern is whether a backlash among districts in CA, NY, NJ and elsewhere might cause the party to lose the House (and plausibly the Senate) and thus cost them any policy victories in the process (as well as line things up for Berniecare and the like).

    Next time, skip a cocktail party to do some actual research on what congressmen are talking about, rather than simply taking as gospel what their opponents state.

  • Leo Kovalensky||

    What ever would we do if Republicans weren't in power? Who would reform taxes? Who would repeal government mandated healthcare? Who would reduce govt spending? Who would protect our gun rights?

    Oh... wait...

  • Stalwart Sam||

    So, from your perspective, how does the tax reform effort look?

  • Alan Vanneman||

    "It turns out that what Republicans really want is to cut taxes, but not the size of government."

    Congrats on discovering the obvious. "Reagan taught us that deficits don't matter"--words of wisdom from Richard "Big Dick No Heart" Cheney.

  • Rockabilly||

    So the republicans are not the party of limited government?

  • lospollos||

    Had the Republican ever been against big government? president Reagan increased the deficit.

    for them, it is more of a platitude than a reality.

  • lospollos||

    http://www.heritage.org/budget.....n-deficits look at this BS

    like Soviet was not doomed from the beginning

  • Eman||

    Republicans are the party of talking about limited government.

  • WakaWaka||

    Shouldn't we account for the economic growth that will be created with a tax cut? They probably still won't pay for themselves and it won't reduce government favoritism, but the gap in lost revenue will probably be narrowed with renewed economic growth.

  • Qsl||

    What growth? Would you invest more than paltry amounts to a system that could turn on the next election?

    Nope, what you are describing is a bubble.

    I do not believe we will have much actual growth until this tax "reform" is put to bed with something stable.

    Luckily, even without cutting taxes, we are looking a massive decrease in government spending as soon as our creditors get nervous.

  • Wearenotperfect||

    Happy Grab'em by the Pussy Day!

    How is your two party dictatorship working for you now America!

  • Uncle Jay||

    RE: Republicans Want to Cut Taxes, But Not the Size of Government
    The tax reform effort is flailing because the GOP doesn't want to reckon with the consequences of tax reductions.

    The republicans are flailing on tax reform because they are gutless. They worry too much about being called, "the party for the rich." Instead of growing some much needed testicles, the GOP is worried about what a bunch of screaming socialists think and say. Some one said that Reagan and JFK would never be allowed in their respective parties because they would be considered "too radical." This is true, but since when is keeping the more money that we have earned "radical?"

  • chemjeff||

    "The republicans are flailing on tax reform because they are gutless."

    I don't think so. This presumes that if they had guts, that they would be fighting for tax reform. Instead, I think they have plenty of guts - but for fighting for what they actually believe in, preserving the status quo.

  • Uncle Jay||

    "...but for fighting for what they actually believe in, preserving the status quo."

    I agree, but how much guts does it take to protect the status quo?

  • Leo Kovalensky||

    I don't think so. This presumes that if they had guts, that they would be fighting for tax reform. Instead, I think they have plenty of guts - but for fighting for what they actually believe in, preserving the status quo. their positions of power.

    FTFY

  • Longtobefree||

    Republicans Want to Cut Taxes, But Not the Size of Government

    This just in; it is suspected that the sun will rise in the east tomorrow, probably early in the day.

  • Braunasaurus||

    Let be honest what sixty year old really cares about deficit they aren't paying it. So why stop now.

  • HillTown Trader||

    President Trump's budge framework did include large cuts in a selection of department.

    Congress' follow on propose ignore President Trumps lower request.

    Secretary Tillerson is putting the President's hair cuts in action, having reviewed the bloat at the State Department. He is not staffing entire offices, leaving empty ambassadors chair that don't have country specific mandates, and cutting programs all around. Hat's off to Tillerson; if you hear that he is "failing" to manage the transition and fill slots, point out that the head count cut is intentional.

  • Alan Reynolds||

    TRA86 just replaced fewer itemized deductions for a large standard deduction, leaving total deductions at 23% of AGI.
    The current "Big 6" plan does that too, but also adds tax credits and eliminates personal exemption. The net effect is a very large increase in individual income taxes - nearly half a trillion in the first decade, according to TPC, and $1.5 trillion in the next.

    So, your comments have nothing to do with all the strange shuffling of exemptions, deductions, and credits, but only with an assertion that cutting the corporate rate will lose a lot of money. That would be obvious if it had no effect on GDP (in which case why doesn't Ireland triple its corporate tax rates?), and if the elasticity of taxable income were not known to be high for business and high-bracket individuals.

    Would you consider an article on that misstated "tax cuts don't pay for themselves" issue? I was a Reason columnist in the seventies.

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