Tax reform bills have been approved by both the Republican-controlled House and Senate. Most observers believe the different versions will be reconciled into legislation representing the most thoroughgoing and consequential changes to the U.S. tax code since the late 1980s.
To get a sense of the good, the bad, and the ugly of tax reform (there's plenty of each) Reason's Nick Gillespie sat down with Grover Norquist, the longtime head of Americans for Tax Reform and arguably the most influential activist over the past 30 years when it comes arguing for lower taxes.
Edited by Mark McDaniel. Introduction and graphics by Meredith Bragg. Cameras by McDaniel and Bragg. Music by Krakatoa, licensed under Creative Commons, CC BY-NC-SA 3.0 US.
This is a rush transcript. Check all quotes against the audio for accuracy.
Nick Gillespie: When the Senate passed its version of tax reform you wrote, "This is big, a bigger deal than Obamacare. Big job creation, big middle class tax cuts, big changes in an outdated tax code." What do you like about tax reform as it's shaping up generally? What are the large contours?
Grover Norquist: There are things that happen immediately and then there's secondary effects. We eliminate the tax deductibility of state and local taxes. It's a pay for. Rates go down, broaden the base.
Gillespie: That's in both the House and the Senate.
Norquist: It's in the House and the Senate, they're the same. $10,000, you can deduct up to $10,000 of property tax at that state and local level but not income taxes. You go, okay, that's lower rates, broaden the base, who cares? What you just did was dramatically remove an incentive for higher taxes at state and local level. This reform packages is going to result in 1,000 tax increases that didn't happen at the state and local level and a 1,000 tax cuts that do. As California with a 13.3% top income tax rate, it's going to have to take that down.
Gillespie: California's also a net donor to the federal government so is this going to kill the golden goose if California's a high tax state when people are wealthy there? They kick a lot of money into the federal government, shouldn't they be getting tax relief from the federal government?
Norquist: Because it is California senators and congressmen and New York senators and congressmen, New Jersey senators and congressmen and Connecticut senators and congressmen who vote for the very high tax rates at the federal level which is why those states are donor states. They also have politicians at the state and local level who have high taxes as well. They damage the country when they raise our personal income taxes for everyone in the country. But they also damage the whole country when their state politicians have high state taxes that are subsidized by being tax deductible at the federal level.
Gillespie: What are the other tax expenditures or tax breaks that get lost here? That you're good about? The Senate version doesn't do anything with the mortgage interest deduction so it allows homeowners and the people who take the mortgage interest deduction overwhelmingly wealthy, they can deduct up to a million dollars or interest on loans up to a million dollars for two houses. The House version caps that at 500,000 for one. Which is better? And why shouldn't it be zero for this?
Norquist: We should take it to zero. Some of these things are how far can you get. Any three senators could kill the whole project. There are limits to how far you can go. Any 25 congressmen can kill the whole project. When you begin to push around the edges and we called it pretty close in both cases. We had two votes to spare in the Senate and maybe 10, 15 votes to spare in the House and now we're going to do this again. Given the rules we were living under, the Senate rule, the Bird Law, and the fact that we had narrow majorities. This is a very good piece of legislation but there's a caveat. It's not what you and I would write if we'd written it down. It's not what I'd like to see in 20 years or 10 years.
Gillespie: Talk about the corporate side of this because in a lot of ways the corporate stuff is permanent, obviously no tax decrease or tax increase is ever permanent really but what excites you about the corporate side of this?
Norquist: This is the driver of economic growth. Reducing taxes on individuals is a question of justice. You earned it, you keep more of it. The rates that we have, the 35% business tax rate for corporations used to be one of the lowest in the industrialized world. Now we're the highest in the industrial world. The whole rest of the world was up in the 40s and now they're down in the very low 20s. We're going to go from 35 completely noncompetitive, socialist China's at 25, we're at 35 and we think there's a difference between us and them. There is, we're stupider. Our 35 goes to 20. It may bounce at 20, 21 as they do final negotiations, but basically 35 to 20. We're going to be competitive with the rest of the world. I really like Donald Trump's idea of going to 15 and I believe that this, and I can assure you that as soon as this bill passes, I will begin whining that 20 is not as good as 15.
Gillespie: There's also a shift from a global tax system to a territorial one. Explain what that is why that's significant.
Norquist: That's the second big deal. The first big deal is that investment income from around the world will flow to the United States at a 20% rate that won't at 35. Companies will move to the United States at a 20% rate when they were moving out. Some 1,700 companies left, got bought, moved, converted.
Gillespie: The paradigmatic case or a newsworthy case from a couple years ago was when Burger King was bought. An American company that was originally based in Miami was bought by Tim Horton's another fast food restaurant based in Canada so they could get away.
Norquist: Canada, how embarrassing to lose one to Canada. That's the one to the north. One of the challenges that we have is the high rates. That's going to 20, big deal. The other's going to a territorial tax system. Most of the world's territorial, almost everybody has a territorial tax system. In France, France taxes French people and French businesses in France. If you set up a French business in the United States or a French person goes over here and runs a rock and roll band, United States tax them and when they want to take their lovely money back to France, France says, "Nice to have you and your lovely money, here, no tax, no penalty." No French taxes on money you earned overseas as a person or a business. We fix that problem for American companies overseas and we say when you earn money in France or Britain, they'll steal some of it but you bring it back and it's yours, we're not going to touch it again.
Gillespie: Is this going to resolve, we hear a lot of stories about places like Apple in particular, having a lot of profits that are parked offshore. Now they can come back without either paying competitive tax rates or no tax on stuff that's already been taxed.
Norquist: Yes. There is somewhere between three and $5 trillion of American earnings overseas. Three is what most economists at least say that they believe is out there. Five the number Trump likes. He may be right because we don't know, we're not sure. But three to five.
Gillespie: But he does have a known documented penchant for exaggerating things.
Norquist: This is true.
Gillespie: From the size of his hands to the size of his crowds. We'll probably go with three.
Norquist: Somewhere between three and five. That's a lot of money to come back into the United States pretty quickly.
Gillespie: Then both versions also take some action against the individual mandate for Obamacare. Does matter in this at all? It's the Senate bill gets rid of it and the House bill reduces the penalty to zero or something like that?
Norquist: Yes. The House has also agreed that they're going to take the Senate pledge.
Gillespie: Is that important in terms of tax reform or is that just an extra, it's the cherry on top?
Norquist: Both. It's a very large cherry. It's a huge cherry. It is as big as any of the other things that we're doing. Getting rid of that tax. One, it's a tax. It is a tax on you if you refuse to buy Obamacare or insurance and it's 700 bucks for an individual but goes up and it's $2,000, $2,400 for a family of four. It is a big number, three million people get hit by it. 80% of them earn less than $50,000 a year. This is a tax on low income people that the Washington Post loves. All of the left of center structures, newspapers, magazines, pundits who like to say that is a bill to help rich people, they most want to keep the tax on low income people who don't want to buy Obamacare.
Gillespie: One of the most controversial or most talked about because it's seems like it's not going to raise much money but it does inconvenience a lot of people, there is discussion that, in the House version, that things such as graduate student tuition, scholarships. If you went to graduate school and you get a TAship and you get free tuition, which costs say, 35 grand a year. You're going to be paying tax on that as compensation. Which makes going to graduate school much more expensive. Is that a good thing or a bad thing?
Norquist: It's a interesting question. What they're trying to do is even out because if you were to do this in any other business that would be taxable income.
Gillespie: Unless it's healthcare.
Norquist: Yes, and frankly and we're trying to cull those down and bring down rates. This is one that sticks out. We have predictably vocal people who benefit from it. There's an easy thing to do. Don't pretend to charge, don't charge them for the education and don't pay for them for the other, you can do both. The establishment has written themselves lots of benefits in tax law over the last 60 years. This is one of them. The tax deductibility of state and local taxes, advantages public sector union who say, "Go raise the money, it's easy to do because it's tax deductible." It's like giving to charity, it's tax deductible.
Gillespie: Which should be zeroed out.
Norquist: I believe so. You take these things step at a time, you don't want to get too far ahead of where the country is to understand it. A lot of people feel if you didn't have tax deductibility for charity, there wouldn't be any. I don't think that's correct, if you look at the history, charity goes up and down with people's incomes not with tax rates or some of these laws or tax deductibility. But I understand the fear that people have on that. It's take this stuff down a step at a time as rapidly as you can and move towards where the government doesn't advantage any behavior or disadvantage any behavior, it just steals what it needs to run some of the government.
Gillespie: Do you feel compared to, Americans for Tax Reform, you created that in 1985. It was a little bit before the last big tax, truly comprehensive reform.
Norquist: It was set up by the Reagan White House to the 86 bill and they asked me to run it.
Gillespie: I was only coming into my political consciousness and I'm not sure that I've fully gotten there yet, but it seemed like there was much more of a national conversation about what was the goal of tax policy? What were the effects of tax policy? It was bipartisan, Bill Bradley, the New Jersey Democratic senator was heavily involved in it. There doesn't seem to have been any kind of discussion like that. Here it's mostly like a grab bag of okay, we can get this done, this done and this done and we need a big win. We, meaning the Republicans. Do you feel like there isn't a consensus or a clearly articulated rationale for what's being put forward as tax reform.
Norquist: There's a complete consensus on why we're doing this within the Republican party. This is the same process as 86 without the Democrats invited to the party. And that's not exactly correct. The Democrats have invited themselves out of the party. When we started this process, all but five of the 48 Democrats wrote a letter saying, "To hell with you, we're going to have nothing to do with anything that's a tax cut." Okay, we're doing a tax cut so goodbye. They decided they weren't going to be in on the process. 86 was unique and not something that can be replicated for a number of reasons. First was, in 81, Reagan came and cut marginal tax rates all across the board. The country was in a recognized recession. It was hard to argue it wasn't. The continuation of all of Jimmy Carter's stuff, we cut taxes.
Gillespie: Deregulation. Let's not pass on Jimmy Carter completely. He was not such a bad guy.
Norquist: On deregulation he and Kahn and a couple of his appointees were very, very good. They don't advertise that they took a lead on that. If you asked them, "What did you do in your president?" He doesn't list that as one of the things. But it's true that Kahn helped got that ball rolling. FTC and so on. And then Reagan got the legislation moved as well to make it permanent. Dramatically changed things. Reagan's economic growth was half deregulation, half tax cuts. But the press can only focus on tax cuts they don't understand deregulation, it's a thousand million different decisions in different places and you can't put it on TV. You can do guys signs bill on TV and they can understand that.
81, we cut taxes, Teddy Kennedy said it would create inflation. Inflation went down to almost nothing. Did it give us a recession or depression?
Gillespie: There were also tax increases after that before 86.
Norquist: There were. These were deductions. The rates just kept coming down. The Democrats were so wrong on the rates and the fact that you would actually get growth and more revenue even out of lowering the rates. By 86, they said, "We don't want to be on the wrong side of the tax issue." To, "We know if we cut the rates, we're not going to lose any money. And we want to get all that lovely money from getting rid of deductions and credits." Republicans said, "Some day the Democrats will be in power, they'll take away all those deductions and credits and they'll leave the rates where they are. So let's trade the rates for those deductions and credits before the Democrats can just take it all."
Each team for their own reasons was willing to go to a revenue neutral, rates down, eliminate deductions and credits, revenue neutral. Led to all sorts of bad things on growth because some of the deductions and credits they got rid of were part of the pro-growth agenda. Long depreciation schedules instead of going to full business expensing immediately. But it was progress because it simplified the code and it did give you the lower rates. But then you had stalemate for the rest of that period. This time around the Republicans, Democrats say they want lower marginal rates on businesses but for eight years of the Obama administration they never wrote a bill, they never did it.
Gillespie: But here in the 90s then you had Bill Clinton coming in and he raised the top marginal income tax rate and a lot of people predicted, okay, that's the end of the Reagan expansion. That wasn't true. Towards the end of the 90s, towards the end of Bill Clinton's years, he cut capital gains rates substantially. All of this stuff is a political process. That worked out extremely well. Why would the Democrats come around at all this time? How much of this is just a way of talking about polarized politics? It doesn't have anything to do with the issues, it's just we're in a particularly tribal period now.
Norquist: One it's tribal but it's more than that. It's tribal but by belief. When Obama was asked, "Why wouldn't you cut the capital gains tax? You know you raise revenue if you cut the capital gains tax and you could help poor people with that lovely money." He said that he would rather leave the capital gains tax up even though it hurt lower income people. Even though it got the government less money. There is recent poll that said one out of six people would like to raise taxes on rich people even if they thought it would hurt the poorest people. One out of six people in the United States is the caricature of the left which is they hate rich people so much they don't mind poor people suffering.
Gillespie: But now in terms of total revenue, which ultimately is what we're talking about here. Taxes are not the price we pay for civilization, they're the taxes we pay for government. We've been pulling in for most of the 21st century, it's gone up and down a little bit, particularly during the recession, but about 17% of GDP. Regardless of what the actual tax code says. Why does it matter? Do you, Grover Norquist, who likes lower taxes, do you want the government to be taking a bigger bite of GDP?
Gillespie: As taxes.
Norquist: No, of course not.
Gillespie: Then what are you, is this going to lead to, are we going to say it's 17% of GDP but we're going to have a bigger economy so we have more money to play with?
Norquist: My target is that government spending as a percentage of the whole economy, as a percentage of GDP, should be as low as possible. You can drive that down in one of two ways. You can either grow the economy and leave the same stupid government, the same size. But it becomes just a smaller problem if you've grow the economy twice a big. Government's half as big as the rest of us. Then we can jump it when they're not looking. The other part of that is you could shrink, you could have the same size economy, nothing gets any better but the government shrinks. That's better too. I want both. That's what this bill gets to. More growth and over time, less spending.
Gillespie: How does it get at all to less spending though? What I want to get real about here is, and you're famous, probably your most famous quote is that you want to shrink the size of government small enough where you can drown it in a bathtub or some such. What are the Republicans doing? This is from a Libertarian perspective, I remember very clearly the Bush years where Bush a small government Conservative who somehow between entering office and leaving, had grown real federal spending, inflation had just terms by 50%. Had refused to pay for wars with war taxes, which is a traditional thing the presidents would do or call for. Every time the Republican party, at least in the 21st century, has been in power, they have tried to cut taxes, sometimes successfully, sometimes not.
Bush certainly did cut taxes a bit and then they just blow out spending and the Republican party is, if you look at the House plan, if you look at Donald Trump's budget plan, if you look at when the Senate gets around to talking about this, they want to go from spending about $4 trillion now to $5 trillion in 10 years. Where are the spending cuts? Donald Trump has pledged never to touch Medicaid or Social Security.
Norquist: You put your finger on the answer to the previous question but you needed to listen more carefully to Donald Trump which is not always what I'd advise somebody to do. In this case, Trump has said during the campaign, we're not going to touch Social Security. Pretty easy promise to make since it takes 60 votes by law to do anything, we don't have 60 votes. Two, that he wouldn't touch Medicare which is a mistake but I understand the argument, I don't need this headache. I don't need somebody being able to suggest …
Gillespie: Between Medicare and Social Security, that's and increasing percentage of government spending.
Norquist: But here's what's on the table and here's what happens in April of this year. Not in some far off time. April of this year, we're going to do tax cuts, that's the reconciliation package this year, passed in December of 2017. April 2018, we're going to do welfare reform. Welfare, TANF is a very small number. We're going to add food stamps, a very small number, well 75 billion or so. It's not too small. And we're going to add in Medicaid which is a quarter of all state and local budgets. And take those together and probably also what's left of Obamacare in terms of spending and block rent those to the states and limit their growth to below the way it's growing now. So that you out 10 years or whatever, ask Peter Farrar what the numbers are. He says in a matter of 20 years it's trillions of dollars that you get just from taking the rate, bringing it down a little bit.
Gillespie: By the same token, Medicare and Social Security spending are going to go up. They're already effectively running deficits so we're going to need more taxes if we don't change their benefit forecasts.
Norquist: How do you eat an elephant. One bite at a time. If you do this and make it work, I believe you can. We did it with welfare reform with Clinton. This is what we're going to shove down the Democrat's throat.
Gillespie: But it was also George Bush who helped expand food stamps, disability et cetera, who expanded Medicare. Who did no child left behind.
Norquist: But Trump actually is President of the United States. George Bush spent six years being the mayor of Baghdad. He couldn't be bothered being President of the United States.
Gillespie: What could Trump do to change spending from in his first budget to his second budget? He's not cutting spending. He will say, "I'm getting of rid of, I'm cutting this small agency here," but he's not touching it.
Norquist: The budget was pretty good. You can't get through the House and the Senate, his better was better than the House and Senate because the way you reduce the size of government in the United State and republic is you reform government down. You don't chop it 10%, you reform it down. You change the rules, you block it out to 50 states and then some states do it really well and some states do it really poorly and everyone says, "Let's do more of that." And the country shifts that way and spending actually came down rather dramatically on the welfare, aid to families with TANF children. They focused on people who needed it and states will police fraud. Because once you give them the money, it's theirs.
Gillespie: I get it. When does Medicare and Social Security and defense spending, which are the three biggest items, when are those gonna come under review?
Norquist: I believe that once we can go to the American people and convince them that this was done properly, that you can look at Medicare and take the project, which was a bipartisan project, not just too long ago that Paul Ryan and Democrats came up with. Now Democrats all ran from it as soon as they thought somebody would actually pass it. We do need to have, you can either keep prices down through price controls or through competition. They try to do it through competition rather than price controls which is why sir.
Gillespie: The Senate joint tax committee has said that they're scoring of tax reform or the Senate plan that is that it will increase national debt which is already, depending on whether you talk about intergovernmental, the total national debt or just the debt owned by the public, but it's already at historic highs. And that the total national debt is over 100% of the economy. They say that the Senate plan will increase that by $1 trillion if you include economic growth, 1.6 trillion without scoring it that way. Do you think that that doesn't, that wrong? Or that doesn't matter?
Norquist: Two things, it's a ridiculous number. If you grow at 3% a year instead of 2% a year and a year ago we were told you couldn't grow at 3% anymore because the new normal is 2%. The same club for growth limits to growth argument that made to justify four years of Carter's failure is now used to justify eight years of Obama's failure. You can't grow any faster than that anymore. There's nothing wrong with that.
Gillespie: When the Republicans, is mounting debt a problem? Because there are no projections really that show national debt as a percentage of GDP or spending is going to be going down anytime soon. Republicans spent a lot of time when Obama was in office saying, mounting national debt is a bad thing. It's a drag on the economy. They were actually aping what Democrats were saying under George Bush. Obama himself in 2008 when he was running for President said, "We gotta get the debt under control." It's this all just kabuki BS theater of when you're out power you say it's a bad thing, when you're in power you run it up because everybody likes it? Isn't if taxes are the price we pay for government, shouldn't we insist from a fiscal reality, we should be paying full freight for government in every year?
Norquist: No. The challenge we have is that both parties use the word deficit and neither mean it. Democrats say, "We're worried about the deficit, we should raise taxes." And Republicans say, "We're worried about the deficit, we should cut spending." The public hears, and Ross …
Gillespie: But then we never do anything. We do cut taxes and we do increase spending. If you on a personal level, if I, this is like government by Groupon. If you can get a dollar's worth of spending for 75 cents, you're going to probably want more spending. If we were spending a dollar, if we were actually fully expensing the cost of government, wouldn't the demand go down? Ceteris paribus.
Norquist: I fear not because one of the things government does is very well, they hide, corporations will pay they tax. They put the tax into products. They put the tax into regulations instead of taxes. Doesn't even show up on the books then. Government's very good at hiding its true cost for just the reason you said. If people understood how much government cost, they wouldn't want as much. But the government gets to play at this game too and they get to hide how they impose costs on the American people. We need to take taxes down to get growth. We need to taxes down because it's your money and it belongs to you. The idea that we're, somebody was running on saying, we're giving all this money to people. The idea that government fails to take your income, they've somehow given it to you. That when you pass a mugger on the street, he gave you your wallet. He gave me a wallet. No he didn't, he forgot to steal it, he didn't give it to you.
Gillespie: It is, but it's also wrong for the government to say, "If you own a house and you make enough money where it makes sense to itemize your tax deduction, we're going to give you some money back that we're not going to give to a renter." Isn't that wrong? That's unfair.
Norquist: Taxing is taking money from people who earned it and giving it to people that didn't necessarily earn it. Fairness is an odd concept in dealing with taxes. There's destructive taxes. There's equal taxes. There's less destructive taxes. Fairness has always struck me as the wrong word to think about with taxes.
Gillespie: Quick final question, when will the tax reform be signed by Donald Trump? And will you be happy with the results?
Norquist: I will be happy because this is a huge step in the right direction. I will then immediately begin to whine that we've got further to go and start in on next year which is the entitlement reform and literally trillions of dollars in reduction. We'll cut more than $9 trillion over the next 20, 30 years, wiping out all the buildup under Obama because unfunded liability is debt. We need to get rid of the unfunded liabilities of Medicaid, Social Security. That is as much debt as bank's debt. That's just debt that hasn't arrived yet. It's coming unless you change what you're doing.
Gillespie: Will tax reform be home for Christmas?
Norquist: Tax reform will be here for Christmas. It will give you significantly more growth than we have. If you grow at 3% a year for a decade instead of 2% a year for a decade, the government nets $2.5 trillion. You buy a lot of tax cuts for that.
Gillespie: All right. We'll leave it there. We've been talking with Grover Norquist. He's the founder and president of Americans for Tax Reform. Grover, thanks for talking to Reason.
Norquist: Thank you Nick.