You can’t cut spending.

You can’t cut spending. Got that? Now go crazy on tax reform. You can call it tax cuts if you want. And maybe a few targeted taxes will actually get cut. As long as it’s revenue-neutral. Which means as long as it doesn’t add to the deficit. Which means that you have to raise taxes elsewhere to balance the tax cuts that are being promised. And without the Obamacare repeal lowering the revenue baseline, by eliminating some of the tax revenue, you have much less room to play with.

Why?

Because you can’t cut spending. To do that you’d be outside the safe zone of reconciliation, and that means wading into filibuster creek which can get quite deep and filled with … stuff. Which is exactly where the Democrats would love to put the GOP Congress: waist-deep in sludgy accusations of pandering to the wealthy. As that economic genius – Senator Wyden of Oregon – puts it:

We need sustainable, comprehensive, tax reform. Not a massive tax cut for the wealthy.

Well said Ron! Bravo! Because America has ridiculously low tax rates right now, especially for high-income earners. Oops, maybe not. Yes, the total burden of taxes in America, according to the Tax Policy Center, is about 26% of GDP. Which is fairly low relative to other OECD countries. But … that overall tax is mostly made up of taxes on income and profits, which at 48% (of income and profits not total GDP) is really, really high. Only Scandinavian countries and Australia are as high or higher.

Not good.

The world’s most innovate economy has come to the point where it is punishing income and profits, which tend to be the reward for hard work and smart work, and smart investing. And innovation underlies all of that. But any tax cut given current Congressional rules has to be revenue neutral. Which means more money has to be raised elsewhere.

Reagan would never have been able to put in place the tax cuts he did under these sorts of rules. Because Democrats today would never, ever agree to any spending cuts. Um, and a lot of Republicans are in the same boat. The ACA repeal failed in large part because of moderate GOP worries about curtailing the rate of growth of Medicare. Never mind actually cutting back on an entitlement. Because healthcare is being seen as a right, not as insurance for a costly, complex service.

So, if you want to cut spending and increase the deficit, you risk the filibuster. Could you cut spending, and cut taxes? Maybe? Please? No one is talking about cutting spending at this point. So one has to assume it’s off the table. You can’t cut spending.

Of course, one could also raise the goods and services taxes – the hated sales taxes – and cut the income taxes and taxes on profits. Reward innovation. Punish consumption. But careful, when consumer spending is something like 2/3’s of America’s GDP raising sales taxes is something most governors and senators would be dead set against. Ok, maybe not in California.

So as we move from the GOP blaming each other for the collapse – but not quite dead yet apparently – of the Repeal and Replace efforts, and on to tax cuts, one can’t be blamed for feeling cautious and not very optimistic that the GOP will be able to do any sort of meaningful reform of America’s tax code. It’s show me time for the GOP.

Because they’re not talking about tax cuts. What they’re talking about is tax shuffles.

Comments