Why the Trump Tax Cut Is Necessary
Thus, the only path to tax reduction is to use the reconciliation process, which allows a single majority in the Senate to pass a budget that includes tax cuts. The rules for reconciliation process is that the tax cuts can be of any size inside the “budget window”—arbitrarily set at ten years. It could be any number larger than five. Outside the budget window, in years eleven to fifty following passage, the only tax reduction that would be “permanent” would have to be offset dollar for dollar by reduction in entitlements (hence permanent cuts), tax increases, or increased revenue projections due to pro-growth policies in the bill scored by the Joint Committee on Taxation.
Since there are limits to how much growth the Joint Committee on Taxation will attribute to tax reform there are limits to how much tax cuts can be made permanent. In the past the Congressional Budget Office has pointed out that if the U.S. economy grew at four percent a year, instead of two percent a year for one full decade the federal tax revenue would be increased by $6 trillion over those ten years. Growth is a powerful generator of more tax revenue. In the past, the Joint Committee on Taxation did not consider the dynamic effects of tax changes. But that has proved embarrassing. The 1993 Bush tax cut in the tax rate on dividends and capital gains generated more revenue between 1993 and 1997 to Washington than was predicted without the tax cuts—i.e. that tax cut actually paid for itself.
So the size of the permanent tax cuts is limited to how much revenue can be raised by eliminating tax credits and deductions—for instance, eliminating the tax deductibility of state and local taxes would raise $1.7 trillion over a decade—and what growth in revenue might be projected by the Joint Committee on Taxation from lower rates and expensing. There is a third way to increase the amount of permanent tax cuts beyond the ten-year window and that is for congress to use “present policy” rather than “present law” in projecting future revenue. Assuming all tax credits that are planned to expire will continue frees us more space for permanent tax cuts that if one employed “present law” and assumed they would indeed lapse.
There is no limit on how many tax cuts can be enacted for the next ten years and how deep those tax cuts can be. The only limit is on how many and much of those tax cuts can be made permanent. That is enough to keep the House, Senate, White House and affected interests busy through November.
So, can the House leadership convince the “Freedom Caucus” to avoid the train wreck of Obamacare repeal and this time avoid making the perfect the enemy of the good. Can they vote for a “less than perfect” tax bill? Can anyone convince John McCain to set aside personal pique and vote for a Trump-endorsed tax bill? One remembers that McCain voted against both the successful Bush tax cuts. Can Trump avoid the siren call of the media to engage in endless and fruitless negotiations with Democrats to water down a bill they will not vote for under any circumstances? Will the Joint Committee on Taxation provide a reasonable dynamic score that allows more of the tax reductions to be permanent?
We shall see.
Grover Norquist is president of Americans for Tax Reform. Twitter: @GroverNorquist.