FILE - In this Wednesday, Sept. 27, 2017, file photo, Speaker of the House Paul Ryan, R-Wis., at podium, speaks about the Republicans’ proposed rewrite of the tax code for individuals and corporations, at the Capitol in Washington. President Donald Trump and congressional Republicans are writing a far-reaching, $5.8 trillion plan they say would simplify the tax system and nearly double the standard deduction used by most Americans. (AP Photo/J. Scott Applewhite, File)
Photo: J. Scott Applewhite
Photo: J. Scott Applewhite

Will Congress, Trump be able to overhaul tax code?

Some in GOP fear big losses next year if tax reform doesn’t happen.

Following months of intense internal fights and minimal legislative accomplishments, Republican lawmakers face the daunting challenge to overhaul and streamline the federal tax code for the first time in three decades.

With the Republicans in turmoil after failing to fulfill a key campaign promise to revise the U.S. health care system, GOP lawmakers and President Donald Trump are hoping they can assuage their restless political base by reducing federal taxes on individuals and corporations while offering a tax code so simple that many Americans could file their taxes on a single piece of paper.

Trump last Wednesday unveiled a series of ideas that would reduce the number of income tax brackets from seven to three, slash the federal corporate tax from 35 percent to 20 percent, scrap scores of loopholes and double the standard deduction to provide middle-income Americans with a tax reduction.

“Opponents of tax reform trot out the argument that the Republicans are cutting rates that will benefit themselves and their rich benefactors,” said conservative economist Lee Ohanian, who teaches economics at UCLA. “Yes, they do benefit those people. But they benefit everyone.”

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But skeptics argue that beneath the seductive promise of a simple tax code blended with a middle-class tax cut, the proposed plan is more warmed over ideas from Republican-backed tax reductions in 1981 and 2001, which they argue caused soaring federal deficits.

They point out the plan probably would reduce federal tax revenue by an aggregate of $2.2 trillion during the next decade. The non-partisan Congressional Budget Office projects even without the tax plan, the government during the next decade will add nearly $10 trillion in publicly held debt, which is from the sale of government bonds and notes held by public and private investors.

“I thought they would have to do something that would claim to be revenue neutral,” said Harry Stein, director of fiscal policy at the Center for American Progress, a Democratic-leaning non-profit organization in Washington. “They have just dispensed with pretending to even care about the deficit.”

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Election fears

Republicans make little secret of the fact that if they cannot overhaul the tax code, they will pay a frightful price in next year’s congressional elections. Their failure to abolish the 2010 health law known as Obamacare disintegrated in recriminations and infuriated their most loyal voters.

“Tax reform is incredibly important,” said Corry Bliss, who heads the Congressional Leadership Fund, a super political action committee that helps GOP congressional candidates. “When the voters voted for change last year, the change they were talking about was relief of economic anxiety in this country. And passing a middle-class tax cut will be vital to electoral success in 2018.”

At the heart of the debate is whether tax cuts stimulate economic growth to generate enough tax revenue to keep federal deficits under control. Although the economy boomed after Congress and President Ronald Reagan cut tax rates in 1981, the government also ran staggering deficits throughout that decade, much greater than past Republican presidents would have ever countenanced.

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The GOP concept is simple: Changing taxes changes the behavior of investors and everyday Americans. The more money they have, the argument goes, the more they will invest in business expansion or spend on consumer products.

“This is pro-growth tax reform and at the end of the day, I’m not for blowing a hole in the deficit,” said Sen. Rob Portman, R-Ohio, one of the leading proponents of overhauling the tax code. “In fact, if we do this right we’ll be able to get some more revenue in that will actually help with regard to the deficit.”

At its core, said Ohanian, the plan must make American companies more competitive in the world.

“Reducing the corporate tax rate is front and center the most important,” Ohanian said. “If we can make just one change, I would make that.”

Wishful thinking?

Critics counter that conservatives are ignoring history. They point out that Democratic Presidents Bill Clinton in 1993 and Barack Obama in 2013 supported tax increases and the resilient U.S. economy kept on growing. By contrast, a major tax cut sponsored in 2001 by Republican President George W. Bush did not produce appreciable economic growth, they say.

Writing last year for RealClearPolitics.com, William Gale, co-director of the Urban-Brookings Tax Policy Center in Washington, concluded: “The record is clear that deficit-financed tax cuts on high-income households and businesses have failed to boost growth at the federal or state level in the U.S., or in other countries.”

They also criticize the timing. Republicans are pushing tax cuts, they say, when the economy is showing improvement. U.S. economic output grew by 3 percent in the second quarter and the unemployment rate was 4.4 percent in August, a far cry from the 10 percent recorded in October 2009.

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“No matter what was going on in the economy Republicans would be pushing to cut taxes for corporations,” Stein said. “These are the claims made over and over again that the middle class will benefit because wealthy people will create jobs for them or give them higher wages. And that’s not how the economy works.”

Deficit alarms

Throughout Obama’s presidency, Republicans complained about rapidly increasing federal deficits, which was a major factor in the rise of tea party conservatives.

It’s not lost on many that the tax plan being championed by Republicans has potential to greatly increase the deficit.

In reality, both political parties are responsible for the massive debt as Republicans champion tax cuts and Democrats ritually refuse serious restraints in the growth of the federal entitlement programs of Social Security, Medicare, and Medicaid.

By 2027, the CBO calculates, those entitlements will consume more than half of the federal budget, crowding out annual spending for defense or domestic programs, such as education and transportation.

Stein said Republicans rail about the deficit only when it serves their interests.

“My biggest concern if they pass a big deficit-financed tax cut is that the same people who supported that tax cut and were freaking out over the deficit under Obama, will turn right around … and use the larger deficit as a way to make the (spending) cuts they want to make,” he said.

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