With the epic failure of Paul Ryan’s healthcare reform bill in the House , can the GOP get it together enough to pass tax reform? The editors of The Wall Street Journal write that prospects for a tax bill have gotten much harder.
President Trump campaigned on breaking Washington gridlock, increasing economic growth and lifting American incomes. The health collapse undermines those pledges. The legislative failure is obvious, but less appreciated is that House Speaker Paul Ryan’s reform included a pro-growth tax cut and major improvements in work incentives. The 3.8-percentage-point cut in taxes on capital income would have been a substantial increase in after-tax return on investment, nearly half of the eight-point cut in the capital-gains tax rate that helped propel growth after 1997.
Now that’s dead, and so is the replacement for the especially high marginal-tax-rate cliff built into ObamaCare’s subsidies. These steep tax cliffs as subsidies phase out are a major hindrance to work, as University of Chicago economist Casey Mulligan has shown. The Ryan bill would have been a significant boost to economic growth and labor participation. The critique that it would not have helped “Trump voters” was willfully false coming from the left and uninformed on the right.
This lost opportunity now makes tax reform even more important as a growth driver, but the health-reform failure also hurt tax reform in another major way. The Ryan bill would have reduced the budget baseline for tax reform by some $1 trillion over 10 years. This means that suddenly Republicans will have to find $1 trillion more in loopholes to close or taxes to raise if they want their reduction in tax rates to be budget neutral.
That means picking more fights with industries that fear they’ll be tax-reform losers. Take the irony of Senator Tom Cotton of Arkansas. He trashed the House health bill far and wide, but he also represents Wal-Mart, which hates the House GOP’s border-adjustment tax proposal that would raise some $1 trillion in revenue to pay for lower tax rates. By helping to kill the Ryan health bill, Mr. Cotton has now killed $1 trillion in tax and spending cuts that would have made it easier to pass a tax reform without the border-adjustment fee. We look forward to seeing the Senator’s revenue substitute.
Read more here.