Detour To Candyland

During Easter weekend (appropriately), a groundswell seemed to appear among Republicans in Congress for what they're calling the "candy option" on tax reform. Like kids with chocolate-smeared faces on Easter morning, they are considering whether to propose a diet of all candy and nothing else. Which, to stretch the metaphor to its inevitable conclusion, is going to lead to a major tummyache in the end.

Here's the basic rundown from Axios, who seems to have broken the story:

As full-blown tax reform looks more and more like an unreachable stretch, there's increasing conversation on the Hill about what's being called a "candy option" -- all the goodies, with none of the pain. That would mean lower personal and corporate rates, plus some limited repatriation, funded largely by deficit spending.

The Washington Post took a closer look at the ramifications of taking the train to Candyland:

To be clear, this is a fallback, not what congressional Republicans would prefer. But it's what I've been predicting. Faced with the complexity of sweeping tax reform and the difficulty of satisfying all the different interest groups and constituencies that have something to gain or lose and will thus be lobbying frenetically on the bill -- there's a reason Congress does this only once in a generation or so -- they'll throw in the towel and default to what they can agree on. And what Republicans can agree on is cutting taxes for the wealthy and corporations. The kinds of reform that are more complex and that some Republicans but not others support, such as a border adjustment tax or the elimination of significant loopholes (each of which has its influential defenders), will just have to be put aside. But doing that presents a couple of major political problems. The first is that Democrats will shout that Republicans are just bestowing a gift on the wealthy, which is what Democrats always say. They say this because it's true, and because it's extremely effective.

The problem for Republicans, however, won't be what Democrats are saying, it will (once again) be the battle within their own ranks that causes them the biggest stomach pains.

Comprehensive tax reform means different things to different Republicans. Putting that aside for the moment, there are two ways to pass a tax reform bill. The first would require Democratic help, because it would definitely mean breaking a filibuster in the Senate. The second is through budget reconciliation, which would mean only 50 votes in the Senate could pass it (with Mike Pence breaking the tie, if necessary). The big problem for Republicans with the second option is that any bill passed this way cannot increase the deficit beyond the next decade. So if the bill passed for the 2017 tax season, it couldn't increase the deficit starting in 2027, and beyond. George W. Bush passed both his tax cuts in this manner, so they disappeared after 10 years because they were not permanent. Permanently changing the tax code or passing any changes with long-term hikes in the annual deficit means getting Democrats on board and getting 60 votes.

But getting Democrats on board means having to negotiate with them and tone down conservative impulses just to slash taxes on the wealthiest Americans. Negotiating with Democrats means eating some vegetables before digging into the candy, in other words. So the reconciliation route is a lot more tempting for the GOP, even if they will have to sunset the bill after a decade. But even this is going to be tough for Republicans, because they all differ on what the objective of tax reform really should be.

Donald Trump was all over the map on how he'd reform taxes as a candidate (as he was on many other issues), so who really knows what the White House will be fighting for in the tax reform debate? The only real specific Trump ever was crystal clear on was getting rid of the carried interest loophole for hedge fund managers, but is he really going to draw a big line in the sand just to hike some very wealthy people's taxes? Or will this campaign promise go down the memory hole the way so many others have?

Paul Ryan has always been an adherent of tax reform being "revenue-neutral" which is a wonky way of saying some people are going to pay a lot more and some people are going to pay a lot less. Actually, to be strictly accurate, that should be "some people and/or some corporations" since corporate taxes are also on the table. To put it another way, there will be winners and there will be losers. This is guaranteed if the reforms are "revenue-neutral," since for the federal government to take in the same amount of money as before, it means whenever someone's taxes get cut, someone else's taxes are going to have to rise to match it.

I don't even personally see the point of "revenue-neutral" tax reform. Why go through all that hassle just to wind up with exactly the same amount of revenue? It's a mystery to me -- I mean, I can understand the ideological stance of either "cut taxes" or "raise more money and reduce the deficit," but going through the entire exercise without changing the bottom line seems kind of pointless, in a way. Maybe that's just me, though -- and I've certainly never claimed to be a macroeconomist.

The problem with any tax reform which either raises anyone's taxes or cuts anyone's "loopholes" is that there is a built-in constituency who is going to be against the idea. Say Republicans announced they'd be drastically cutting corporate tax rates, and furthermore that this would be paid for by eliminating the deduction homeowners claim for their mortgage interest. Every family that owns a house in America would instantly be against such a reform. This is but one example, but every single deduction or credit or other loophole (including the ones that benefit corporations) exists in the first place so that some particular group benefits -- and any affected group is going to be strongly against any change to their particular loophole.

This is the whole "picking winners and losers" problem. And this fight is really going to happen within the Republican caucus, once again. Moderates will balk at any tax hikes on the middle class and the Tea Party will probably throw a temper tantrum for some reason or another (it's what they do best, after all). All the while, the lobbyists that the rich can afford will be skulking around making sure their clients aren't the losers in the process in any way.

This is why Republicans are now considering just stuffing their faces with candy. One new tax idea has been floated -- a "border adjustment tax" otherwise known as a tariff for foreign goods -- but already some in the GOP ranks are strongly against the idea. It cuts against the "no new taxes" grain within the party, after all. The only thing all Republicans can really agree upon is that taxes need to be cut, and if most of those tax cuts go to the ultra-wealthy -- oh, excuse me, the "job creators" -- then that's totally acceptable because it will all magically trickle down one sunny day in the future.

This is the candy, at least for Republicans. The "tummyache" is the fact that doing this will explode the deficit. Cutting taxes costs money, period. No amount of "tax cuts pay for themselves" delusional notions can change this. The question is whether Republicans really want to have to go campaign in 2018 on: "We created huge deficits for the next decade so your boss can get another big tax cut!" The GOP has certainly done so before (those tax cuts passed under George W. Bush, for instance), so they might decide to do so again. But the mood of the country has changed since then, so it remains to be seen whether the voters will be impressed by this reasoning this time around.

The temptation for Paul Ryan and Mitch McConnell and Donald Trump is that they probably could pass a Candyland reform bill. They'd only need a bare majority in both houses, and perhaps enough candy could be tossed in to win over enough Republican votes to pass it (even the Tea Partiers). Negotiating a bill that created winners and losers would be a lot harder, and Ryan may never be able to bridge the differences within his own caucus in this regard. Which would lead to another spectacular failure of the House to pass anything (as we already saw on healthcare reform). And if the House fails just as miserably at reforming taxes as it did on reforming healthcare, then the voters (especially those who voted for Republicans to go to Congress) are quite likely not going to be very impressed. Republicans have been complaining for years how Democrats were the ones holding everything up in Washington, but with Republicans in full control of everything they can't even pass a bill through the House on anything? That's likely not going to go down very well with the voters. When the only other option to such a failure is to stuff as much candy into your mouth as you can, it might just be seen by congressional Republicans as a better option. What could possibly go wrong with a diet of candy for breakfast, after all?

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