Why Republicans are struggling mightily to overhaul tax code
WASHINGTON (AP) — Why are Republicans struggling mightily to reach a consensus on how to overhaul the nation’s tax system?
The GOP is supposed to be really good at cutting taxes. President George W. Bush cut taxes. So did President Ronald Reagan, though he also raised them.
Why is President Donald Trump, who has promised the largest tax cut ever, having so much trouble accomplishing one of his main initiatives?
Some questions and answers about why tax overhaul is hard and why Republicans have been unable to reach a consensus.
What’s the holdup?
After weeks of private negotiations, the White House and congressional Republicans still don’t agree on exactly what they want to accomplish.
House Republican leaders are firm that they want to completely overhaul the tax system for businesses and individuals. They want to make the tax law simpler and more efficient, and they want the changes to endure beyond the next decade.
They want to cut tax rates, but they don’t want the changes to add to the federal government’s long-term debt. That means Congress would have to eliminate a lot of exemptions, deductions and credits, and probably come up with a new source of revenue.
The White House is all about tax cuts. Administration officials have talked about simplifying the tax system and getting rid of deductions, but have offered few specifics.
Why not just cut taxes?
A growing number of Republicans say they would rather cut taxes than tackle the difficult task of overhauling the tax system. House Speaker Paul Ryan vehemently opposes this approach.
Republicans are working to pass a tax plan under a procedure that requires only a simple majority in the Senate, preventing Democrats from blocking it. But to use this procedure, the package cannot add to the government’s long-term debt.
That means simple tax cuts would have to be temporary, like the ones passed under Bush.
“Every expert agrees that temporary reforms will only have a negligible impact on wages and economic growth,” said Ryan, R-Wis. “Businesses need to have confidence that we will not pull the rug out from under them.”
Why is Ryan pushing for a tax on imports?
Ryan is pushing a plan that would increase taxes on imports and cut taxes on exports. It’s called a border adjustment tax.
One reason Ryan likes it is because it would raise enough revenue – about $1 trillion over the next decade – to lower the corporate tax rate from 35 percent to 20 percent without adding to the government’s debt.
The tax would provide strong incentives for U.S.-based companies to keep their operations in the United States and perhaps persuade companies to move overseas operations to the U.S.
The tax, however, has no support in the Senate because senators fear it would increase the cost of consumer goods.
How would Ryan’s tax work?
The border adjustment tax is a cash-flow tax in which corporations could deduct business expenses immediately instead of depreciating them over time. But interest on debt would no longer be deductible, though current debt would be grandfathered.
A U.S. company that makes a product and sells it domestically would pay a 20 percent tax on the profit. A U.S. company that makes a product and exports it would pay no taxes on the proceeds from the sale.
Both of these companies could deduct the cost of making their products as a business expense.
The tax is often described as a tax on imports because companies that import goods would also pay the tax, but they could not deduct the cost of imported goods as a business expense.
For example, if a U.S. retailer imports a product from China for $5 and sells it for $10, the retailer would have to pay tax on the entire $10.
If a U.S. retailer buys a domestically-produced good for $5 and sells it for $10, the retailer would only pay tax on the $5 profit.
Retailers that rely on imports hate the proposed tax. U.S. exporters love it.
Why not just cut loopholes?
A popular idea on Capitol Hill is to cut tax rates for everyone – individuals and corporations – and make up the lost revenue by eliminating special-interest loopholes.
The numbers, however, don’t add up.
On the corporate side, if Congress eliminated just about every tax break enjoyed by corporations, it would raise only enough revenue to lower the corporate tax rate to 28.5 percent, according to an analysis by Scott Greenberg, a senior analyst at the conservative Tax Foundation.
Ryan wants to lower the tax rate to 20 percent; Trump wants to lower it to 15 percent.
Greenberg modeled the effects of eliminating 54 different tax breaks enjoyed by corporations, including the widely used domestic production credit and the popular credit for research and development.
“If lawmakers are interested in paying for a large corporate rate cut solely by ‘closing corporate loopholes’ or ‘repealing special preferences,’ then they will be greatly disappointed,” Greenberg wrote.