Tax cuts just got more likely

Rick Newman
Senior Columnist

The spectacular flameout of Republican efforts to kill the Affordable Care Act is a humbling moment for Washington’s ruling party. But it doesn’t signal GOP feebleness on every issue.

In fact, there may now be a greater likelihood Republicans, backed by President Trump, pass tax cuts by the end of 2017.

Trump, with typical moxie, has promised “massive” tax cuts. And unlike healthcare—an issue Republicans still don’t have a coherent plan on—low taxes are a staple of the Republican agenda. And it just got more important for Republicans to prove they can accomplish something before the 2018 midterm elections.

“They need to prove to their core constituency there’s a reason they elected Republicans,” says Tom Block, Washington policy strategist for investing firm Fundstrat. “Tax cuts are very much alive.”

On July 27, the White House published a statement on behalf of leaders in the House, Senate, White House and Treasury Dept., outlining tax-reform principles they all agree on. Details were scarce, but this is a running start compared with the GOP’s health reform breakdown. And there’s one important bit of momentum: Republicans have agreed to drop the border-adjustability tax that House Speaker Paul Ryan supports, removing what up till now has been the biggest source of friction between the House and Senate on tax cuts.

Congress actually has a lot of work to do—on a limited schedule—before they can get to tax cuts. But the end of Obamacare repeal clears the slate, to some extent, since some analysts had speculated that Congress could be dickering over competing health bills in the House and Senate well into October.

President Donald Trump, flanked by Senate Majority Leader Mitch McConnell of Ky., left, and House Speaker Paul Ryan of Wis., right as he speaks during a meeting with House and Senate leadership in the Roosevelt Room of the White House in Washington, March 1, 2017. (Photo: Evan Vucci/AP)

Tackling the debt ceiling and budget

With health care out of the way,  the next priorities for Congress are raising the debt ceiling, so the Treasury can borrow more money, and passing a budget for the government’s fiscal year, which starts Oct. 1. Those will both be contentious issues generating plenty of headlines. But odds are good that the Republicans who control Congress will have deals in place in time.

That would leave the fall for negotiating a tax-cut bill. Similar efforts in the past have taken years. But Congress might decide quick, modest tax cuts are preferable to deep, complex reforms, simply because they require less work and can pass more easily. And they might be able to make faster progress on tax cuts than on just about any other issue. “If there’s a core issue uniting Republicans, it’s tax cuts,” says Block. “They could come up with a bill that the full spectrum [of Republicans] could agree on.

There’s broad agreement that the top corporate tax rate, 35%, is too high, since the rate in most other developed nations is considerably lower. That’s one reason some US companies have relocated their headquarters to other nations, such as Ireland. Trump wants to slash the corporate tax rate to 15%, but that might cut federal revenue too sharply. A new rate around 25% seems more plausible.

It’s also likely there will be a tax repatriation “holiday” meant to encourage US firms to bring home nearly $2 trillion in profits that are stashed overseas, to avoid high US taxes. That money could be taxed at a temporary low rate of 10% or 15%. Corporate groups such as the Business Roundtable and US Chamber of Commerce strongly support such moves, creating momentum for tax cuts that didn’t exist for repealing Obamacare, which many powerful interest groups opposed, contributing to its downfall.

The tax plan Trump published as a candidate included massive tax cuts for the wealthy, but Trump has wavered on that recently, suggesting he may focus more on middle-class tax cuts and perhaps leave the top tax bracket in place. That would lend a more populist bent to his tax plan and raise the odds it can pass.

Republicans hoped that repealing Obamacare would provide budget savings they could use to offset large tax cuts. Without those savings, tax cuts could end up much more modest than Trump has promised. But if Congress can pass a bill, it would still let Trump claim he did something he promised to do. And if it helps suppress memories of the Republicans’ disastrous foray into health care, that would be a fringe benefit.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman