'Tax Reform': A Meaningless Buzzword for a Confusing Idea

On July 27 the "Big Six"—a group of powerful government officials from the Department of the Treasury, the White House, and Congress—revealed the results of a series of closed-door policy discussions they'd been having every week for months: an eight-paragraph statement about the future of federal taxation in the United States. If it was meant to provide a roadmap of the future of tax policy, it fell flat on its face.

Titled "Joint Statement on Tax Reform," the document says the Republican-dominated government finally has the unity of purpose required to "fix our broken tax code for families, small business, and American job creators competing at home and around the globe."

As for how to do this, the document is short on answers. Very short on answers.

That might be because the Trump administration doesn't seem to know what it wants to see changed in America's tax code. Last week, the Intercept reported that White House strategist Steve Bannon would like to change the tax code to make it so that those making more than $5 million a year pay 44 percent of that additional income in taxes instead of the 39.6 percent they currently pay. Trump himself appeared to support raising taxes on the rich in a recent interview, though he later clarified that this wasn't true. The White House likely still supports the one-page plan Trump laid out in April, which would reduce the number of income tax brackets to three and the top bracket's rate to 35 percent. (It's not clear which income levels would be in each bracket.)

From there this issue just gets more vague and confusing. Here's why:

According to William Gale, economist at the Brookings Institute's Tax Policy Center, "tax reform" has no meaning. "Generally, people use it to mean whatever they want," Gale told me. He added that there's no consensus in Washington, DC, about how to alter the tax system, but he's settled on "a policy that changes the structure of the tax code, as opposed to reducing the rates," as his functional definition.

Gale said sometimes people distinguish tax reform from tax cuts by saying "reform" is revenue-neutral—the government compensates for the new cuts by introducing new sources of money—as opposed to tax cuts, which simply reduce revenue. Speaking of which:

No matter what Steve Bannon says, if you're a Republican, you're part of an organization that wants to lower taxes literally across the board—or at least anywhere that they "penalize thrift or discourage investment," according to the GOP's 2016 party platform. Indeed, this most recent paper specifies that taxes need to be lower in the case of working families, along with small businesses "so they can compete with larger ones." And they also need to be lower for "all American businesses," presumably meaning large corporations, "so they can compete with foreign ones."

Democrats aren't going to go along with the Republican tax plan, and even though they are in the minority in both houses of Congress, they have a surprising amount of power. The 52 Republicans currently in the Senate are nowhere near the 60-vote majority they need to bypass filibuster rules.

Senate Democrats sent a letter to the White House on Thursday that was essentially a list of demands: If there's no net tax cut for the wealthy, the overall tax reform plan is revenue-neutral, the middle class don't get a tax hike, and Medicare and Medicaid aren't slashed, Democrats will support it.

"That is going to be hard to square with Republican goals," Gale told me, putting it mildly.

Republicans might use a procedure called budget reconciliation, which would let them pass their tax bill with a simple majority of 51 votes. (This is the same technique they used when attempting to repeal the Affordable Care Act earlier this summer.) Unfortunately that procedure doesn't work if the bill being passed would add to the budget deficit after ten years, which is exactly what permanent tax cuts would do.

So if Republicans use budget reconciliation they'll have to avoid adding to the deficit, and that means taxes can't possibly just be slashed willy-nilly. "Paying for tax reform would require somebody to pay more, and I don't think the Republicans have the fortitude to do that, unless it's poor people through Medicaid cuts who bear the burden, but I don't think there's enough money there to finance serious tax reform," Gale explained.

The "Big Six" paper says taxes need to be "simpler," and the GOP platform has called the tax code the "object of both anger and mockery" because its length is "exceeded only by its complexity." The Republicans may be plotting to simplify the tax code, but in Gale's opinion, they might need to pull shenanigans to get there. He told me that with their options limited, Republicans might just use "gimmicks" and "smoke and mirrors" in an attempt to cover up the costs of their new policy.

If they succeed in cutting rates, and that costs the government a lot of money, so lawmakers, Gale said, may have to result to "dynamic scoring," which is where they "assume that their tax cuts generate a whole lot of economic growth, then that will raise some revenues, and help offset the size of the tax cut, and I'm guess they'll make pretty strong assumptions about that."

Will that happen? "It's still hard to know, because it doesn't strike me that they're anywhere close to putting out a plan," Gale said.

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