What to Watch for in TrumpTax

After all the noise about Obamacare and football players on bended knee, after the obsession with a border wall and promises to wipe North Korea off the map, after all the bluster and bravado that has marked his improbable tenure in public office, Donald Trump gets down to the real business today, unveiling a tax cut plan that might be the signature achievement of his tenure as President.

This is not to suggest Trump and Republican legislators do not really care about all those other issues. But as I have written before, the real reason the GOP Circus rolls into town is to cut taxes, especially on the affluent and corporations. Wall Street hasn’t been booming of late because of Trump’s attacks on undocumented immigrants; it’s the prospect of windfall tax cuts that whets the appetite of the plutocrats with whom Trump feels most empathetic.

There has already been much speculation about this Republican-only tax plan – and the partisan nature of the proposal is more than sufficient reason to regard it with alarm and skepticism. But Mitch McConnell and Paul Ryan will use their remaining get-out-of-responsible-legislating-free card – the 2018 reconciliation bill – to try to slam through an irresponsible and debt-generating tax cut without any regard for (a) regular order, (b) the normal bipartisan tax-writing process, or (c) the all-but-certain ballooning of the deficit that will result from this ill-conceived plan.

Trump and his minions will try to sell this tax turkey based on several well-worn GOP promises: Everyone will get a tax cut. The cuts, especially to business and the affluent, will stimulate investment and hiring, boosting the economy. The deficit will shrink as a result of cutting taxes.

And it is true, everyone will get a tax cut, just as they did under Ronald Reagan and George W. Bush (and Barack Obama, for that matter, as part of the stimulus of 2009). But the key to tax policy isn’t the breadth of the cut, but rather the distribution, that is, what proportion of the cuts each quintile of the tax-paying public receives. While giving an across the board cut ensures that the gross amount going to the large middle class is sizable, it obscures the hugely disproportionate amount that will go to the extremely wealthy thanks to a lowering of the top rate and likely changes to the treatment of capital gains and estate taxes. And wait to see if Trump follows through on his campaign promise to rescind the obscene carried interest loophole that benefits no one but hedge fund multi-millionaires.

The other key point to watch will be the Congressional Budget Office score. CBO has been the bane of the Republicans’ plotting on health care because it has predicted massive benefit losses when reviewing each of their misbegotten plans. But Speaker Ryan was careful to include instructions in the House rules adopted in January that skew the scoring for tax policy, directing CBO to accept the disproven concept of “dynamic scoring” that assumes that tax cuts will generate growth rather than cause deficits. This perverse misrepresentation is based on Ronald Reagan’s “supply side economics” model that has been demonstrated to be worth barely the napkin the theory was sketched out on in the 1970s.

Indeed, the continued Republican reliance on the mythical impact of tax cuts is the major reason why deficits have been significantly higher under supposedly fiscally conscious Republican Administrations. Under Reagan, the national debt grew by 189 percent. George H.W. Bush was better; the debt rose by just 54 percent (but of course, he fatefully raised taxes to slow down the debt explosion). In between, during Bill Clinton’s Administration, the debt rose by just 32 percent and the annual budget was actually balanced; twice. Returning to the tax cutting model under George W. Bush, the debt soared by 101 percent. Barack Obama weighed in at 68 percent, but he, of course, inherited not only all of W’s irresponsible tax cuts but the worst recession in three-quarters of a century which necessitated massive countercyclical spending. Indeed, every Democratic president since Kennedy has produced a lower debt increase than his Republican predecessor.

There is, of course, a downside to this Democratic diligence. Confronted with the serious debt momentum set in place by their predecessors, most Democrats have acted responsibly and raised taxes, slowing the pace of the debt increase. Predictably, such action has provided grist for the Republican campaign machine to castigate Democrats as profligate “tax and spend” proponents, even though, for the most part, the tax raising was needed to clean up the mess left by the tax cutters.

While one might assume the Republican tax mantra was little more than smoke to obscure the real goal of fattening the wallets of the fat cats, there is a strategy behind their irresponsible behavior. Increased debt is a very convenient straw man to use to justify the other Republican obsession: cutting spending, and specifically domestic discretionary spending that benefits lower and middle income Americans. Reagan’s genius, in fact, was employing this indirect method for attacking Democratic policies without necessarily opposing the programs or their beneficiaries directly (as did Barry Goldwater, for example, when he called for elimination of Social Security and opposed Medicare). By pumping up deficits, Republicans create the rationale for spending cuts, even though those domestic programs have little to do with creating deficits and the cuts will have no significant impact on staunching the red ink. Reagan’s budget director, David Stockman, so much as admitted the deception once he left office.

So watch the distribution curve and the debt projections to determine the real winners and loser from Trump Tax. And don’t be surprised if it looks like the same old bait and switch, because it will be.

Trump Cuts a Better Deal

Today was, unexpectedly, one of the most consequential in the short, turbulent and unpredictable tenure of Donald Trump as President. In what must have been a demoralizing turn for congressional Republicans, Trump dismissed the debt crisis strategy advocated by Senate Majority Leader Mitch McConnell and Speaker Paul Ryan and instead threw in with Nancy Pelosi and Chuck Schumer. There’s a better deal the Republicans didn’t see coming.

McConnell, Ryan, Pelosi and Schumer held their first “Big Four” meeting at the White House with Trump to game out the urgent items requiring congressional action. The debt ceiling needs to be raised within the next few weeks to prevent a default that would be catastrophic to the U.S.’s stature and scramble international finance. The government faces a shutdown on September 30^th if a continuing resolution (CR) is not enacted to cover the beginning of the 2018 fiscal year. And billions of dollars need to be appropriated to assist the devastated residents of Texas and Louisiana in the aftermath of Hurricane Harvey.

Must-pass bills always offer opportunities for congressional mischief and those who hold the balance of power enjoy their most prominent moments on the congressional stage. Ultimately, the responsibility for preventing a catastrophic outcome – a government shutdown or a default – lies with the majority. While it is often all fun and games for the minority to exploit the majority’s challenge, the majority cannot escape blame if legislation fails to pass, which is why shortly after assuming their current roles, both Ryan and McConnell offered assurances that they would not shut down the government (which had proven a huge political mistake for Republicans in 2013) or default on the debt.

While Democrats controlled Congress, there was never a real chance of a shutdown. Democrats need government open, operating and well-regarded in order to achieve policy goals that cannot succeed without governmental engagement. Knowing this, Republicans were happy to sit on their hands, proclaim their opposition to deficit spending and insist upon massive spending cuts as their price for supporting CRs or debt increases. Democrats enjoyed sufficient majorities that they did not need to make any compromises with the conservative hardliners.

Things became more complicated when Republicans won control in 2010. Suddenly, they had the responsibility to pass must-pass bills, but Speaker John Boehner lacked the votes to do so. The conservative caucus that had delivered him the speakership – the Tea Party activists – did not get the memo about behaving responsibly when in the majority, and regularly refuted Boehner’s pleas for votes to pass GOP versions of these bills. Boehner behaved like any responsible leader of a congressional majority: he cut a deal with those who had the votes, in this case, Nancy Pelosi, who naturally insisted that the bills include none of the devastating cuts or policy riders demanded by the conservative activists who had no intention of supporting the bills even if they included their demands. Boehner’s explanation to the Tea Party-Freedom Caucus zealots reflected his responsibilities as Speaker: if you won’t provide me 218 votes to pass the bill I (and you) want, then I have no choice but to get the votes wherever I can.

After Boehner quit in 2015, following years of aggravation from the hardliners, Paul Ryan faced much the same dilemma. Five years of being in the majority had done little to convince the Freedom Caucus that they bore any responsibility for governing. And their hostile view of government meant they cared little for the disdain heaped upon Congress for its failure to perform. After all, an unpopular Congress is unlikely to be entrusted by voters to empower government to act.

But what happened today was a very different outcome, and one that could hardly have been predicted. McConnell and Ryan arrived at the White House arguing for a debt ceiling extension that would extend beyond the 2018 election, minimizing the need for a succession of embarrassing votes and limiting the opportunities for Democrats to insist on policy riders.  Not surprisingly, Pelosi and Schumer argued for a short debt ceiling extension and Continuing Resolution, until only December, avoiding the short-term crisis but setting up another opportunity for leverage just before the Holidays.

In the meeting, Trump evidently assessed who had the capability to make a deal, and determined it was Pelosi and Schumer. Did the GOP majority leaders have the votes they needed for the long term fix, he asked? No, admitted Ryan and McConnell, both of whom have rebuked Trump and drawn his insults. And just like that, Trump threw in with Pelosi and Schumer, demonstrating yet again his unpredictability and affirming Pelosi’s hard-nosed tactical maneuvers. Meanwhile, the Democrats declared that their support for Hurricane Harvey relief was conditioned on the short-term debt and CR agreement.

Republican staff recoiled in horror at the affront to their bosses that, unlike Trump’s juvenile name-calling, has real policy and strategic implications. The inexperienced Trump, the staff believes, got rolled by the crafty Pelosi and Schumer team. Now, Republicans now will have to cast votes again, perhaps numerous times, on these prickly issues between now and the 2018 election, fueling anger from the base and potentially stimulating primary challenges. Moreover, the time that will invariably be devoted to these additional negotiations will likely consume all the oxygen on Capitol Hill that the GOP leadership had hoped would be devoted to tax reform or even another attempt at health care before the 50 vote threshold evaporates with reconciliation authority on September 30^th.

Trump really did nothing that Boehner had not done previously, bowing to the inevitable and cutting a deal with Pelosi that reflects her demands. But it was one thing to endure that humiliation when a Democrat occupied the White House and could back up his congressional allies. But with a Republican in the Oval Office, the GOP leaders had every reason to believe a little presidential muscle would be flexed on their behalf.

No such luck. Trump lived up to his self-proclaimed reputation as a deal maker and he cut one with the people who had the power to make a deal. “We had a very good meeting with Nancy Pelosi and Chuck Schumer,” the President told the press aboard Air Force One. “We agreed to a three-month extension on debt ceiling, which they consider to be sacred — very important — always we’ll agree on debt ceiling automatically because of the importance of it … [W] e had a very good meeting. We essentially came to a deal, and I think the deal will be very good. We had a very, very cordial and professional meeting. So we have an extension, which will go out to December 15th. That will include the debt ceiling, that will include the CRs, and it will include Harvey. So we all very much agree.”

Ryan and McConnell were removed from the account of the meeting like old Soviet apparatchiks who were excised from a photo after falling from favor. Pelosi and Schumer were reportedly delighted with the outcome and immediately began plotting to exploit the coming December deadlines. “Both sides have every intention of avoiding default in December and look forward to working together on the many issues before us,” they declared, adding that “as Democratic leaders, we strongly believe the DREAM Act must come to the floor and pass as soon as possible and we will not rest until we get this done.” No report on Ryan and McConnell’s mood but unquestionably, it was not a good day for the congressional majority.