After last week’s collapse of health care legislation, many believe Republicans can’t afford to fail again, especially on what is widely considered their signature issue: taxes. As Scott A. Hodge, president of the conservative-leaning Tax Foundation, told me this week: “If the Republicans fail with tax reform, it would be truly catastrophic. It’s really all or nothing at this point.”
There’s only one major stumbling block to a 15 percent rate, and the conventional wisdom is that it’s an intractable one: how to pay for it.
According to estimates by the Tax Foundation, a cut in the corporate rate to 15 percent would add $2.2 trillion to the deficit over 10 years on a “static” basis, which assumes no additional economic growth. After factoring in growth and higher resulting tax receipts, known as “dynamic” scoring, the deficit would grow by $1 trillion, according to the foundation.
And if rates also go to 15 percent for pass-through entities — businesses that pay taxes at individual rates, like limited-liability corporations and partnerships — that adds another $1.5 trillion on a static basis, and $1.3 trillion on a dynamic basis, the foundation estimates. (A cut in pass-through rates has much less impact under dynamic scoring, because individuals and small businesses spend far less on capital projects and thus do less to stimulate the economy.)
Paying for corporate tax cuts of that magnitude “is a tremendous challenge if you don’t want to blow a hole in the deficit,” Mr. Hodge said. “Anyone writing tax legislation will find that the options are very limited.”
How big is the challenge? In their tax blueprint, House Republicans could only get the corporate rate to 20 percent. The 2014 proposal from Representative Dave Camp, a Michigan Republican who was then the House Ways and Means Committee chairman, struggled to reach 25 percent. And when President Barack Obama nearly reached a “grand bargain” on tax reform with Republicans in 2013, he could only get to 28 percent, with 25 percent for some manufacturers.
“The math is really hard,” said Ray Beeman, a tax expert at Ernst & Young and a former adviser to Mr. Camp. “There’s really no big source of revenue that won’t rile people up.”