The Tax Trainwreck Everyone Sees Coming

And more from this week...

Republicans are headed straight into a trainwreck that everyone can see coming, yet they continue shoveling coal into the firebox. Your one thing to read this week is the Wall Street Journal’s Richard Rubin on the ongoing fight over a new tax bill: GOP’s Right Flank Secures Deeper Spending Cuts as House Budget Advances.

If you want more detail, I recommend these four short items from Politico:

• Vance, Miller and Vought backing 2-bill reconciliation strategy; Bessent pushing 1.

• House Republicans advance their budget after appeasing hard-liners

• Fiscal hawks tweak House Republicans’ party-line framework

• Sweeping safety-net cuts have GOP centrists questioning Johnson’s budget

And, for good measure, this one from The Hill too:

• Senate Republicans say they won’t support tax bill that doesn’t make Trump cuts permanent

We have here a classic case of politicians searching in vain for political solutions to what is a substantive problem: The U.S. tax code does not raise enough revenue to pay for the spending that U.S. voters want the government to do. No amount of clever legislative drafting will get around that. As House Budget Committee chairman Jodey Arrington observed in the Wall Street Journal last month, “Our deficit is unsustainably high, and without a course correction it will undermine efforts to promote economic growth and reduce inflation.” Last year, underscoring the need for a balanced response that considers both higher taxes and lower spending, he acknowledged, “It’s only fair to have both revenue and expenditures on the table.”

This problem could be solved, American Compass showed in our The Return of the Fiscal Conservatives collection, if leaders had the courage to pursue such a combination of tax and spending measures that shared the burden of closing the fiscal gap. They could place the nation on much firmer footing from which to invest and grow in ways that would share the ensuing prosperity. But capitulating to pressure from anti-tax activists and Republicans who seemingly care not a whit about governing responsibly, the GOP has now moved forward a budget framework that would lower tax revenue by as much as $4.5 trillion over the next ten years.

On one hand, remarkably, that’s still not good enough for one side of the party. “Let me just say that a 10-year extension of President Trump’s expiring provisions is over $4.7 trillion according to CBO,” said House Ways & Means Committee chairman Jason Smith. “Anything less would be saying that President Trump is wrong on tax policy.” Funny construction, that, as if Trump’s infallibility must be the ground truth from which policy analysis gets built. There’s no logical defense of a tax cut that large, so an appeal to authority will have to do.

On the other hand, fiscal hawks are demanding at least $2 trillion in spending cuts to offset at least some of the lost revenue, and the final deal struck in the House would bring the $4.5 trillion figure lower if the spending cuts don’t materialize. “Fiscal hawk” is an admittedly strange term for someone supporting an additional $2.5 trillion of debt over the next ten years. “Slightly less irresponsible deficit-monger” seems more appropriate. To-ma-to, to-mah-to, I guess.

It does bear mentioning, though, that if you pursue safety-net cuts not for the sake of actually reducing the deficit, but rather to pump up the size of your tax cut, then you earn exactly zero fiscal-responsibility points. You’ve “used up” the spending cuts that may indeed have been needed for deficit reduction, placed the burden on lower income households, and yet managed to increase the deficit. What are we even doing here?

And still there’s the third hand: the moderates already stating their quite reasonable concern that spending reductions on the scale demanded would mean sharp cuts to popular programs, which are especially untenable politically when used to cut taxes for high-income households. “I ran for Congress under a promise of always doing what is best for the people of Northeastern Pennsylvania,” said Congressman Rob Breshnahan. “If a bill is put in front of me that guts the benefits my neighbors rely on, I will not vote for it. Pennsylvania’s Eighth District chose me to advocate for them in Congress. These benefits are promises that were made to the people of NEPA and where I come from, people keep their word.”

Can I interest you in a fourth hand? Senate Republicans are declaring they will reject any bill that does not make all the 2017 Trump tax cuts permanent. And they are proceeding with their own bill that ignores the issue altogether, instead tackling the more popular immigration and defense measures now and leaving the tax dilemma for later. The party cannot even agree broadly on a strategy for when they want to address the budget. Trump’s own senior team is still arguing about it and Trump has refused to provide clear guidance.

Which brings us to the fifth hand (perhaps we should have done fingers?), Trump’s continued interest in a host of other tax cuts—on tips, on overtime, on social security—that fit nowhere in any of these plans.

At least everyone is focused where the American people want them focused. Fully 1% of Americans say tax reform should be President Trump’s top priority.

As General David Petraeus said on the eve of the Iraq invasion in 2003, a Republican misadventure of comparably thorough planning and careful execution, “tell me how this ends.”

Steaming down this track, it ends one of two ways: either with a politically and economically disastrous bill that weakens the tax code, raises deficits, and frustrates the core of the coalition that elected these folks to power, or in a meltdown of intraparty recrimination. When meltdown of incriminations is your best-case scenario, perhaps time to change course?

The craziest part is that elected representatives know this. Off the record, many will acknowledge the problem. Yet in public they stampede together toward the cliff’s edge, egged on by activists as toxic to the governing aspirations of conservatives as the Left’s so-called “groups” are to aspirations on the other side. As I wrote in my column for the New York Times yesterday:

Special-interest pressure campaigns have been associated in recent years with “the groups,” as they are often called, activists that have pushed the Democratic Party far to the left of the typical voter on issues such as immigration, race, gender identity and climate change. But the Republican Party has its own special-interest groups — mirror images of the progressive ones, equally destructive of both its popularity and its prospects for getting anything done.

Alongside the Club for Growth, such groups as Grover Norquist’s Americans for Tax Reform and the Koch Network’s Americans for Prosperity have made it their mission to cut taxes continuously, regardless of what most voters prioritize or the federal budget can bear.

They preach tax cuts with the same desperate zeal as climate activists demanding a near-total elimination of carbon emissions. They oppose tax increases, no matter how large the deficit, with the same determination that open-borders advocates oppose any effort to restrict immigration. They insist that tax cuts spurred the late 1990s economic boom, although Bill Clinton raised taxes; that George W. Bush’s tax cuts in 2001 and 2003 paid for themselves, although tax revenues fell sharply; that Mr. Trump’s tax cuts in 2017 propelled growth, although growth slowed. They accuse anyone who suggests a need for more tax revenue of betraying conservatism — never mind that Ronald Reagan raised taxes repeatedly.

The alternative would be to accept that one consequence of passing temporary tax cuts, as Republicans did in 2017, is that sometimes they have to expire. Otherwise, why pretend they are temporary in the first place, except to try and put one over on the American people?

Some of the 2017 measures were good ones and should be preserved or even expanded, such as favorable treatment of capital expenditures and the larger child tax credit. Plenty of other options exist for raising the revenue that those cuts would cost, as we showed in the new American Compass collection, No Tax Cut Is Free. In the context of responsible tax policy, needed spending cuts could be pursued with much greater political support too. As American Compass policy director Chris Griswold and I discuss on this week’s American Compass podcast, an entirely compelling, coherent, and conservative path forward is available.

OK, OK, but what’s the counterargument? Shouldn’t we give the people promoting this plan their due? Well no, there isn’t actually a counterargument. Be my guest, try to find one. Send it in and I’ll address it next week. But in my experience, there’s only hand-waving and name-calling.

There’s Senator Mike Crapo, arguing we should just ignore “current law,” under which the tax cuts are set to expire, and instead count the extension of the tax cuts as free because they are already the “current policy.” As Roll Call put it rather wryly, “assumption that extending 2017 tax law wouldn't add to deficits could substantially shrink price tag.” This is just dishonest. The tax cuts were made temporary so that they could be sold as less expensive in 2017. When are we supposed to count the cost of extending them or making them permanent? Not in 2017? Not in 2025? Just never?

And then there’s “the groups” of the Right, who make no pretext of having arguments to support their fundamentalist project of slashing tax rates, consequences be damned. Their argument is that I’m a “loser” spouting “left wing nonsense.” Also a “squish” promoting “bonkers, walking quacking uniparty progressivism.” I particularly appreciated the meme posted by Americans for Tax Reform spokesman John Kartch, which captured the dynamic well:

All the cool kids are doing it. Don’t be a loser. That really is the argument. Definitely a recipe for effective leadership, good politics, pro-growth policy.

BONUS LINK: Obviously, a return to fiscal sanity is an uphill fight. But we have everyone’s attention, and we are making more progress than anyone else on the Right has made on these issues. Here’s Politico’s Influencer newsletter this evening:

EYES EMOJI: As Republicans in both the House and Senate took baby steps this week toward enacting Trump’s domestic agenda — most notably a $4.5 trillion extension of Trump’s 2017 tax cuts that the business community has been salivating over for for more than a year now — a key voice from an increasingly influential wing of the GOP is imploring lawmakers once again to proceed with another round of tax cuts at their own peril, and lampooning conservative groups lining up to put the squeeze on members.

“If Republicans spend the next year fighting over a tax bill that is a low priority outside the Beltway, they will stall the more promising elements of the Trump agenda and expose themselves as badly disconnected from the interests of the working class that put them in power,” Oren Cass, the chief economist for the JD Vance-aligned think tank American Compass, argued in an op-ed in the New York Times on Thursday.

Cass’ populist position — that Republicans shouldn’t fritter away their political capital on tax cuts, especially when there’s support for hiking taxes on corporations and the wealthy to reduce the deficit rather than slashing spending — isn’t new. But it’s more notable now that one of his ideological adherents now occupies the vice presidency, and with budget hawks already flexing considerable power over the reconciliation push.

In the process, Cass also excoriated anti-tax groups like the Club for Growth, Americans for Tax Reform and Americans for Prosperity, which have pledged to drop tens of millions of dollars this year in support of what Cass views as “their mission to cut taxes continuously, regardless of what most voters prioritize or the federal budget can bear.”

Cass dug the knife in further, accusing conservative ideologues of “preach[ing] tax cuts with the same desperate zeal as climate activists demanding a near-total elimination of carbon emissions” or “open-borders advocates oppose any effort to restrict immigration.”

BONUS BONUS LINK: Ronald Reagan Raised Taxes Five Times.

WHAT ELSE SHOULD YOU BE READING?

Sorry, that went on a bit. Important issue though. So I’ll just highlight the other things that caught my eye this week without much commentary:

A Tech Power Playbook for Donald Trump 2.0 | Senator Todd Young, The National Interest

“Over a period of years, through our enormous combined market share, we can make it economically impossible for the export-oriented economies of our adversaries to sustain a bifurcated market for technologies—free versus unfree markets. As President Ronald Reagan once put it: ‘We win, they lose.’”

Hedge Funds Are Pocketing Much of Their Clients’ Gains With ‘No Limit’ Fees | Bloomberg

“In 2023, the main hedge fund at billionaire Dmitry Balyasny’s eponymous firm notched a gross return of 15.2%. Investors walked away with a gain of just 2.8%. The rest they paid in fees — more than $768 million — mainly for compensation but also a wide variety of other costs down to mobile-phone service.”

Why I Left Management Consulting to Build America’s Future | Nathan Halberstadt, The American Conservative

“The ideological distortions continued as BCG senior leadership assured us that special consideration would be given to the distribution of hiring, bonus, and promotion outcomes across racial and gender identities. These early career experiences, among others, led me down a path of reevaluating the role that BCG plays in American society. I am now convinced that the interests of BCG and the transnational professional-managerial class are at odds with the values and welfare of the American people.”

The Deeper Question Raised by the NIH Grant Overhaul | Yuval Levin, The New Atlantis

“Lost in the rush on all sides to play right into one another’s crudest clichés was an opportunity to actually govern a little better. On this front, as on many others, Donald Trump’s election has created real opportunities for advancing needed change. But the new administration seems intent on squandering those opportunities because it does not see itself as responsible for the federal government. Eager to demonstrate how corrupt our institutions have become rather than to facilitate their improvement, it is opting for lawless and performative iconoclasm over the more mundane but potentially transformative work of governance.”

Tech Firms Want to Upend the Pentagon. The Old Defense Guard Has Some Lessons for Them. | Jon Sindreu, Wall Street Journal

“The Air Force is now buying the first, limited-production units of the B-21 bomber, in development by Northrop Grumman, under ‘fixed-price’ contracts. The U.S. Space Force, created by President Trump in 2019, strongly favors them too, as do the Silicon Valley challengers. Indeed, analysts believe that the shift away from cost-plus will accelerate under Defense Secretary Pete Hegseth, who has pledged to make procurement nimbler. But the industry has been down this road many times before.”

• Bonus Link: Big Stick Economics | Mark DiPlacido & Oren Cass, Commonplace

And, in case you missed it, some great legislative progress on two major American Compass priorities:

• Congressman Jared Golden introduces the “Fisc,” a family benefit based on the one that Wells King and I proposed back in 2021.

• Senator Josh Hawley continues to make progress on a significant pro-labor bill. Importantly, “Trump and Hawley have spoken in the days since the inauguration. A source familiar with those calls reports that the president is generally supportive of Hawley’s pro-labor legislation.”

AND IN COMMONPLACE THIS WEEK

Just a few highlights:

A Trucking Agenda for Trump | Gord Magill

The new administration could make roads safer and help drivers support their families, mostly without new legislation.

Where Love Goes to Die | Benjamin Ogilvie

Campus dating is on life support. But university leaders could rekindle the romance.

The 'Blame America First Band' Is Back Together | Mike Lind

Outrage about Trump’s decisions on steel and aluminum ignores reality.

They're Not Really Bending the Knee | Sam Silvestro

Our cultural institutions aren’t suddenly becoming more conservative in Trump’s second term.

Rich Feminists Are Monetizing Poor Women | Emily Jashinsky

How wealth and class are the driving forces behind OnlyFans

As noted above, we were back with a special episode of Talkin' (Policy) Shop on the American Compass Podcast, where Chris Griswold and I discuss our new collection of proposals for fiscally responsible conservative tax reform with guest host Drew Holden, managing editor of Commonplace.

Of course, visit commonplace.org regularly, follow us on X @commonplc, and subscribe for email updates.

Programming note: No U/A on Monday. I’m off to London, where Michael Gove and I will debate free trade with the House of Lords’ Daniel Hannan and former Australian Prime Minister Tony Abbott. Should be interesting. Perhaps fodder for Friday. So…

Enjoy the weekend, and next week!