Why Tax Cuts Are Such A Heavy Lift

The Senate has passed its version of the annual budget resolution, which would permit a simple majority to pass a $1.5 trillion 10-year tax cut. That’s a modest amount—only about three-quarters of a percent of GDP—and factoring in some revenue gains from increased economic growth, it would increase the budget deficit by no more than one-fifth—likely much less.  Still it will prove a heavy lift for Congress to pass.

The basic problem is tax cuts can’t go far enough owing to legitimate worries about budget deficits. Entitlements are on track to exceed 100 percent of federal revenue within a decade, leaving the government to borrow just to keep the lights on in the Capitol dome.

The GOP majority in Congress—especially senators like Collins, Capito and Murkowski from welfare dependent states like Maine, West Virginia and Alaska—refuses to tackle entitlement abuse, putting the borrowing capacity of the U.S. Treasury near its limit.

Consequently, tax cuts will be limited to about $150 billion a year—approximately divided between corporate and personal tax relief, including ending the estate tax, which garners about $17 billion a year. That is not nearly enough money to sooth whose those whose oxen are gored by efforts to simplify America’s painfully complex tax code.

Such reforms come down to eliminating cherished deductions like those for state and local taxes or domestic manufacturing to pay for lower rates overall. Keeping the exercise revenue neutral would create about as many losers as winners.  For example, eliminating SALTs would benefit individuals in low tax states like Florida and Texas but raise taxes paid by those in New York and California.

To make tax simplification politically palatable, the overall revenue take must be reduced more significantly to lower rates more dramatically, or the losers will apply pressure on Congress to kill the reforms.  Spreading around $150 billion in additional rate reductions—less $17 billion to axe the death tax—is not nearly enough.