The chaotic swirl of proposals and demands coming from the Trump White House as the administration approaches its 100th day grew even more confused late Monday, when the president appeared to back down on his requirement that funding for a border wall be included in a must-pass spending bill, while at the same time proposing a massive business tax cut that would explode the federal deficit.
President Trump surprised even his own advisers last week by telling the Associated Press that he would announce plans for major changes to the tax code on Wednesday of this week. What that would entail was unclear -- full-on tax reform is considered the most daunting legislative challenge there is -- and over the weekend, White House Office of Management and Budget Director Mick Mulvaney said that the announcement would likely be a declaration of “principles” and some general targets for rates.
But White House officials told The Wall Street Journal on Monday that the president now wants to declare a major reduction in the tax on business income, from 35 percent to 15 percent, and to do it without proposing offsetting changes that would prevent a huge spike in the federal deficit, adding an estimated $2 trillion to the national debt over a decade.
The revelation of the president’s tax cut gambit came at the same time that the White House softened its demand that money for the wall that Trump wants to build on the US-Mexico border be included in legislation that must pass by Friday in order to avoid a government shutdown.
The government is currently operating under a “continuing resolution” that authorizes federal spending through midnight on Friday. Leaders of both parties in Congress have been negotiating a deal to extend that spending authority, perhaps through the end of the fiscal year.
Last week, though, Trump threw a wrench in the ongoing discussions by having Mulvaney announce that a “down payment” on the wall was among the president’s requirements for the bill. While the White House didn’t issue an explicit veto threat, the possibility that the president would refuse to sign a bill without such funding was plainly implied. This put the president and Congress at an impasse, because Democrats and some Republicans flatly oppose the wall, and point out that Trump has repeatedly insisted that Mexico would pay for it, not U.S. taxpayers.
On Monday, administration officials signaled that the president might be satisfied with additional funding for border security, not earmarked for the construction of the border wall. By backing down, the White House may be providing enough room to maneuver for Democrats and Republicans in Congress to come together on a funding bill and avoid a shutdown that both parties say they wish to avoid.
Of course, if Congress manages to craft a spending bill that keep the lights on through the end of the fiscal year 2017, there will still be the matter of developing a spending bill for the following fiscal year, and Trump’s apparent determination to demand a huge tax cut for corporations would make that debate much more complex.
There is broad bipartisan agreement in Congress that the federal tax code, and particularly its corporate components, is in dire need of overhaul. The U.S. model is antiquated, with a high nominal rate compared to other countries and a complex labyrinth of loopholes and deductions that are dedicated to making sure most businesses don’t actually pay that rate.
The system also taxes U.S. companies on business they do overseas, which has created perverse incentives that drive some American companies to move their headquarters offshore and others to hoard profits in foreign countries in order to avoid a 35 percent haircut on cash repatriated to the U.S.
But it is precisely because there is agreement on the need to overhaul the business tax code that many experts are leery of trying to pass something like Trump’s 20 percentage point cut all by itself. The need for broader tax reform – including the personal income tax, the estate tax and more -- is also widely recognized, but is a political minefield. Making changes to the business tax code part of a larger package could help to bring along support for other, more politically painful reforms.
The silver lining here, from the perspective of budget hawks, is that pushing a tax cut for businesses without offsets and adding $200 billion per year to the deficit may be a bridge too far even for many of the most pro-business voices in Congress.