Could The Republican Tax Bill Help Democrats Later?

Dec 20, 2017

Today's Planet Money indicator is zero. Earlier today, a bill transforming America's tax code was approved by congress with zero Democratic votes.

On today's show, we talk with Josh Barro. He points out a problem Democrats have been struggling with for a while: Most Democratic candidates promise not to raise taxes on the middle class, but also want to expand social programs.

Barro argues that, in the long run, the Republican tax bill could help the Democrats solve this problem.

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CARDIFF GARCIA, HOST:

Hey, everyone, I'm Cardiff Garcia. And this is THE INDICATOR from Planet Money, a show about work, business and the economy - also a show that's wondering if it's not too late to become a pass-through entity.

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UNIDENTIFIED WOMAN: Senators voting in the negative - Baldwin, Bennet, Blumenthal, Booker...

GARCIA: Today's Planet Money INDICATOR is zero. That's how many Democrats in Congress voted for the tax cut that just passed today.

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VICE PRESIDENT MIKE PENCE: The nays are 48. The Tax Cuts and Jobs Act is passed.

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GARCIA: So the Republicans have scored a big legislative win. But today's show is about the possibility - crazy as it sounds right now - that the Republican tax bill actually could make it easier for the Democrats to get some of what they want the next time they're in power.

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GARCIA: Some of the most trenchant analysis of this tax bill that I've come across has been written by Josh Barro.

JOSH BARRO: I'm Josh Barro. I'm a senior editor at Business Insider where I cover politics and the economy. And I'm also the host of "Left, Right & Center" from KCRW.

GARCIA: Josh says this is a bad bill. It's going to raise the national debt as much as one to two trillion dollars - more than it should, he argues. And most of the benefits go largely to rich people. And every credible nonpartisan analysis of the plan supports this. But Josh recently wrote a piece arguing that if Democrats return to power in Washington in a few years, the Republican tax bill actually could help them solve a problem they've had for a very long time.

BARRO: And it had become politically impossible to say that you should raise taxes on middle-income people or even frankly upper-middle-income people. So basically Democrats were in this problem where they want to promise big things, and they had ruled out all the ways they could possibly pay for it.

GARCIA: Josh says this new tax bill may eventually make it easier to pay for some of those big things that Democrats have promised. Now, this is obviously somewhat counterintuitive. We just told you that the bill's going to cost a lot of money. So let's talk through it. Josh's argument rests on three planks in no particular order. First, he says, the Republican bill does do some politically unpopular things that are good, sensible policy - or at least that aren't bad policy. And these policies also will raise money from the government from taxes. One example - the bill limits the deduction for interest on home mortgages.

BARRO: The mortgage interest deduction, they lower the cap on that. I think that's - I would have lowered the cap even more. The mortgage interest deduction and, to some extent, the property tax deduction, which is also capped in this bill, they just create a bias in favor of investment in residential real estate as opposed to other things. They drive up home prices. And so the - there's been this sort of funny thing where people are saying, well, you know if you do this house prices will fall. Great, then housing will be more affordable to people.

GARCIA: Right.

BARRO: So basically it's a lot of things that were like, you know, economically sensible ways to raise revenue but politically unpopular. And it's almost like Republicans did Democrats' dirty work for them.

GARCIA: So if the Democrats come back into power, they can keep these parts of the bill. And even if that's unpopular, they can blame the Republicans for having put in those parts in the first place. So for instance, they leave those caps on deducting mortgage interest and property taxes in place. They get more tax money. That's the first plank. The second part of Josh's argument is about what's really the centerpiece of the Republican tax bill, which is the big cut in corporate income taxes. He says it's a reasonable enough idea to lower the corporate tax rate from where it was. It should incentivize companies to invest more of their money and help the economy.

But the benefits of that tax cut do largely flow to rich people. Rich people, after all, are more likely to own shares in the companies that benefit and to be executives at those same companies. So lower rates will give Democrats a much stronger argument for raising other taxes on rich people. Josh says they can do this in a couple of ways by getting rid of or allowing to expire some of the rules in the new tax bill, like the breaks for pass-through companies, or just by raising tax rates again.

BARRO: I think they should say, well, we need a higher tax rate on rich individuals because, you know, inequality has gone up and because companies have benefited from this business tax cut. And, you know, maybe it's helping the economy a little bit. But still much of the benefit of that tax cut doesn't flow through to workers. It flows through the rich people who own the companies. Let's tax those people more - both on the regular income and on their capital income.

GARCIA: The final part of Josh's argument - this idea that Democrats can use the foundations of this bill for their own goals later - is based on another key part of the bill. Specifically, many of the tax cuts for individuals - for people like you and me - will automatically expire over the course of the next decade.

BARRO: They can let some of them expire and keep others going and basically design a tax code that's significantly more progressive out of that - undo the stuff that's just giveaways to rich people and keep only a portion of the stuff that applies to middle-income people. So you can end up with a tax code that raises more revenue than before this bill passed and that is more progressive than before this bill passed and is able to support some government programs that the Democrats would like to do but that there was not enough space in the existing government budget under the existing tax code to do.

GARCIA: Look, I know how this all sounds. A giant tax bill just passed with not a single Democratic vote. But I'm convinced by Josh when he says that we should zoom out a little and frame this tax bill against the recent history of tax reform.

BARRO: The tax code has always been in flux. You can look back. Congress typically passes a major - a bill with major tax changes every, you know, three or four years - 1981, 1982, 1985, 1986, 1990, 1993, 1997, 2001, 2003, et cetera, et cetera. So it's normal for Congress to make pretty substantial changes to the tax code pretty often. Now this is a more substantial change than a lot of those bills. But this is like - this is usually how Congress spends a lot of its time.

GARCIA: So with this bill, the Republicans have just gotten a lot of what they wanted. The process was contentious and rushed, and the Republicans didn't allow nearly as much public vetting as there would normally be for something this transformative. But looking at this longer history makes it clear that tax reform is a game that doesn't really ever end. This is not a permanent or a decisive win. It was just the Republicans' turn. Democrats, they'll eventually get their turn again too.

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