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June 2012
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STALLED Past fiscal recklessness undercuts GOP agenda


Republicans had high aspirations coming out of the 2016 election with control of Congress and the White House. The party's leaders laid out an ambitious timetable to repeal and replace Obamacare by March and implement tax reform by August.

The health insurance initiative came crashing down rather quickly, which may ultimately prove for the best. There's no gain to the GOP or the American people in replacing the Affordable Care Act with something worse.

But bypassing Obamacare significantly complicated the tax reform goal. And this week Treasury Secretary Steve Mnuchin conceded in an interview with the Financial Times that getting a tax reform package through Congress by the end of August is no longer realistic. Mnuchin now says he believes it can be accomplished by the end of the year. We'll see.

Tax reform is a laudable goal. One of the few things people on both sides of the aisle in Congress agree on these days is that the U.S. corporate tax rate of 35 percent -- highest in the developed world -- is not competitive and needs to come down. There's less agreement about the Republican idea that individual income tax rates should be flatter and fewer.

But when one looks under the hood, the current GOP tax proposals have little resemblance to the Reagan-era "supply side" tax cuts that accepted higher deficits over the short term in the name of igniting economic growth.

Rather, the current proposals are largely a zero sum game. Headline tax rates are reduced, but the revenue is recovered elsewhere by eliminating deductions or imposing new fees. We don't see how that does anything to spur economic activity and growth.

But we understand Republicans' plight. Their ambitions are colliding with fiscal reality.

Consider for instance that in a mere 16 years the Social Security Trust Fund will be fully depleted. At that point, unless something is done, Social Security will only be able to pay 78 percent of what it owes to retirees. Medicare is in similar straits. It is not difficult to understand why Congress is fearful of any meaningful reduction in revenue when the wolf is literally at the door.

The GOP had hoped to find some room to maneuver via its failed Obamacare "replacement" bill, which would have saved the federal government $1 trillion over the next 10 years. It also hoped to find $1 trillion in new money by way of a "border adjustment tax" to make way for corporate tax cuts. But both proposals now appear politically untenable.

Other ideas like slashing or eliminating mortgage interest deductions as part of an income tax revamp and shifting all corporate tax to shareholders by raising taxes on dividends also seem to be non-starters.

The tax reform idea thus faces two fundamental problems. One is that if the program simply changes who pays without changing the total collected, there is no stimulative effect. The bigger problem is that the nation has a surging population of pensioners demanding to be paid and Congress doesn't have the money to do it.

We don't begrudge Republicans for thinking big. But unlike the Reagan era, today there's not much room to maneuver. The fiscal reality probably is that smaller, more incremental change will be the best the GOP can hope to accomplish.

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