First 100 Days

A Funny Thing Happened on the Way to Tax Reform

Ronald Reagan signed a massive tax cut into law on Day 206 of his presidency (August 13, 1981).1 George W. Bush did the same on Day 139 (June 7, 2001).2 Candidate Donald Trump promised “middle class tax relief and simplification” within the first 100 days of his presidency—faster than Reagan and Bush achieved their ambitious tax-cutting goals.

The wind should have been at President Trump’s back. Republicans today hold clear majorities in both chambers of Congress: 52–48 in the Senate, 238–193 in the House (with four House vacancies as of this writing). By contrast, President Reagan had to contend with a Democratic-controlled House, and President Bush faced a Senate split 50–50 (including a moderate Republican from Rhode Island who opposed the president’s plan and another moderate Republican from Vermont who would soon switch parties). President Trump entered the White House with a more comfortable congressional majority than any first-term Republican since Herbert Hoover.

At the 100-day mark of his presidency, however, all President Trump has to show for his tax reduction efforts is a single-page plan, remarkably short on detail. The one-pager tells us that the president wants three tax brackets at rates of 10%, 25%, and 35%, but not where those brackets will begin and end. It says that President Trump wants to “[r]epeal the death tax,” but adds nothing about how asset transfers at death will be treated for capital-gains tax purposes. It promises a 15% tax rate on corporate and business income, but without any explanation as to how the Trump administration will prevent individuals from recharacterizing wages as business income. We are a long way away from a fully fleshed-out tax plan—and an even longer way away from its enactment. President Trump’s Treasury Secretary, who initially predicted passage of tax cuts by August, now acknowledges that meeting that target is “highly aggressive to not realistic at this point.”

Why has tax reform proven so difficult for President Trump? The first obstacle to tax reduction is a function of the president’s own action (or, more precisely, inaction): the Trump administration has failed to fill key tax-policy positions at the Treasury Department. His predecessors moved more briskly: President George W. Bush secured Senate confirmation for his nominee to be assistant secretary of the Treasury for Tax Policy on Day forty-one of his first term (March 1, 2001). President Reagan’s nominee was confirmed on Day sixty-seven (March 27, 1981). President Trump, for his part, is trying to produce a tax policy before he has a tax policy team in place.

To be sure, the Trump administration could have pursued tax cuts without writing the plan on its own. President Trump might have proposed a reversion to the rate structure that the last Republican president put in place. Or, he could have relied on the tax reform blueprint produced by House Speaker Paul Ryan in 2016 or the proposal being developed by Senate Finance Committee Chair Orrin Hatch. But, the president chose, instead, to discard the work done by his ostensible allies on Capitol Hill—a curious way to begin an effort that ultimately depends on House and Senate passage.

A second obstacle is similarly self-created—and likewise a product of the president’s inaction: President Trump’s failure to release his own tax returns makes the task of tax reduction much more difficult. If President Trump had not broken from the decades-old practice of presidential tax transparency, he would have had a stronger chance of winning votes for tax reduction from moderate Democratic Senators facing reelection fights in red states. Instead, he has given Democrats an easy soundbite to explain their opposition to his tax plan: we won’t vote for your tax cuts until you release your returns so that we can know how much you will benefit from your proposal. At a time when majorities in most polls say that President Trump should release his tax returns, President Trump has taken what should be a political liability for Democrats—their opposition to tax cuts—and allowed them to transform it into a political asset.

President Trump’s inability to win votes from Democrats—and, in particular, from Senate Democrats—forces him to pursue his tax policy objectives through the budget-reconciliation process. Going through the budget-reconciliation process avoids the filibuster, and without support from Democrats, President Trump cannot count to sixty Senate votes. But, budget reconciliation imposes constraints of its own—constraints that severely limit what the president can achieve.

A comprehensive overview of the budget reconciliation process lies well beyond the scope of this short essay, but one element is essential to understanding the challenge President Trump now faces. Legislation passed through budget reconciliation cannot increase the deficit outside the reconciliation “window” (usually ten years). If the relevant window is from fiscal year 2017 to fiscal year 2026, then the bill cannot add to the deficit for fiscal year 2027 or thereafter.

Importantly, a tax reduction that expires at the end of 2026 might still add to the deficit in 2027 and beyond. For example, if the corporate income tax rate is lower in 2026 than in 2027, some U.S.-based multinationals will repatriate offshore earnings at the lower rate in 2026 rather than at the higher rate in 2027. The reduced rate in 2026 leads to less revenue (and, thus, a wider deficit) in 2027. Under reconciliation rules, the rate cut cannot be passed unless it is coupled with another provision that offsets the effect on the deficit outside the window.

This dynamic has significant implications for President Trump’s tax-reduction efforts. First, it means that any rate reduction passed through reconciliation will have to be temporary—likely no longer than ten years. And second, even a rate reduction that lapses at the end of 2026 may run afoul of the reconciliation rules because a lower rate in 2026 means less revenue in 2027. President Trump still promises to pass a tax reduction “bigger . . . than any tax cut ever.” But, if forced to rely on reconciliation, then the best he can do is a short-term rate reduction that lapses at the beginning or middle of the next decade.
To be sure, long-term tax reform would indeed be possible outside the reconciliation process if President Trump could secure the support of at least eight Senate Democrats. Yet, instead of coming forward with a tax plan that has a hope of bipartisan backing, President Trump’s one-pager proposes an utterly unrealistic set of changes projected to add $5.5 trillion to the national debt over the next decade. Forget the prospect of winning over moderate Democratic lawmakers; it is doubtful that President Trump can retain the support of Republican deficit hawks in the House and Senate.

100 days ago, the political conditions for tax reduction seemed more hospitable than in January 2001 or January 1981. But, in the time since Trump entered the White House, he has done everything he could to make the task of tax reduction more difficult for himself: pursuing a go-it-alone strategy that sidelined House and Senate Republicans; refusing to hand over his own tax returns, thus handing the Democrats a political gift; and coming forward with a plan so ambitious it is hard to take seriously. If President Trump makes tax history this year, it will not be for enacting the largest tax cut ever. It will be for taking an historic opportunity to reduce tax rates and—against all odds—managing to squander it.

* Assistant professor of law, University of Chicago Law School;

1 Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172 (1981).

2 Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38 (2001).