Great book titles suck you in.
Think about it. You are more likely to read "Something Wicked This Way Comes" by Ray Bradbury just to know about the wickedness that is coming. "The Devil Wears Prada" is just great juxtapositioning. And "Go the [Expletive] to Sleep" is not only a hilarious title (Google it for the full effect) but eludes to its overwhelming practicality, described by the author as "a bedtime book for parents who live in the real world!"
So, admittedly we got sucked in by the title of the Big Six's latest work: "Unified Framework for Fixing Our Broken Tax Code" (Framework). In case you aren’t familiar, the Big Six is the group of top tax policymakers in the Republican Party that includes Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chair Orrin Hatch, House Speaker Paul Ryan and House Ways and Means Committee Chair Kevin Brady.
The Framework provides the Trump administration's point of view on a set of fiscally ambitious objectives with the intent to guide the Congressional committee review process in simplifying the tax code. The Framework could go a long way toward ultimately boosting the U.S. economy through increased productivity, capital investment and employment … all hallmarks of Trumponomics as we have mentioned previously. Tracy Monroe, a tax partner at our related firm Cohen & Company, is a tax policy expert and follows the Trump administration's fiscal objectives closely (we wish her luck in her future endeavors!). Her ongoing coverage of the journey to tax reform is a must-read. Her recent analysis of the Framework, covering the tax impact to individuals and domestic and international businesses, can be found here.
From a macroeconomic perspective, the Framework could increase the potential of the U.S. economy and extend the current, longer-than-average business cycle expansion. However there are some longer-term hurdles in the way.
Given the pressures of an aging society colliding with the "three-headed hydra" of popular entitlement programs — Social Security, Medicare and Medicaid — there is little room to reduce the “revenue share” (tax collection) of the government's income statement with a large middle-class tax cut. Indeed, the government's own baseline forecast suggests that under current tax law, the three-headed hydra alone will cause the government's "spending share" (government spending) to rise by $4 trillion over the period and increase the government deficit (accumulated government revenue minus spending) from $3 trillion this year to almost $9 trillion 30 years from now.
Absent generous assumptions about the Reagan-esque realization of supply-side economics, which are hard to quantify in advance but should not be understated, the challenges that lie ahead will require a rise in tax revenue, a reduction in spending (via entitlement cuts and reforms) or some combination of both. And therein lies the rub: getting anywhere near revenue neutrality means taking away popular loopholes, credits, deductions and subsidies that could really make people angry. Those same people will not go down without a fight.
In the meantime, there are whole other constituencies in positions of power that may not even entertain tax laws that add a penny to the deficit in the long-term — namely Republican Senators Corker, Collins and McCain. With the razor-thin Republican majority in the Senate, it will be interesting to watch how the Framework gets put into law.
The upcoming battle around tax cuts suggests the "Unified Framework for Fixing Our Broken Tax Code" needs a subtitle. Two of the three titles listed in our intro could work!