The Democrats’ Options for Repealing the Trump Tax Cut

(Bloomberg Opinion) -- It’s not too soon to think about what the Democrats might do about the Republican tax cuts if they eventually win back power, maybe as early as 2020.

President Donald Trump thinks he knows the answer. He told voters at a rally in Charlotte, North Carolina, that their gains from the cuts would be in jeopardy if the Democrats had their way. They “will try to erase every single thing that we’ve achieved,” he warned.

Is he right?

Recently, I’ve been writing about the impact of the tax cuts. First, I argued that Democrats were missing the point by focusing on how the reductions affected the federal budget. Then, I explored the popularity (or lack thereof) of the cuts, noting that most Americans view them as a giveaway to the rich, even as the average taxpayer will benefit, at least a little, from them.

In this column, let’s look at the Democrats’ options should they manage to win control of Congress and the White House in two years. Why wouldn’t they just scrap the Tax Cuts and Jobs Act?

After all, the legislation passed without a single Democratic vote in the House or the Senate. Only 8 percent of Democratic voters support the cuts. Overall, just 46 percent of the population approves.

Here’s the rub.

Right now, more than half of Americans (51 percent) say the cuts aren’t helping them. The law took effect at the beginning of the year, but the benefits didn’t show up in the 2017 taxes people filed in April. That probably explains some of the lackluster sentiment captured in the chart.

The Democrats’ Options for Repealing the Trump Tax Cut

But, as people begin filing their 2018 taxes, some of the provisions that benefit a wide swath of Americans will become more obvious (as will some of the bill’s harmful parts).

On balance, the Tax Policy Center estimates that 91 percent of filers in the middle quintile will benefit from the tax cut. Beyond 2018, most Americans will continue to benefit until many of the individual income tax provisions expire at the end of 2025.

Remember, Republicans made the corporate tax cut permanent, but most provisions for individual filers are scheduled to be phased out before 2026. By 2027, the Tax Policy Center estimates that 53 percent of Americans will face higher taxes. This is why Democrats often tell voters that Republicans are going to raise taxes on the middle class. 

But assume that Democrats are in charge well before that shift happens. Would they erase Trump’s legislative achievement, even if it means swiping tax breaks from the middle class?

I see three possible scenarios: Undo it. Rewrite it. Or use it to “pay for” other programs. You can find varying degrees of support for each option in Democratic circles.

Undo It

Since the Democrats got so worked up over the fact that the tax cuts will increase the federal deficit and add trillions to the national debt, they could come in and push for a clean repeal, citing a desire to mitigate the so-called damage the Republicans have done to the nation’s finances.

Asked whether his party might try to do something like this, Democratic Senator Bill Nelson of Florida said, “I’d love to eliminate the trillion-and-a-half-dollar deficit, but that’s all gone.”

Senator Bernie Sanders of Vermont doesn’t believe that ship has sailed. Citing concerns over projected budget deficits, Sanders called on Congress to “repeal all of President Trump’s tax breaks for the wealthy and big corporations.” Call it a partial undo.

Democrats might also argue that the tax cuts must be undone so that Congress can claw back “lost revenue” and reclaim some much-needed “fiscal space” so that it won’t be caught flat-footed when the economy eventually turns sour.

You see this sort of argument in some Democratic policy circles. I’m on record opposing this line of thinking.

Rewrite It

The kind of outright repeal Trump foresees is almost certainly not in the cards. History shows that once Republicans succeed in cutting taxes that benefit the middle class — however meagerly — it’s difficult for Democrats to come in and snatch that away. Like President Barack Obama with the cuts under George W. Bush, Democrats may end up leaving many of the provisions in place.

One way to do that is to simply start over. Senator Sanders thinks Congress should “pass tax reform that permanently benefits all middle-income and working-class families without giving tax breaks to the 1 percent.”

Democratic Representative Ro Khanna of California agrees. “We should repeal it, and I think we should offer an alternative tax plan," he said, aimed at providing “tax relief to the middle class and the working class.”

Also on board is Arizona Representative Raul Grijalva, who would keep the middle-class cuts, while raising the top marginal tax rate from 37 percent back to 39.6 percent. “I don’t feel like we need to be trapped saying we want more taxes,” he said. “We just want them to be fair.”

So far, the most concrete plan to repeal and replace is Senator Kamala Harris’s proposed LIFT the Middle Class Act. Harris will have legislation that would replace the Trump law with a progressive tax policy that ensures that the benefits go to middle- and low-income families, defined in her plan as those earning less than $100,000 a year.

The proposal is estimated to cost around $2 trillion (over 10 years), about the same amount as the Trump cuts. It could help as many as 80 million working families by offering up to $3,000 a year for a single person or $6,000 a year for a married couple. People could elect to have the payments disbursed as a lump-sum tax refund or a monthly stipend.

If Democrats learned anything from the Obamacare experience — Republicans in the House tried to repeal the Affordable Care Act more than 50 times — it is that it is extremely difficult to take something away from voters once they have it. Don’t even try to pull it off without a replacement.

Republican Representative Kevin Brady, for one, hopes Democrats didn’t learn that lesson. “I would welcome Democrats running for election based on, ‘Let us slow down the American economy, raise taxes and make sure people’s paychecks are stagnant for another decade,” he said. That’s not at all where Democrats appear to be.

Call it a “Pay For”

Many Democrats would like to repeal all or most of the tax cuts in order to be able to say that they have the money to “pay for” some new legislative proposal. Since every big piece of legislation has to get a budget “score” from the Congressional Budget Office (and satisfy other self-imposed constraints), lawmakers face pressure to show they can do whatever it is they’re proposing without adding to future deficits. (It’s all a bit of a sham, really, but let’s deal with that in a future column.)

All of this makes repealing the Trump tax cuts a kind of tantalizing, low-hanging fruit. Just think about it. Soon, Democrats are going to start announcing their 2020 presidential ambitions. As many as 20 could jump in.

Already, we’re hearing about a federal job guarantee, massive infrastructure projects, housing assistance and opportunity accounts, all with price tags of hundreds of billions or trillions of dollars. Expect many candidates to respond to the inevitable “but how will you pay for it?” question by answering that they would repeal the tax cuts.

That game started shortly after the Republican tax legislation passed in December 2017, when Senate Democrats called on Congress to repeal the cuts and fund $1 trillion in new infrastructure spending instead.

This is a potential problem in a crowded Democratic primary. Repealing the tax cuts can’t be everyone’s “pay for.”

There’s already competition, and it’s about to heat up. In addition to infrastructure, Senate Democratic leader Chuck Schumer and House minority leader Nancy Pelosi are pushing for $100 billion in new funding for teachers and schools, paid for by reversing parts of the tax law.

And then there’s the House bill introduced by Democrat Jared Polis of Colorado to repeal the law and use the money to “pay for” student debt cancellation and free college.

Meanwhile, Democrats are telling voters that Republicans want to cut Social Security, Medicare and Medicaid to “pay for” the tax cuts. And voters are telling pollsters they’d rather lose the tax cuts to protect these programs. So now even the voters are calling dibs on the “savings” from the tax cuts.

In my next column, I’ll explain why the Democrats, in their fight against Republican attacks on entitlements, are wrong to claim that the revenue loss from the tax cuts threatens the so-called sustainability of these programs. It’s a trap.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephanie Kelton is a professor of public policy and economics at Stony Brook University. She was the Democrats' chief economist on the staff of the U.S. Senate Budget Committee and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders.

©2018 Bloomberg L.P.