Trump Should Demand a Better Tax Cut, Not a Bigger Wall

(Bloomberg Opinion) -- The conventional wisdom among President Donald Trump’s circle seems to be that he has no choice but to stick to his guns on the border wall: His base would regard anything less as a betrayal. Senator Lindsey Graham has gone so far as to say that, if Republicans fail to support Trump’s demand, it will be “the end of his presidency and the end of our party.”

But unless Trump can motivate suburban Republican voters, he has no clear path to re-election anyway. And the way to excite those voters is to focus on an issue they care about: taxes.

Instead of a border wall, Trump should focus on improving and making permanent the middle-class tax cuts the Republican Congress passed and he signed in 2017. No other issue has more potential to draw such a stark contrast between the visions of the GOP and the Democratic Party.

Yes, the tax cut itself was not especially popular just after its passage, but neither was the Affordable Care Act. Most Democrats stuck with Obamacare even in its darkest days, and have seen its popularity rise dramatically over the last two years. If Republicans stick with the Tax Cut and Jobs Act, they may find a similar reward.

Both Obamacare and the tax-cut law were the targets of intense negative campaigns. In both cases, partisans were driven to disapprove of the other party’s signature legislation, almost regardless of content. Many independents, meanwhile (and some party loyalists), disagreed with the implementation of the law. In the case of Obamacare, the law became more popular as the debate turned toward repeal and it became clear that Republicans had no viable alternative. Now there is an analogous situation with Democrats and the tax law.

The corporate tax cut in the law is permanent, but the provisions for individuals will be phased out by 2027. So Democrats will need to have some kind of alternative to offer. Some Democrats complain that the law adds too much to the debt, others that its caps on various deductions are too burdensome to the upper middle class. But these objections are in tension. Removing the caps would add even more to debt — and reducing the debt would require that revenues be made up somewhere.

In theory, both these objectives could be accomplished by raising the corporate tax rate. Yet even the Obama administration supported lowering that rate, as it rightly recognized that U.S.’s high statutory rate was out of line with those of other industrialized countries. 

In other words: Democrats have a lot of criticisms of the Tax Cut and Jobs Act, but no clear strategy for an alternative.

That being said, Republicans might strengthen their hand by moving to make the middle-class tax cuts permanent and doubling down on some of the law’s best features. It includes a $2,000 child credit, for example, but does not make that credit refundable against payroll taxes. Doing so would expand the benefits to the working poor. Another improvement to the law would be an expansion of the earned-income tax credit, one of the most powerful pro-work provisions in the tax code.

How will these changes be paid for? With interest rates so low, that may not be necessary. The emphasis should be on encouraging work and growing the economy, especially for less skilled workers. If members of Congress feel obligated to find budgetary offsets, then they should eliminate entirely the state and local tax and mortgage-interest deductions. These deductions are inefficient and primarily benefit more affluent Americans in expensive urban areas on the coasts.

Of course, getting Trump to climb down from his demand for a wall will be difficult, to put it mildly. But there can be little doubt it would be good for Republicans to focus on something else. If the party wants to win back the suburban voters who reject the president’s message of division and exclusion, then it needs to pursue a pro-work, pro-growth agenda.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

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

Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.

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