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Vox: House Ways and Means Committee Chair Kevin Brady on taking the hard road on reform.

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Washington, March 3, 2017 | comments

A key Republican explains why he wants to reinvent taxes, not just cut them

There’s an easy way to cut taxes in Washington, and there is a ludicrously hard way. The easy way is just to cut tax rates. The hard way is to cut rates while also limiting some deductions; the ludicrously hard way is to do all that while also taxing something that was not taxed before, to help offset the cuts. That sort of effort is more commonly known as “comprehensive tax reform,” and Washington hasn’t really pulled it off for 30 years.

Which is why it is notable — and, to many conservatives, confounding — that Rep. Kevin Brady is attempting the ludicrously hard version this year.

His choice reflects what could be the boldest departure in conservative economic thinking since Arthur Laffer sketched a tax curve on the back of a napkin in the 1970s. To cure the ills of an American growth in a globalized economy, Brady believes, it’s not enough to just cut taxes.

“My worry,” he said in an interview this week, hours before President Trump addressed a joint session of Congress, “is that if we just do rates, lower rates, and don’t redesign our code to be competitive with the world, it will be as if we got supercharged new fuel for our car but it’s an old clunker that can’t compete with the modern version on the road today from China, and Europe, and Canada, and Mexico.”

 

Brady, the Texas Republican who chairs the House Ways and Means Committee, finds himself blessed with full GOP control of Washington this year, including a president who consistently promised tax relief on the campaign trail. That combination could easily produce a policy layup: a simple bill to cut taxes for people and businesses, which could pass without fear of a filibuster.

Brady is passing that up to attempt the half-court bank shot of comprehensive reform. His tax plan, released last year, includes rate cuts at almost every personal income level, for traditional corporations, and for so-called pass-through entities whose profits are taxed as individual income for shareholders. It would also eliminate most personal deductions, change how investments are written off, and, most controversially, begin to tax imports — but not exports — in a fundamental overhaul of how the government treats business income.

Brady chose the harder road because his theory of the economy goes far beyond what most Republicans have offered in recent years. His worry is not just that we tax business too much (though he does believe that) but that we tax it in the wrong places. The current tax code, he says, pushes companies, investment, and jobs out of the United States, boosting foreign competitors and sapping US growth.

 

He explained those choices in a half-hour interview with Vox, which has been lightly edited for clarity.

Jim Tankersley

I’ve gotten used to hearing about tax plans that are mostly about “what are you going to do with the rates?” But here you’re not just talking about what to do with the rates. You’re talking about restructuring the entire way we tax business. And I’m wondering — there’s an economic theory behind that. Can you lay it out for me? What does this say about what’s wrong with the economy?

Kevin Brady

So we know tax reform only happens once in a generation. It’s been 30 years. It may well be another 30 years before we have this opportunity. House Republicans made a conscious decision to go bold, to create a tax code built for growth, literally designed to grow jobs, wages in the US economy, and, while doing that, to leapfrog America into the lead pack as among the best countries in the world for that new job and that next investment.

Those two elements, growth and leapfrog to the lead, continue to drive every decision we make. So in business are three big reforms: We go all in for jobs and growth with the lowest rate breaks for business in modern history. And we redesign the tax code so our companies can compete and win anywhere in the world, especially here at home.

Our second big reform: We’re proposing for families and individuals a code so fair and simple, nine out of 10 Americans will be able to file using a postcard system.

And finally, because we’re proposing a simpler, bolder, fairer tax code, we propose a simpler and fairer tax collector. So we’re proposing to bust up the IRS and redesign it into a smaller focused agency with a singular mission: taxpayer service for businesses, families, and easy small-claims court approach, so families can resolve their differences more affordably, yeah.

Jim Tankersley

I want to drill down on that first part, the code being built for growth. What about the current code holds back growth?

Kevin Brady

Well, everything is wrong with the current code, especially in our competition with our global competitors. Like every successful business, we know what our competitors are doing. We look at China, Europe, Canada, Mexico. Today they are beating us with lower rates. They no longer tax worldwide; we’re one one of the few that do. And they border-adjust their taxes, so they give an advantage to their products over American-made products both here in the United States and abroad.

So for us to compete, it’s not enough, as in 1986, merely to lower the rates. That’s very helpful and critical. But that’s not enough. Which is why we’re proposing full — for the first time in history — full, unlimited expensing of your business investment in the year you purchase it, which is buildings, equipment, software, and technology, not just incredibly pro-growth but all focused on productivity of American workers.

We’re proposing to no longer tax worldwide, so we’ll match what our competitors do, and then we’ve proposed to border-adjust our taxes to match our competitors. In effect, imagine jettisoning that whole complex international tax code that America has — one of the most complex and, I would say, uncompetitive on the planet — jettisoning all of that for a simpler tax that says, “If your product or service is consumed in the United States, it is taxed equally at a low business rate of 20 percent.” It doesn’t matter where it’s produced; it doesn’t matter who produces it, foreign or domestic. An equal taxation.

That is incredibly pro-growth because, first, it levels the playing field between foreign products and made-in-America products. True competition is always good for consumers. Secondly, it allows us to simplify the international code in a very positive way. But perhaps the most important benefit is that in conjunction with lower rates and no longer taxing worldwide, this means we’ve eliminated every tax incentive to move jobs or research or headquarters overseas. In fact, just the opposite. We’ve created major incentives for businesses to locate that new plant, that new research, that new intellectual property here in the United States, whether they are trying to access the US market or the world market.

So it is the combination of that along with repealing the AMT and the “death tax,” really important to family-owned businesses and farms, [that] really makes the business side of this reform as bold as people have seen in a long time.

Jim Tankersley

I want to drill down just for a second on the border adjustment, because it’s obviously been the most politically controversial so far. Did you expect that? And how much do you think it has to be in the final plan in order for it to work?

Kevin Brady

It’s a critical component, because without it, those business rates on “Joe the plumber” and corporations will all go up significantly. We will keep the status quo that favors foreign products over made-in-America products. That doesn’t make sense, and it’s not fair. And it will continue to encourage businesses, American businesses, to move their jobs overseas. That’s why it’s a critical provision, in conjunction with the rest.

But while that concept of border adjustability seems new to the US, it’s not to our competitors — 160 countries in effect do this.

As importantly, border adjustability has been a feature of every dream American tax code over the last 40 years, knowing that our competitors, frankly, are beating us soundly with its use, and so while it’s new to the US, it’s not to the rest of the world.

Lawmakers, policymakers, businesses who are just learning how it would work are a bit stunned by the simplicity of it because once they understand equal taxation in the United States and no taxation worldwide, support grows. And when they realize that this is unlike a VAT [value-added tax], which is hidden and complex and grows the government, this does the opposite of all that and is extremely simple. Because of that, businesses who began looking at this in a negative way, just as an import tax, for example, [are]now understanding with the complete blueprint, House Republican blueprint, where it catapults the US in comparison to our competitors.

Jim Tankersley

Do you think the president supports the border adjustability?

Kevin Brady

You know, I don’t want to make news for the president, but he — there’s no greater fighter for the American worker and for keeping US jobs here and bringing them back from overseas, so border adjustability fits in with President Trump’s approach of “let’s level the playing field; let’s create jobs in the United States.”

Jim Tankersley

Tax reform is hard.

Kevin Brady

It is.

Jim Tankersley

What would you like to see from the president in terms of involvement down to a details level?

Kevin Brady

So first, and this can start tonight, the president — having a president who’s willing to lead on tax reform and expend his political capital to do that is critical, as it was with President Reagan and his economic team. So President Trump speaking out today and reinforcing his commitment to tax reform, I think, is invaluable.

Secondly, his Treasury Department and economic team will play a critical role in working with the House and Senate here on achieving it this year. ... I was with [Treasury] Secretary [Steve] Mnuchin over in his office this afternoon, and clearly they’re going to devote the resources to being a partner with us in this. I think that’s a very encouraging sign.

Jim Tankersley

I want to go back to growth for a second, before we jump back to politics. Growth is important to the middle class in a way that the Republican Party has long talked about. But for the last few decades, a lot of middle-class people haven’t felt like growth has helped them. How do you make sure this is the sort of growth that boosts incomes across the distribution?

Kevin Brady

I think Americans are frustrated by a sub–2 percent economic growth in America; that’s European-style slow growth. So they’re not watching their paychecks grow. They’re not getting opportunities for promotions. Their kids aren’t finding good jobs after they leave school. And so that frustration will continue until we change the tax code and until we rebalance regulations so local businesses can hire again.

Our House Republican blueprint focuses on jobs, on growing wages — the estimate by [the] Tax Foundation is, on average, growing wages by more than 8 percent.

Jim Tankersley

On the dynamic score.

Kevin Brady

On the dynamic score. And growing the economy by 9 percent. But they also — middle-class Americans look at our postcard, how simple and fair that is. They love the simplicity of a code. They love the thought there aren’t hundreds of special tax breaks for some and headaches for them, only headaches for them. So I think, in my town hall meetings in our discussions on tax reform, middle-class Americans like what they see.

Jim Tankersley

Filing taxes annoys everybody. But I think it’s easier to make the case that business tax complexity holds back hiring more than personal tax complexity does. On personal taxes, I think there’s [often] this feeling like, “Well, wait. Am I going to pay higher rates than businesses are, or than small businesses are?” You’ve got a couple of parts of the plan that have some disparities there between rates on work and rates on pass-through [business profits]. How do you think about that?

Kevin Brady

Because we’re going all in for growth, we know that a lot of our businesses — in fact, the vast majority — aren’t corporations or aren’t C corporations as we traditionally think of them. They’re organized in other ways. And so we knew that in the past, because those small businesses were tied to individual rates, you couldn’t distinguish between Michael Jordan and Michael the local plumber. We made a conscious decision to separate your wage income — your salaries — from your business income, so that we could dramatically lower the rates for Michael the local plumber.

And because they are huge salary creators in the economy, in the past efforts to reduce taxes on them haven’t succeeded. So we consciously went bold on lowering the rates for those local small businesses.

Jim Tankersley

What do you mean efforts to reduce taxes on them haven’t succeeded?

Kevin Brady

Well, it’s been difficult to bring the individual rate down over politics over wealthy earners, so the local businesses were sort of caught up in all that.

We consciously separated them and their income so we can lower the rates. We want them to hire more, want them to send less to Washington, invest more in their company and in their workers. And this was the best way to do it.

Jim Tankersley

I’m glad you brought up high earners, because that same Tax Foundation score does show pretty big windfalls to high earners. The politics on that as we’ve seen over the last 10 years are tough for [Republicans] pushing those cuts.

Kevin Brady

So again, going from growth and what grows the economy, what we know is when Washington takes less from families, they invest more not just in their dreams, which is really important, but in the local communities as well.

But we’re lowering rates on everyone at every tax level so they can keep more of what they earn. They flatten out the brackets so it’s not so complicated. We protect more of the first dollars that families earn. That’s really important to young families and middle-class workers.

And then we go further: For families trying to save for the future, whether it’s college or their retirement, for the dollars they earn from savings and investment, we cut the rates in half again. We’re not a nation of savers. We need to be; we want to reward that.

Secondly, it turns out when you save and invest just as an individual, it’s incredibly pro-growth to the local community, and capital that goes out for small businesses to build that second doughnut shop or invest in that new equipment. So we, looking at the individual side, I’m convinced there’s lots of economic growth there as well, not just on the business side.

Jim Tankersley

President Trump has talked about some other middle-class tax cuts that are not typically characterized [by conservative economists] as pro-growth — particularly his child care deductions, and the things he’s been pushing. How do those fit into your vision? Are you open to including them in your package?

Kevin Brady

The president has made clear he’d like to do more for families dealing with expensive child care costs. We’ve had some preliminary and, I think, productive discussions with Ivanka Trump and her team on this area. [Author note: Brady’s staff later clarified that Brady has not personally spoken with Ivanka Trump on the issue.] They are preliminary, no decisions have been reached, but we’ve been exploring with the Trump team about how you could make child care more affordable for families. More work left to do.

Jim Tankersley

The president has also talked about spending more money on infrastructure. He’s got a lot of plans; some of them cost money. And this tax plan — if you don’t end up getting the optimistic growth forecasts, and even if you do — could end up with some holes in the budget. We’ve been hearing for years from Republicans about how debts and deficits hold back growth. How much are you worried about that?

Kevin Brady

Deficits matter. And so we designed the tax reform in the House to be deficit neutral, counting on economic growth. Not economic growth judged by us, but by the independent Joint Committee on Taxation. What that means is that over a 10-year period, the tax reform breaks even. We think that’s — in the budget, we think that’s fiscally responsible.

Looking at issues like infrastructure, I know the president is still developing his plan and is very interested in drawing more private capital into that area. I don’t know that they’ve finished their exploratory phase. I know they’re asking a lot of good questions. So I don’t know yet what that’s going to be. But clearly, especially for House Republicans, not just getting this deficit down but getting to a point of starting to balance the budget and pay down the debt is still our top goal. And growth makes a difference.

Jim Tankersley

You happen to sit at the head of the committee that is handling the two most important legislative issues [this year]. And it seems like they have to go in order. There’s a lot of talk that Obamacare repeal and replace must come first, then tax reform. Do you agree with that? And how do you possibly pull that off?

Kevin Brady

I do, in the sequencing, since the — Obamacare has helped some Americans, no doubt. But it’s hurt an awful lot as well. And we believe Americans deserve relief from a health care experiment that’s collapsing and will only get worse for patients who are just seeing the costs skyrocket, no more choices in plans or few, and then can’t even see their local doctor or go to the local hospital. So we know the status quo can’t sustain itself.

So moving first to not just repeal but to begin to replace it, and, as we do that, giving Americans who are on the Affordable Care Act the peace of mind that they’ll have plenty of time — years — to examine the plans and options for them before they make that decision.

That’s why I think repealing alone is not the right solution. Starting to give states more control of health care so they can tailor it more closely to their communities, restoring the free market so there’s a lot more choices than patients have today, and then giving Americans really [the choice of] a plan that’s tailored to them, personalized to them, can travel with them through their life. It’s very important we start those steps right now.

Jim Tankersley

When you think about the repeal and the replacement plan and what it needs to look like, there are some big issues that seem to be dividing Republicans on replace. One of them seems to be coverage losses. Are you willing to put forth a repeal plan that doesn’t cover as many people as the ACA? And if so, how many are — what’s the number you’re willing to lose?

Kevin Brady

Unfortunately, the coverage numbers in the ACA don’t reflect how unaffordable much of that coverage is. And we hear this from families who are forced in the ACA, whose deductibles and copays and out-of-pocket costs almost make the plan unusable for them. We’re focused on health care coverage that is, that can be used. That’s affordable, tailored, and designed around patients, not Washington. So I’m confident we can offer Americans who don’t get health care or who don’t get it through a government program like Medicare or the VA better choices, more affordable plans, and personalized health care.

Jim Tankersley

And you think you can make that sort of, everybody who has bad coverage now will have good coverage?

Kevin Brady

The access, the opportunity for affordable health care will be there, not just for those who are on ACA now but in many states where more than half of the residents have exempted themselves or, frankly, paid a fine just to be excluded from the ACA — that’s a huge coverage gap in America. And I think with the right plans, you’ll see them reenter the market.

Jim Tankersley

Can we talk about tax politics for a second?

Kevin Brady

Sure.

Jim Tankersley

You’ve already got a big lobbying fight developing not just over the border component but other components. How much of the success of tax reform is going to depend on that fight being resolved with one group of lobbyists winning out over another, and how much can you split the baby?

Kevin Brady

This is tax reform, which is difficult. And simplifying the code means eliminating a lot of special breaks for a few so we can lower the rates and simplify it for everybody. So, as you’d imagine, special interest groups are fighting desperately to maintain the current tax breaks. That’s to be expected. That’s why the Ways and Means Committee and the speaker are fully focused on the policies, where we want to go, why we need to make these changes to be able to compete again. And so I expect that type of sort of K Street lobby-driven controversy to continue through the process. But if we stay focused on growth and leapfrogging America back into the lead pack, explaining why these provisions are so critical at the end of the day, we’ll carry the day.

Jim Tankersley

Larry Kudlow and some other conservative economists are of this view that the lobbying fight is too much — we shouldn’t worry about full reform, just cut some rates and declare victory and you can come back to reform later. Is that something you’d be interested in?

Kevin Brady

I’m a big fan of Larry Kudlow and Steve Moore, and had coffee with them recently up in New York on this issue. So, I wish… well, I was taking into consideration their advice, because they’re good thinkers. My worry is that if we just do rates, lower rates, and don’t redesign our code to be competitive with the world, it will be as if we got supercharged new fuel for our car but it’s an old clunker that can’t compete with the modern version on the road today from China, and Europe, and Canada, and Mexico. So I continue to make the case that while it is a new and difficult debate on border adjustability, it’s important that we solve it and maintain it in the final version, because that’s critical for us to leapfrog to the lead pack.

Having said that, we recognize as House Republicans that we’re going very bold here. We don’t expect industry pivot on a dime from 30 or 50 years of tax policy. Which is why we’ve engaged leaders from the import industry in two areas. First, how to best design these provisions like border adjustability, interest deductibility, so it works for growth and jobs in America. And how to phase in these major changes so that we can allay their valid concerns about this, and focus on growth. So we’ll continue, since we laid it out, outlined this in June; we have continued consistently to say, “This is not our tax code, America. This is yours. So engage, help us improve it at every step.” And I’m confident at the end of the day, with the changes, the designs, and the transitions we’ll be in a very good place.

Jim Tankersley

Do you expect to get any Democrats to vote for this?

Kevin Brady

I would love to have Democrats’ support, and we’ve invited them to engage—

Jim Tankersley

Have they at all?

Kevin Brady

No, but you know they’re in a difficult place these days with the transition to the Trump administration. What I know is Democrats have good ideas on how to grow the economy, and they’re seeing the same community struggle and the same businesses leave the country as we did. So I’d love to have their engagement on tax reform. And we’ll continue to invite them to the table.

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