Fiscal Policy Reform This Week

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The latest fiscal policy negotiations at hand are the debt ceiling, healthcare reform, and tax reform. A cursory analysis would tell you the GOP controls both branches of Congress and the presidency which would make you think it will be easy to pass legislation. The reality is far from that. The two factions which House Speaker Paul Ryan must coordinate legislative plans with are the Tuesday Group and the House Freedom Caucus. In some cases which will be reviewed in this article, Democrat support is needed which makes solutions tougher to come by.

The two deadlines which are approaching this week are the current spending resolution which expires on April 28th and the made-up deadline of achieving a legislative goal by April 29th which marks Trump’s 100th day in office. In terms of the debt ceiling, either a compromise plan can be passed or a temporary funding measure can be passed which kicks the can down the road to the fall. Ordinarily, the government likes to delay making tough choices as long as possible. That’s why the government is in this predicament in the first place. The motivation to kick the can down the road is countered by Trump’s motivation to show some success in his first 100 days. Passing a temporary spending measure would be the opposite of that.

Laying out the terms of the negotiations, the GOP needs some support from Senate Democrats as the debt ceiling raise needs 60 votes to pass. The Senate Democrats led by Chuck Schumer have already done a good job of negotiating with Republicans as the GOP has backed off from asking for funding for the border wall and it lowered its ask for a defense spending increase from $30 billion to $15 billion.

The Democrats are asking for either $15 billion in non-defense spending or about $5 to $10 billion in cost sharing reductions which are subsidies to insurance companies. The Democrats cite the precedent since 2011 that defense spending increases have been matched with non-defense discretionary spending increases. This is the road to ruin which the country has been on ever since the GOP decided to focus on tax cuts and the Democrats decided to focus on increasing spending. The two parties have compromised to bring the nation to the brink of disaster as you can see from the chart below.

The debt held by the public is expected to reach almost 250% of GDP by 2090. When interest rates rise, the deficits will skyrocket.

If a deal on the debt ceiling is made by the Friday deadline, the most likely deal would include the insurance subsidies and the $15 billion spending increase on defense. The reason for this is some moderate Republicans support the Obamacare subsidies since without them premiums would increase. There would be a mass exit from the Obamacare state exchanges. This type of increase in premiums is what President Trump means when he discusses Obamacare blowing up. The problem is the voters may blame the GOP for premiums increasing. The better solution for the Republicans would be to support their own plan. Since that plan is still in the works, it would make little political sense to allow premiums to increase in the meantime. Premium increases would cause uneasiness among voters and possibly make it tougher to pass the latest version of the American Healthcare Act.

The American Healthcare Act failed to even get a vote in the House of Representatives, but there have been changes made to it to gain appeal from House Freedom Caucus members. The question is how moderates from the Tuesday Group feel about the plan. Moving to the conservative side was the only option as they blocked the first iteration. This new iteration has a few changes. The most critical one is the state limited waiver from the community rating which is an Obamacare requirement. This allows insurance providers to raise premiums for those with pre-existing conditions. Those with pre-exiting conditions will be moved to either state or federal high risk pools.

You may be thinking that the GOP should follow through with its promise to repeal Obamacare entirely. It makes political sense because the GOP will be lambasted if it gets nothing done and it will be criticized if anyone has issues with this new plan. This line of thinking concludes the GOP might as well go for broke. The reason this hasn’t happened is because of opposition from within the GOP. The GOP is a big tent party; that’s sounds good when it wins elections, but makes it difficult to govern because the ideological spectrum is wide.

With the tax reform plan, the first aspect you must understand is the Byrd Rule. The Byrd Rule is Section 313 of the budget act which states a budget passed through the reconciliation process cannot increase the deficit after the window of the reconciliation bill. In this case, it’s ten years. This means if the GOP’s tax plan raises the deficit, it will either need to only last ten years or pass with 60 Senate votes outside of the reconciliation process.

Trump’s proposed plan isn’t even close to meeting that first threshold as he wants a 15% corporate tax rate and no border adjusted tax to fund it. A 3-year cut in the corporate tax rate to 20% would cause a $489.7 billion decrease in government revenues over the next ten years. Therefore, a 15% rate would be even worse. The proposal with the best chances of passing would be for a border adjusted tax to be put in place along with a 20% corporate tax rate. The assumption that, that plan has the best chance of passing relies on the notion that Democrats won’t support any tax cuts, which seems reasonable. Trump wants a bold tax cut, but legislation isn’t about being bold; legislation is about getting a deal done within the confines of parliamentary restrictions and negotiations with the factions in Congress. There is a chance the Byrd Rule is overturned. There will be another article on that topic if movement towards that rule change is made by Congressional leaders.

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