Editorial: Tax reform is going nowhere

In a rational political environment, there's a strong argument for tax reform—the next item on President Donald Trump's agenda. But we don't live in such an environment. So instead, let's use healthcare as a microcosm to explore why an incompetent White House and its enablers in Congress will be as unsuccessful at tax reform as they were at healthcare reform.

First, we must define tax reform. Another massive tax cut for wealthy individuals and companies is not tax reform. Cutting taxes when the economy is near full employment will do nothing more than blow a massive hole in the federal budget. That's a very bad idea given the ongoing retirement of 70 million baby boomers.

Real tax reform entails simplifying the tax code so it is fairer with fewer loopholes and has lower rates. Most importantly, it must be revenue-neutral or even increase the tax take so the government can meet its obligations over the next 30 years.

How much will we need? The Congressional Budget Office projects spending on Social Security and Medicare over the next three decades will drive federal spending to about 23% of GDP, up from 20% today. (In 2012, the projection was similar, which indicates the CBO continues to give short shrift to all efforts at healthcare cost control.)

Is that unmanageable? Among the 35 nations in the Organisation for Economic Co-operation and Development, the U.S. comes in fourth-to-last in the share of its economy taken in taxes. Thank goodness for Chile, South Korea and Mexico.

In fact, the federal government this year will collect just 18% of GDP in federal taxes. That's about 2 percentage points less than in the late 1990s, and 2 percentage points less than what it will spend this year on all programs except interest on the debt.

Because of the tax cuts passed in the early 2000s—the last time Republicans controlled the White House and both houses of Congress—tax collections are slated to rise to just under 20% of GDP over the next three decades or 3 percentage points below what's needed.

Tax reform could help make up the difference by bringing the U.S. somewhat closer to the OECD average, which is already at 25% of GDP. But that requires taking on the special interests that benefit most from the current tax code.

The president, in a recent interview with the Wall Street Journal, said he wanted to cut the corporate tax rate to 15%. House Speaker Paul Ryan is talking about moving from a 35% rate to 20% to 25%, a more modest goal.

Either way, getting there will require cutting tax loopholes for some companies in exchange for lower rates for all. The accompanying chart indicates who some of the winners and losers will be in healthcare.

The big winners under reform will be insurers such as Anthem and UnitedHealth, with for-profit healthcare providers such as DaVita and HCA also benefiting. The big losers will be pharmaceutical and medical-device companies. Similar splits between winners and losers will play out in other industries.

Tax reform will never happen without confronting the losers. There's no evidence to suggest this White House or either political party is willing to take on the lobbyists for companies who benefit most from the current code.

I don't think I'm going out on a limb here. Real tax reform is going nowhere. What we're likely to see from the GOP is a call for a massive tax cut—the legislative equivalent of repeal and replace and deserving the same fate.