The Big Tax Hike Coming in Just Over a Year

just goes away in ten years. It actually seems very hard to pass a law that has any sort of permanence, especially if it changes to government spending or taxation. It seems very hard to make permanent, substantial changes to our fiscal policy.

this to happen. We don't want taxes to go for Americans earning less than four hundred thousand dollars. That's something Democrats say from time to time, things like that. But it doesn't matter if every side doesn't want it to happen. You still need some sort of compromised law to replace the existing law, and there's no guarantee of that because politics is politics, and so as of right now, Yes,

so it is a something for people to recognize. And b I think it's also important to understand what is the existing tax code, what did we change? Why did we have this change under the Trump administration find Dacga.

I was living in London at the time, so I had to file things like the foreign earned income exclusion and stuff like that, and I remember receiving this like four hundred page book from the IRS on how to do your taxes, and it would say, like for box seventy eight, a turn to page three hundred and twenty eight, and I would turn to the page and there would

be nothing there of relevance. And I remember sitting on the floor of my living room in London and crying over this paperwork and this like admin that I had to do. So America's tax system seems incredibly complicated to me. I don't even know how you start to make changes to it. And I am very interested to learn.

that affects corporations, et cetera. When you went you're considered to be the architect of the TCGA, when you went into this project of reforming the US tax code, which I believe was the first time the tax code was reformed in over thirty years. At bad point, these things do not come. The stars do not align often for this. What was your goal?

old clunker. We're a big economy, but we couldn't keep up. So as a result of the highest corporate rate at the time in the world in the obsoste tax code, you know, we were falling behind. For a decade before twenty seventeen, growth was really slow in America one point

five percent average GDP growth, way low. Paychecks were stagnant for the decade, and as you may recall, about every other month there was another US company picking up roots from the US and moving overseas or bought by a foreign company, even though we were the bigger factor there moving headquarters and employees overseas. So you know, we had to act ways and means. Committee Republicans actually worked eight

years to be ready to do tax reform. And I've credit former Chairman Dave Camp from Michigan and Paul Ryan, who later became a speaker the work we did for all the time, ready for prepared for someone in the White House to lead on tax form, and that's what happened in twenty seventeen.

When they did compete, win overseas, bring those dollars, make it easy for them to bring it back invest in the US. The old tax code said, no, don't do that. And we wanted to be to drive innovation because whatever country wins the innovation race really wins the future, I think economically. And we wanted to make America the most desirable place for that new plant, that new research, that

new intellectual property. So those were the bigger goals, and then we wrote to those and one of the lessons we learned during the eight years as we laid out drafts of what we might do, is that we realized, especially in twenty seventeen, we had to go bold because we only get this only happens, as you said, Joe, once generation really and so you can't miss that opportunity.

The other thing we learned is the boulder you go, the more people are willing to give up parts of the old tax code to drive a new, modern, faster, better performing tax vehicle going forward. So we took lessons we'd learned into the whole tax debate.

to change. But what do you just sort of give us the bullet points from twenty seventeen and what could reverse.

But the redesign of the international code made us very very competitive, and so twenty one percent puts us in the middle of the pack for our major foreign competitors at twenty one percent, and we could have gone lower in that regard. In fact President Trump wanted to go lower there, but what we thought that would perform very well, and it did. We lower taxes on individuals across the board.

Our taxes were high, they had been growing since the Reagan tax cuts, and so our job was we believed if you give families, workers, and small businesses, you know, more control over their earnings one, you know, they get to live their dream not the government's stream, and omy is going to grow. And so we did some some big things. I think on the middle class tax cuts. We created the first ever small business tax deduction twenty

percent for those what we call pass throughs. Those are the non corporations where the money gets paid by the individuals.

the most part. But here's what we did. So we took a look at it. It wasn't a red blue

thing at all. In fact, Texas is one of the bigger users of the salt deduction because of our properties, the proper each yeah, yeah, So what we looked at and we realized, you know, everyone's subsidizing everyone, you know, rural community cities, low and modest income, higher income, non itemizers, itemizers, and so we arrived at a simple premise, which is why doesn't everyone just pay their own state and local taxes? I mean, we choose where we work and we live.

We have a choice in our elected officials. Why is anyone obligated to help us pay more importantly, why are we obligated to help pay others? Because half the salt deduction goes to households making a million dollars and more. So what we did was and then use that money to lower rates across the board. So take a deduction from some, give it to many more. At the end, though, you know, we compromise talking with the legislators and high tax states. You know, it was really important we preserve

some of it. So we took the standard average standard deduction across America, which was five thousand, and we doubled it. But then we didn't stop there. So we took the child tax credit, which was was sort of limited about one hundred and twenty thousand. We took us up to four hundred thousand, provide more tax relief for people who were impacted by salt. Then we did away with the

AMT Alternative minimum tax. Again that's what how people couldn't get like in New York, New Jersey couldn't even use the salt tax deduction even those in place. Then we changed the marginal tax rates all to make we want lower taxes in every state, not red states, not every state. And so we made big changes to make sure we saw those tax cuts. And I know most people look at it and say, look, we just need to restore that.

And I wouldn't be surprised if there's some give on that, because we've got we've got in our party as well. You know, we've got New Yorkers and New Jerseys, California's Illinois, you know, Minnesota, Long Island Republic. Yeah, so look, that's fair. It's important to them, and so I think there's there's some prett good discus sessions. I think you might see some relief. But here's the warning. It's really expensive. Yeah, and every dollar comes out of those middle class tax cuts.

So whatever you give there, you know, you got to figure out where to pick it up somewhere else.

We're well aware of that. But I'm going to tell you what was driving this as a model, and you're going to laugh at first, but let me explain it

to you. So and why we did it. So you heard us talk about getting ninety percent of Americans to be able to file on the back of a postcard, and you probably said that is a political gimmick, but in fact, that was driving our goal of simplifying the tax code dramatically, so getting rid of a lot of that complexity for some, lowering the rates for everybody, and creating more fairness and understanding of how we tax people.

And our thinking was look for again, there's people who would never be able to do that, but for a lot of Americans, you know, there is something powerful about looking at thirteen lines and saying, this is how I'm taxed. In almost all the neighbors that I can see, this is how they're tax too. And it also makes it harder for Washington to raise taxes because you actually know, you know what I mean, how you are being taxed. So the postcard drove what we hoped would be simplicity, fairness,

obviously stronger growth as well. And on the business side, you know, our first proposal, which didn't make it all the way through, was to basically eliminate huge chunks of the international code and replace it with a border adjustment tax, which is basically a consumption tax that asks a simple question, do you sell your product or service in America? If so, everyone's paying the same rate. It doesn't matter where it was made, doesn't matter where it's shipped from, doesn't matter

who did it. Are you selling it here? If so, if you're US or you're from France, you're paying the same rate. And so we thought, well, in the the other big virtue of it is that for American companies, you took that tax off of products you're exporting and selling, you put it on those coming in. So now we're more competitive compared to the vat around the world. And the simplicity of it it was bold. I still think it's, you know, an incredibly positive approach on taxes, but we

had a short runway to get all this done. You know, industries that that that import a lot, whether you're a Walmart or a refiner or an Apple or whatever. You know, they have real objections to it. We didn't have time to be able to sit through and work, and so at one point we had to jettison what was one of the bolder I think more were positive things. But that's the process, you know, Tracy, you're asking about. It's you do. No matter what your dreams are, you got to get it through Congress.

to get crunch time. All of that accelerated, and so we certainly in the House, we started with this premise and we went to our House members and said, look, we're going to tear the tax code down to its foundation and we're going to rebuild it. So go back home and listen to what people what's important in twenty seventeen, not the nineteen eighties, like what is important to you, and then we rebuilt it from that. And so lots lots of meetings, a lot of listening sessions late into

the night. We had the Ways and Means Committee members working. We brought them back for holidays, you had them work when everyone was on recess. A lot of it was listening because to other members in briefing groups from DC and around the country. Even though we didn't get Democrats support, you know, I briefed our Ways and Means Democrats, our new Democrats, our problem solvers, the trade the unions sat down with them. We knew, I knew they weren't going

to be able to support this. If I wanted to hear what was important to them to figure out what might be the biparson areas that we can design too, and it was all that was hugely helpful. But the process you're working with, the Senate, the White House, constant media presence, lots of groups attacking or supporting. It's sort of a hurricane, you know what I mean of input. As you're doing that.

client and pay off the deficit. So what I want to ask you is, from the perspective of a someone writing policy, how should people think about what he says publicly and translating this or taking it seriously? How seriously should we tell you?

not wed to doing exactly that. So my advice always is take him seriously, but not literally, because whether you're working on taxes or trade, whatever, man, he's opened lots of changes. He's listening to sort of that team of rivals discussion. You can shape, and we did in tax from shape a lot of what were campaign promises into positive things, but not exactly.

terarff promises. And I have to imagine that you know a lot of people, particularly in DC, who are like deeply uncomfortable about this, particularly corporate anyone who trades internationally, et cetera. What are you telling them about the risk of a very different international trading regime unto the next president.

that's he uses that threat fairly effectively. It is disruptive. I did have an impact on economic growth. There's no quote, both the threat of withdrawing from NAFTA, for example, the major threats with the steel aluminum filed through on in China. There's no question it slowed growth and had an impact, and so would future terror. My advice is again, take them seriously. He likes Tarff's believes that levels the playing field, and he's held that belief since eighties, but that he

also listens to the economic impact. You know, he's proud of his economy and he's open to arguments of how this hurts the very people he's trying to help.

there are always other factors. I think the relief on regulation played a pretty important part, I think in the economy overall, and you just have the economy in general. So we were always taking a look at how much did it grow jobs, how much money returned from overseas two and a half trillion, you know, we had innovations to do your intellectual property in America, we'll bring it back.

Those revenues doubled, really good outcome there. Investment from businesses, big thing that drives, that drives, equipment that drives all this stuff on average went up twenty percent, really good numbers. Research did the exact same thing, and so watching the economic data, we were achieving much of what we had hoped for. The the one element. Twenty nineteen to me was the most fascinating year. We watched it closely. Because the code had been in place one year now we

could sort of see how it was working. And we know generally how an individual, like a corporate rate cut or research and development, how it will perform. Generally, the question is how does it all interact, you know what I mean, like, how does that it's like a Formula one car and bring an upgrade? How does it affect the rest of the performance. And so that's what I was following twenty nineteen. Couple key things happened, I think

besides very strong economic growth. One, real wages and like a head of inflation grew more in one year than in the eight years combined before it. In fact, those first three years after TCJA, real wages average nine percent. That's the best three years on record. So paychecks were growing.

We checked the box that was working really well. Poverty, you know, twenty nineteen just plummeted in a good way, but it did the most, made the most progress among the people who'd sort of been left behind, people of color, those without a high school degree, disabled, young folks got new opportunities. That was that was what we were driving for. And then income inequality began to strength for the first

time in fifty years. According to Larry Lindsay, fed Governor and in the White House Economic Team, another goal of ours and so yeah, we were every year tracking what progress we were making and what provisions might not be performing as well as you want.

where those dollars are going to flow. But just talk to us about your philosophy of the role that the tax code can play in the TCGA or just generally and thinking about the importance or unimportance if that's your view of progressivity in the tax code.

half of income earners. What we would think is up to the middle class shoulder only about a little more than two percent of the whole income tax burden. So and it grew after the tax reform. It grew a quarter for the wealthy, they picked up a bigger burden. It's shrunk by a quarter for the modest and low income down to two point three percent. So we are people are always surprised how progressive we are compared to other countries.

The standard deduction, which we nearly doubled, hugely popular, and now ninety percent of Americans don't have to itemize their time. They sort of love that. That reverts as well. The small business tax cuts we created goes away. That's really damaging, I think in a big way. And then things like the estate tax, what we call the death tax family farms and businesses, goes back to very few exceptions in

a much higher rate. Things like opportunity zones disappear. The new we create a new child or a tax credit for paid family and medical leave, so businesses that created those programs tailored to their workers could get some help doing it goes away as well. And in some business credits, really important research and development expensing, expensing of your equipment, software, all of that reverts to a very I think negative

position there. So yeah, for trillion or more of tax heights that it'll slam the economy, and neither party I think has anything to win by letting these expire, which is where why you asked why something's expiring sometime. So I'm not going to just blame it on Senate budget rules, but I'm going to blame it on Centate Budger because that's what did it. But our thinking was we locked in all the growth competitives because so important on paychecks

and jobs. We left the more biparson issues We believed Republican Democrats would want to keep, the middle class tax cuts, the small business tax cuts, the child tax credit, issues like that, where I think they'll be more common ground heading into twenty twenty five.

could we reduce inequality through something other than taxation. Could we just spend in a different way in order to.

You know, I think we're all really cognizant of you know, we often discourage work in connecting back to the workforce in a lot of those when you put all that net together on average, you know, in a state like Texas, or that family, whether it's single mom or with a couple children, you know, those benefits start to add up. Like in Texas, we're a little stingy on all that. It's still close to fifty thousand dollars a year. In

a Pennsylvania it'll be sixty seven sixty some thousand. So the problem is is that you make it really hard for people to move off out of the social safety net. It's not in their interest to do it, or it doesn't feel that way for them. And so part of our thinking again on the tax code was let's reward work, you know what I mean, in a way that allows them and encourages them to move back into the workforce. That happened in TCJA certainly not to the level we

will need for the long term. And COVID changed everything sort of on labor participation in just change the game that way.

sell them. When they go up to enjoy the fruits of their increased wealth, they borrow against them, and that borrowing is tax free, and then they spend that and then assets tend to go up like stocks over time, and then they die and then their bequeath to their children, and the children get a step up in basis such that they don't actually pay capital gains on the original purchase of the real estate or the stock or whatever.

And so one thing that was for about a week people were talking about it was like, well, maybe we should have some sort of tax on unrealized capital gains. Seems very unlikely to me for all kinds of reasons. But setting that aside, are there still issues out there that seem structurally wrong, such as step up and basis and some of these other ways that the wealthy can accumulate assets without having a big tax bill before realizing their benefit.

borrowing against values you've invested in. And I'll tell you this too. Most of those investments come I think, because you know our tax code. We try to drive investments. So you know, when you're in a dollar, there's three things you can do with it. You can spend it, which a lot of us do. You can save, which is economically better, Or you can invest that's risky, no guarantee you're getting it, but is the most pro growth

of everything you do with that dollar. And a lot of we're trying and to encourage people of every income level to invest more, say more and invest more, because usually it's good for them and super for the economy and in one of my one of my concerns always is when you go after unrealized gains or you know, tax hikes on the wealthy, you're actually taking those who

are the super investors, you know what I mean. And our country are willing to risk everything to take us to Mars or you know, in some cutting edge technology that drives jobs and opportunity in such a big way. And so I'm always really cautious about just picking that group of villains saying, you know, we need more of

your affair shares, how much your money you owe me. Yeah, I think economically and for the US, it's really the innovation and the investment we're We're our tax cod is pretty good at this driving that risk.

cuts and the deficit. And I guess Joe don't come at me. But are Republicans MMT ers now like do deficits matter?

in the game and drive the drive the economy. We raised four trillion dollars through reforms that paid for growth and for lower rate and so on the day President Trump signed it, seventy two percent of those tax cuts were already paid for. On top of that, we've seen huge revenue growth. For example, corporations now pay more to the government at the lower twenty one percent rate than was projected at thirty five. I mean, growth really matters, drives a lot of revenues. So I think that one

and a half a trillion. The Congressional Budget Office quickly revised it down to about one point one. We see more growth since. And unlike most tax cuts, you know, you can safely say for most tax cuts you can recover about thirty percent of it. Generally that's the rule of THEMB. In this case, we recovered twice that to begin with. It's gone much higher. It did create deficits, no question about it, but I think much smaller than

most people ever dreamed we would do. Going forward, though, Congress is going to have to raise four trillion dollars just to keep the current tax cuts. On the Republican side, this is going to be a real issue. Debts and deficits matter. It's exploded in a big way, and so I think, especially if Republicans run the table, who knows

how this hat works. In November, I think there's going to be, especially in the House, some real serious discussions about how much of these of the extensions are paid for. You know what, I mean, what do we do, what kind of other reforms do we do, either in spending or tax cut or the tax code itself to lower that that number. So no, I don't see us now moving to you know, monitor monetary theory. No matter what said, I think it's I think that's the biggest issue to worry most Republicans.

Maybe like something also still you know, iPhones, etc. But pharmaceuticals, there's this sense of unfairness that Americans pay some of the highest prices in the world for drugs, and at the same time, many American drug companies seem to pay fairly small amount of taxes with a lot of the revenue booked overseas.

from importing their deductions to lower the rates. It's complicated, in probably more complicated than needed. We generally achieve that. Can you do more in that regard? I think we can. But the outcome we noticed was one it was much harder for companies to do it. Two multinationals now are investing so much more in America than overseas. That's good. Yeah, we always got to look at at how we improve the international side of this.

I actually think the race ought to be to more grow better paychecks, more competitiveness that way, and so yeah, I think these international sort of cabals on tax are often mistake. But if you're going to do it, here's a lesson from the last couple of years. If you're going to do international tax treaties and agreements, you've got to take both parties along with you because you want the agreement to stick, right, you want to have the

buy in from both parties. In the past that was the case, not so much the last the current administration, which is a shame because I think had both and even Democrats will say, look, there hasn't been a lot of conversation to do international Take the time to keep your folks with you. I don't care Republican or a Democrat in those conversations, because you're can end up with a better product and it'll stick.

for very important things. They're limited basically spending and tax issues, tax growth issues, lots of complex rules, but the bottom line is reconciliation budget if approved by the House and the Senate, it goes to President, allows that bill to pass with the simple majority in the Senate, but with a lot of rules to go with it. So reconciliation

happens first. So Congress has to agree on what the what the parameters are for tax reform or healthcare in the Affordable Care Act or in the in the Build Back Better or the Inflation Reduction Act. So that's the first step. It's not easy to do it if either but but here's the tip tip off. If either party runs the table, reconciliation will show us what they're going to do in taxes or spending, you know what I mean? It will it will show you right up front what

the guardrails are are around this. If there is divided government, which most people think there will be in one way or the other, you won't have that, and so you'll you'll sort of glean all that at the end of the process. So reconciliation is a runway that you land these major bills on. The House version will invariably look different than the Senate version because of these very difficult

budget rules. The reason for years Republicans wrote tax reform to be revenue neutral was that we could get permanence there, which to me, the best tax code is a permanent at least as much as you can get with the political environment that will change these That's where you get the most growth, most certainty, the better outcomes, which is why it's been frustrating to in reconciliation. We didn't get

all of this permanent for the long term. But it is what it is, and it's a really an arcane process, but a really vital one.

places in Europe or elsewhere. And he was making the point that there is a social safety net, it's just so much of it is embedded in the tax system rather than direct spending. Yeah, and I don't you know, I don't necessarily I'm a journalist, so I don't have opinions.

Social Security Administration, send out people send out checks. Instead, you file taxes and you get money. Back to former Chairman Brady's point at the end, it does sound like if there were ever some if even if we could ever agree on one ideal tax system would look like it would be a never ending process of sort of like asymptotically getting there over time. Probably, thank you, thank you, And we're probably theoretically many many more things that could

be done. Can I say one other thing. You know, I sort of I enjoyed hearing this sort of like a certain I don't know old fashioned is the word, but I would say old fashioned view of like, you know what, competitiveness, cutting taxes, this is the path to growth, et cetera. It's certain, you know, certain old school vibes that I feel against a little bit. Like you don't hear as much these days in conversations about growth. You hear a lot about industrial policy.