Republican Roulette. Trump and the leadership in Congress bet on tax cuts to retain office

After a largely frustrating first year in Washington, Donald Trump will secure by far his biggest domestic political victory yet when he signs the Tax Cuts and Jobs Act 2017 in to American law. This is a huge measure in many senses (a thousand pages plus in length) and is the most comprehensive overhaul of the US tax system since the enactment of the Tax Reform Act 1986, three decades ago.
In a sign of how much the political atmosphere in Washington has changed during this time, though, while the 1986 measure was incubated by and supported by the Reagan Administration, its leading congressional backers in the Senate (Bill Bradley) and House of Representatives (Richard Gephardt) were both Democrats and the measure was embraced by a unanimous voice vote in the House and by 97-3 votes in the Senate. This time, every single vote in favour of the Tax Cuts and Jobs Act was cast by a Republican, while every Democrat in both chambers of Congress opposed the measure.
The Act passes a series of radical measures for both corporations and personal taxpayers. The most dramatic provisions, not least because they are permanent, concern US corporations. The corporate tax rate is to be slashed from 35% (one of the highest in the developed world) to 21% (to one of the lowest) and it creates a 20% income tax deduction for owners of ‘pass-through’ businesses such as partnerships and sole proprietorships. The new system also replaces the present global US tax regime with a territorial structure that taxes US multinational companies only on income that is related to the United States and imposes a one-time tax on all existing foreign earnings and a new minimum tax on ‘excessive’ foreign profits. This is an absolutely fundamental shift in tax policy.
The sections relating to personal taxation are also sweeping. The standard deduction (basically akin to the UK Personal Allowance) is set to be increased from February from US$6,500 for individuals and US$13,000 for married couples to US$12,000 and US$24,000 respectively. The per-child tax credit is doubled from US$1,000 to US$2,000. The highest income tax rate is cut from 39.6% to 37%, although the effect of this on the wealthiest Americans is partly offset by changes in deductions that can be claimed for state and local taxes and state property and income taxes.
Although strictly speaking these are all just temporary reductions in tax which expire in 2026, past experience suggests that the incentives for politicians then to extend them for a further period of time will be considerable. The estimate is that for the typical American family of four on the median income of US$73,000 this package is worth a tax cut of a shade over US$2,000 annually, enough to be noticed. The Act also introduces a substantial simplification with more than 90% of citizens able to file tax returns on a form the size of a postcard. It is manifestly a bold move, albeit one that will add over US$1 trillion to the US deficit over 10 years.
The Republicans believe that it will also have an impact on their political fortunes. These have been looking less encouraging in recent weeks and months. The President’s approval rating is stuck at 37-38% and threatens to be a drag on his party in the contest for control of the House and Senate next November. Defeats in the gubernatorial elections in New Jersey and Virginia, followed by the upset victory of a Democrat in the Senate special election in staunchly conservative Alabama earlier this month has added to anxiety at the White House and Capitol Hill and will make the Senate (soon to be controlled by the Republicans by a wafer-thin 51-49 seat margin) even more awkward next year. As a consequence, it is now universally assumed that the party will not be able to repeal Obamacare.
All of which made it more essential than ever that the Republicans had at least one big domestic win on an issue that mattered both to their own base and the wider electorate. Although controversial (because corporations are undoubtedly the biggest beneficiaries of the new legislation, although its advocates insist all will be richer if billions or trillions of dollars return from overseas), the Tax Cuts and Jobs Act at least offers something for Republicans to campaign on. How big might its effect be?
Holding the House
After the 2016 elections, the Republicans found themselves with a 241-194 majority in the House of Representatives. The Democrats could thus take control of the chamber if they managed a 24 seat advance in November 2018. Although this would be comparatively high by the standards of mid-term contests, it is far from an impossible ask. The party managed a net advance of 30 seats in 2006 when the unpopularity of the Bush Administration, then in its final term and consumed by the dire aftermath of the Iraq War, proved to be a severe drag on Republican candidates in Congress. Recent political developments have made Democrats more confident that history may repeat itself in 2018.
That is certainly possible but, especially with the tax cuts coming into effect so swiftly, the odds on the Republicans holding on to the House have improved significantly. The party has innate advantages in mid-term elections in that incumbency is an enormous political asset in House elections. Turnout is much lower than in years where there is a presidential battle and those who do vote tend to be older, whiter, more affluent, more religious and more conservative than the electorate as a whole. This bias would not be enough to save Republicans if there were sufficiently large numbers of angry citizens willing to break with their normal behaviour and vote next November. That is precisely what happened in 2006.
On the whole, nonetheless, Democrats need to work harder for sizeable shifts in seat numbers in the House of Representatives than the Republicans do. The key factors in mid-term elections for the House are presidential approval ratings and the performance of the economy. If Mr Trump’s score does not fall below 35% on the former and there are signs of strength in the latter (and one would think that a tax cut on this scale would assist), the House will probably be held.
Securing the Senate
With the Democrat victory in Alabama, the Republicans will be defending a slender 51-49 seat edge in the Senate. In theory, this might make retaining control of the Senate far more challenging than the House. In practice, the opposite is the case. That is because only one-third of the Senate is up for election in every two-year cycle. The 2018 Senate seats were last fought in 2012, a very good year for the Democrats in that chamber.
As a result, Democrats and two pro-Democrat Independents will be defending 25 regular Senate seats, plus a special election in Minnesota triggered by the imminent resignation of Senator Al Franken after accusations of sexual misconduct, while the Republicans only have to retain eight seats. Furthermore, most of those eight are in extremely safe territory such as Mississippi and Texas in the south and Utah and Wyoming in the west. Only Arizona and Nevada look as if they could conceivably fall to the Democrats. This means that the President’s opponents have to hold absolutely everything they are defending plus win the two possible victories in Republican territory in order to squeeze out a 51-49 majority. This would be an almost unprecedented outcome.
Trump 2020?
It is too early to predict what impact this Act might have on the 2020 elections. The essentials of a presidential re-election campaign are, despite this, reasonably predictable. They come down to a loyal base party vote, positive perceptions of the economy and an opponent who is viewed as being on the fringe and not the centre of their political party. If these factors align in Mr Trump’s favour he could easily be re-elected. Assuming, that is, that the probe on his links to Russia does not strike oil.
Tim Hames
Director General, BVCA