WASHINGTON • Picking themselves up after the bruising collapse of their healthcare plan, US President Donald Trump and Republicans in Congress will start this week on a legislative obstacle course that will be even more arduous: The first overhaul of the tax code in three decades.
Mr Trump's inability to make good on his promise to repeal the Affordable Care Act, popularly known as Obamacare, has made the daunting challenge of tax reform even more difficult. Not only has Mr Trump's aura of political invincibility been shattered, but also without killing Obamacare, Republicans will be unable to rewrite the tax code in the sweeping fashion that the President has called for.
The grand plans of lower rates, fewer loopholes and a tax on imports may have to be scaled back to a big corporate tax cut and possibly an individual tax cut.
Many people think Mr Trump might go for this to get an easy win.
"They have to have a victory here," said Mr Stephen Moore, a Heritage Foundation economist who advised Mr Trump during the presidential campaign.
SCALING BACK PLANS
They have to have a victory here. But it is going to have to be a bit less ambitious rather than going for the big bang.
MR STEPHEN MOORE, an economist who advised Mr Trump during the presidential campaign, on how his grand plans of lower rates, fewer loopholes and a tax on imports may have to be scaled back in order for the tax legislation to be passed.
"But it is going to have to be a bit less ambitious rather than going for the big bang."
Because of the arcane rules of lawmaking in Congress, there may be little choice. If Republicans intend to act again without the help of Democrats, they will need to use a procedure called Budget reconciliation to have the Senate pass tax legislation with a simple majority. To make their changes to the tax code permanent, their plans cannot add to deficits over a period of 10 years.
Eliminating the US$1 trillion (S$1.4 trillion) of Obamacare taxes and the federal spending associated with that law would have made this easier. Because they failed, Republicans will struggle to reach their goal of cutting corporate tax rates without piling on debt.
Speaker Paul Ryan acknowledged last Friday: "This does make tax reform more difficult."
Mr Trump followed Mr Ryan's lead and lost on the healthcare Bill, making it more likely that the White House will try to steer the direction of tax legislation.
Since last summer, Mr Ryan and Representative Kevin Brady of Texas, chairman of the Ways and Means Committee, have been aggressively pitching a reform blueprint that includes a "border adjustment tax". It would be a 20 per cent tax on imports that, by making imports more expensive, would spur domestic production, they say.
They think the plan would raise US$1 trillion to compensate for the lower revenue that much lower tax rates would probably bring in.
Mr Trump has at times expressed admiration for some form of border tax as a way to give an advantage to US producers.
However, facing a backlash from retailers, energy companies and conservative think-tanks which warn that consumer prices would soar under the House Republican plan, Mr Trump and Treasury Secretary Steven Mnuchin have sounded cool towards the idea.
Many Senate Republicans are also sceptical, raising the prospect that Mr Ryan's tax vision could suffer the same fate as his health plan, toppling under the weight of divisions within his party.
Mr Trump on Sunday squarely blamed his Republican Party's ultra-conservative wing for the most stinging defeat of his young presidency, holding it responsible for the failed attempt to repeal Obamacare.
In a Twitter message, the US President not only faulted the hardline Freedom Caucus and two other influential conservative groups for the stunning setback, but also said that they had weakened efforts to curb abortions, a key conservative cause.
Nevertheless, analysts say to pursue his plans, he will have to work with the small but determined Freedom Caucus - or find a way to work around it, most likely by forging coalitions with Democrats, who for now seem little disposed to cooperate.
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