So last week the GOP gave up on healthcare reform. That isn't very surprising, as the bill they pushed last week had no hope of being signed into law (in it's current form). It's first draft was refused by the Freedom Caucus, the most conservative Republican representatives. Paul Ryan tried revising the bill to make it more conservative, but only ended up losing more moderate Republicans who thought the revised bill too harsh. Even if the bill somehow passed, it would have to go to the Senate where Republicans only have a two-seat majority.
So it's no surprise that Paul Ryan has declared Obamacare "the law of the land," and Trump vowed on Twitter to pick up healthcare again after Obamacare implodes.
But more important than the failure of Trumpcare is what it showed. It means that the next target on the GOP's platform, tax reform, is going to be a lot more difficult than anyone expected.
First, the numbers. The Obamacare repeal was put first not because of some Republican lapse in judgement, but because repealing all of its taxes would have freed up almost $1 trillion dollars. That money would have been used to finance the sweeping tax cuts that Republicans campaigned on.
So the GOP now has far less leeway in tax cuts. The Republican Party has long complained about the government deficit, but it runs up against the simple electoral fact that cutting spending can be just as unpopular as a tax increase.
The U.S. 2016 budget was as follows; mandatory spending, discretionary spending, and interest payments.
Mandatory spending includes programs that are mandated by law to be funded, and any cuts require a special law beyond an annual budget. This includes Social Security, Medicare, and Medicaid, things that no one realistically wants to cut anyway. Mandatory spending makes up nearly two-thirds of the budget, or $2.4 trillion dollars.
Then there is the interest payments. The U.S. government has been taking out loans to pay for its deficit for a long time, and this is the cost. This is another $241 billion that is non-negotiable.
And finally there is non-discretionary spending, which can be further split into "military" and "non-military." They each make about half of non-discretionary spending, about $600 billion each.
So last year the government spent $3.9 trillion in total, and received revenues (mostly taxes) of $3.3 trillion, a deficit of $600 billion.
The GOP wants to do three things; balance the budget, increase military spending, and cut taxes. Oh, and build a giant wall. This is all probably impossible.
The only thing this leaves open to spending cuts is the non-military and non-discretionary spending of $600 billion. If the budget was balanced this year without tax cuts, this entire segment of the budget would have to be eliminated.
And this segment actually matters. It pays for meals-on-wheels, the Department of Education, the Environmental Protection Agency. Any funding from the federal government that goes to transportation, education, veteran's benefits, and housing assistance is made here.
Trump released a budget draft last week that shows exactly what this means.
Source: http://theweek.com/articles/686331/moral-bankruptcy-president-trumps-budget
It eliminates the below programs;
- The U.S. Interagency Council on Homelessness, which coordinates the federal government's efforts to fight homelessness
- The Community Development Block Grant (which does financial counseling for low-income families, local business development, home repairs for the poor, and foreclosure prevention)
- The Appalachian Regional Commission, which funds job creation in 420 counties
- The Corporation for Public Broadcasting
- The Energy Department's weatherization program that has helped seven million households insulate their homes
- Fifty EPA programs that assist with everything from environmental restoration to industrial waste cleanup
- The Chemical Safety Board
- The National Endowments for the Arts and the Humanities
- The Institute of Museum and Library Services (libraries and museums)
- The Neighborhood Reinvestment Corporation
- The United States Institute of Peace
There's far more programs that receive significant cuts. The budget director Nick Mulvaney said their guiding logic was, "Can we really continue to ask a coal miner in West Virginia or a single mom in Detroit to pay for these programs?" I wonder whether Mr. Mulvaney understands that many of these programs directly aide many of these same people, those with low-incomes.
Now this budget is too extreme to pass Congress. But this exemplifies the problem that the GOP has, because even these spending cuts will fall short of the goal of offsetting the military spending and tax cuts.
So Trump's team has another idea, an import tax. And this is one that the Freedom Caucus will likely try to stamp out, as they recognize an import tax just means Americans paying higher prices on imported goods. Essentially a sales tax on anything foreign.
Tax Reform will run into the same problems Trumpcare did, with moderate Republicans in stark disagreement with the Freedom Caucus. But if this fails, there's a far greater backlash looming.
Part of the reason the stock market has been so bullish in recent months is because the investor class is expecting a big tax cut from this tax reform. They'll probably get one, but if it isn't as substantial as people expect, or tax reform is derailed somehow, this good run the stock market has had might finally end.
I'd like to end this with some optimism, but there is very little to look forward to whatever happens in the coming tax negotiations.
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