Washington Insider - Thursday

Understanding the Tax Proposal

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

OMB Receives Final RFS Plan from EPA

The final volume requirements for the 2018 and 2019 (biodiesel) Renewable Fuel Standard (RFS) have been received by the Office of Management and Budget for interagency review after being sent by the EPA.

EPA's preliminary proposal left 2018 ethanol volumes at 15 billion gallons, the maximum set by law, and biodiesel volumes for 2019 at 2.1 billion gallons. While EPA Administrator Scott Pruitt initially signaled cutting biodiesel volumes in an August notice, Pruitt abandoned the plans and also dropped discussions on other changes such as allowing exported biofuel to retain the Renewable Identification Number (RIN) credits and shifting the point of obligation on the RFS. Those commitments by Pruitt came after Sens. Chuck Grassley, R-Iowa, and Joni Ernst, R-Iowa, made their views known to President Donald Trump, who then told Pruitt to back off his plans to alter the RFS.

Progress with China on Trade Matters Becoming 'Increasingly Difficult'

China appears to be flouting the spirit of its WTO commitments and that is keeping the U.S. and others at bay as they seek more access to the market, according to a senior Trump administration official. "Progress on a range of bilateral economic issues [with China] has become increasingly difficult," the official told reporters during a briefing ahead of President Donald Trump's visit to Asia and China. "We believe this reflects a slowdown and even a retreat in China's move toward a market-oriented economy.

China is now so large that its distortionary practices not only have effects within the U.S. market, but in markets around the world." While China had initially made reforms and improved access to their market, the official said, "I think what we're seeing is a trajectory of retrenchment, a trajectory of moving away from market-based principles. And as member of the WTO, that is not a sustainable direction." The U.S. decision last week to calculating antidumping duties on China based on the view the country is not yet a market economy sets the stage for a potential showdown at the WTO between China, the U.S. and other countries.

Washington Insider: Understanding the Tax Proposal

Not only do the tax reform proposals have enormous political implications, but there is deep disagreement about how important these might be, and how they should be evaluated, Bloomberg is reporting this week.

The debate involves several “esoteric” questions about how much global capital is available and how many details have to be settled to score a tax proposal. Bloomberg says this is leading to an unusually frank debate among Washington economists over revamping the tax system.

And, it includes “unusually bare-knuckle rhetorical sparring, at least by academic standards, and includes two of the capital's most visible tax-related think tanks, the Urban-Brookings Tax Policy Center and the Tax Foundation. Bloomberg says as details of the proposal emerge, the debate is likely to get more heated.

While the recently adopted congressional budget resolution would allow for a tax system reboot to add up to $1.5 trillion to the national debt over 10 years, Republicans have been arguing that the final cost will not be that high because they say the tax revamp will speed up the economy's growth rate.

It will cost less, too, they argue as they question the estimates of the tax plan's costs, which have ranged from $2.4 trillion to $2.2 trillion over 10 years, on the grounds that the estimates, based on a Republican “framework” document, was too vague to support those numbers.

Kevin Hassett, the chairman of the White House Council of Economic Advisers and regarded as the administration's top economist, pulled no punches when he appeared at an Urban-Brookings Tax Policy Center event Oct. 5. The TPC days earlier had estimated the tax plan to fall $2.4 trillion short of deficit-neutral.

“It's I think scientifically indefensible, as the Tax Policy Center report does last Friday, to say that the framework, the tax framework that we're here to talk about, would have little macroeconomic feedback effect,” Hassett said. “It's inaccurate. I think it's fiction.”

Hassett's attack drew a drew a defense of TPC from Larry Summers, a well-known Clinton-era Treasury secretary.

He didn’t elevate the debate much by adding that, “I no longer take CEA Chair Kevin Hassett seriously as an economic thinker after his absurd attacks on the Tax Policy Center. If Hassett keeps distorting what economists generally think, I doubt he will be able to get a non-hack economist job when he leaves CEA,” Summers tweeted.

Len Burman, a co-founder of the Tax Policy Center, said the TPC estimate included some assumptions but those were laid out extensively and drew from statements made by Republicans that implied those assumptions. “If they want us to analyze a more complete plan, then put out more details,” Burman said.

Hassett went on to praise the Tax Foundation, which didn't make an estimate based on the framework. The think tank has long been praised by Republicans, who often tout its estimates of tax bills. For example, House Speaker Paul Ryan, R., Wis., was asked about its study that warned temporary expensing for equipment would sharply limit the potential economic boost from a tax plan.

“That would surprise me. Their model is very pro-expensing,” Ryan said at press conference held at a mechanical valve manufacturer in Chestertown, Md. “I haven't read that study, but I'd be kind of shocked if the Tax Foundation said that.”

Instead, Ryan said the study must have come from the Tax Policy Center.

“I think TPC has shown their ideological and partisan colors with the fact that they put out an estimate on a mythical tax plan that hasn't been written, that doesn't exist, that they just made up a bunch of assumptions.”

Ryan's comments capture much of the disagreement between Republicans and the Tax Foundation on one side and tax plan critics and the Tax Policy Center on the other: How much would increases in government debt “crowd out” money available to finance private sector investment? The TPC, as well as the nonpartisan Congressional Budget Office and most economists, say there is at least some crowding out that in turn slows growth. The Tax Foundation disagrees, saying overseas capital would rush in to offset any loss in the availability of domestic capital used to buy additional government debt.

Representatives of both TPC and the Tax Foundation say they are only following the data, but the debate has underscored the divide between their intellectual stances. The TPC's parent organizations, the Urban Institute and the Brookings Institution, are widely seen as centrist to center-left ideologically, while the Tax Foundation is often described as conservative or libertarian-leaning.

Well, this is a debate worth having because the amounts are so large, as are the potential impacts. To date, it has proven very difficult to get agreement on what is being proposed, let alone the long term impacts of the proposed changes. Many of the changes proposed are very important to ag producers, and the debate should be watched closely as it proceeds, Washington Insider believes.

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