President Trump raised eyebrows on Wednesday when he suggested Republicans would take another stab at tax cuts this year. Head of the tax-writing committee, House Ways and Means Chairman Kevin Brady, R-Texas, had also expressed commitment to further tweaking the tax code, saying, “We think more could be done,” in an interview on Fox Business Network earlier in the day.
These comments came the day after the special election in Pennsylvania, where Democrats’ success in a House district Trump carried handily is causing Beltway operatives to question the path to success for Republicans in November.
Skeptics spent most of 2017 predicting tax reform could never be accomplished in a year, and they have readily seized on these announcements, declaring further reforms are impossible ahead of the midterm elections.
This is a mistake.
For one, the Pennsylvania race can hardly be seen as a harbinger for this cause; tax reform was a campaign theme at first, but abandoned in the weeks leading up to the special election. This, at a time when the new tax law is actually rising in popularity: last month, the New York Times published a survey showing a majority of Americans approved of the bill.
Popular inertia is growing while the economic fundamentals are beginning to shift in response to the law. Millions of Americans have been awarded bonuses, seen their benefits expanded at work, or received lower utility bills as result of tax reform. At the same time, their paychecks are bigger thanks to withholding changes taking effect. Over the next several months, business behavior will begin to change to take advantage of new incentives that will bring capital back from overseas to be invested at home.
While these changes rightfully augur optimism for the coming year, there is still work to be done. By making some of the changes to the code only temporary, tax reform sustained some of the uncertainty that plagued our old tax code, exerting drag on a burgeoning economy. Congress should fix this by making the relief granted in the tax package permanent.
This is especially important if the goal is, as Brady stated on Fox Business, “to make sure we’re encouraging innovation in America; we want to help families save for the long term.”
First, Congress should act immediately to make the reduction in individual tax brackets permanent. Not only would this create certainty for families planning for their financial futures, it protects the overwhelming majority of business owners who pay their taxes on the individual side of the code. A majority of American businesses are “pass-throughs,” or businesses whose income “passes through” to the owner’s tax return. These companies also make up the majority of business income produced in the country — holding this capital hostage to an arbitrary timeline will undoubtedly have a chilling effect on commercial activity. Republican leadership in the House of Representatives has already expressed enthusiasm for this effort; when a vote is scheduled, the Senate should do the same.
Secondly, the new tax law replaced arcane laws governing cost recovery with full business expensing. By allowing businesses to fully recoup the cost of an investment at the time it is made, business owners are relieved of capricious and burdensome accounting rules that previously required them to write off the cost of an expenditure over a certain amount of time. However, full business expensing will begin to phase out in 2022. This weakens a major growth component of the bill at a time when other changes in the code will free up capital for businesses to invest.
It is particularly important that this element be made permanent for entrepreneurs, for whom access to capital has been a pervasive barrier to entry. Entrepreneurial interest remains at an all-time high and is especially salient among young people, who make up an increasingly sizable portion of the electorate. A recent survey showed that 35 percent of millennials have started their own business to supplement their income. As the relationship between work and workers continues to change, lawmakers would be wise to promote a tax code that evolves along with it.
Lastly, Congress should seek permanent relief for family businesses facing the Death Tax. Last year’s tax reform increased the exemption threshold to $11.2 million, but that level will fall back to $5.6 million in 2025 under current law. Family businesses spend millions every year attempting to comply with the burdensome tax, the economic loss of which is estimated to cost the economy a full percentage point of growth. The Death Tax operates as a custodian of dead weight, hoarding capital that would otherwise be freely exercised in a competitive economy.
Tax reform was a monumental stride forward in bringing our tax code into the 21st century. Making the relief it granted to families and businesses permanent is a common-sense step lawmakers should be eager to take.
Mattie Duppler (@MDuppler) is a contributor to the Washington Examiner’s Beltway Confidential blog. She is the senior fellow for fiscal policy at the National Taxpayers Union. She’s also the president of Forward Strategies, a strategic consulting firm.
