There are, in essence, three things wrong with the federal tax code. They are, in descending order of importance, that corporations pay an absurdly high rate; that the code is a labyrinthine mess that turns the work of paying one’s taxes into a nightmare; and that marginal individual rates have in recent years become punitive, with higher-income payers bearing most of the punishment.
The tax reform bills currently in the House and Senate don’t eliminate any of these problems. But both bills address all three problems—and particularly the corporate tax rate—in ways that will encourage growth and investment.
The most significant provision would spur growth in the medium- and long-term: Both bills would lower the corporate income tax to 20 percent from 35 percent—now among the highest in the world—and allows business to immediately take capital investments as an expense, rather than depreciate them over time (as is now the case). This provision alone would make the bills worth passing. A few progressive economists have tried to argue that lowering the corporate rate wouldn’t accomplish the advertised goals—job and wage growth—but their arguments hardly deserve countering: When companies have more money, they very often expand and increase wages.
The fate of individual taxes is more muddied, with both bills cutting rates while eliminating some deductions and credits but increasing others (the child tax credit, for instance, would be increased). Most people come out ahead: 76 percent of Americans would pay lower taxes under the House bill, while just 7 percent would pay more, according to an analysis by the Tax Policy Center, a joint venture between the Brookings Institution and the Urban Institute.
Both bills, moreover, would eliminate a large collection of market-distorting deductions and credits. Lawmakers could have cut far more than they have, but the longer tax reform bills sit in committee, the more time lobbyists have to dissuade members from cutting some allegedly vital break for the favored group or industry they represent. Both House and Senate proposals erase dozens of carve-outs for expenses that sound benign but have no real justification: Rehabbing historic properties, buying vacation homes, driving electric cars, and borrowing money for college are all worthy endeavors, but they’re not more virtuous or important than other taxable activities and shouldn’t be treated as such by the tax code. Our elected leaders may wish to encourage or discourage certain forms of behavior, but the tax code is for collecting revenue, not for effecting desirable social behavior.
There are sticking points between the House and Senate bills, on serious issues such as the top tax rates, the individual brackets, small-business taxes, and the state- and local-tax deduction. On Tuesday, Senate Republicans said they’d like to scrap the Obamacare individual mandate (the law’s requirement that individuals buy health insurance), which would save $338 billion that could be applied to bridge some of these differences. If they have the votes, these would be genuine accomplishments—but the GOP Senate majority is adept at turning easy victories into debacles.
Democrats and their allies in the media are complaining that “the rich” benefit too much, “the middle class” doesn’t benefit enough, and the poor will suffer the most. But nobody should be surprised—or pay any attention.
Neither bill is a history-altering achievement, and both will be watered down as they advance. That’s how difficult it’s become to reform the nation’s byzantine and punitive tax code. If legislators want to make a permanent contribution, however, they could implement an idea floated by Pete Sepp, president of the National Taxpayers Union. He suggests establishing a commission modeled on the Base Realignment and Closure commission that would regularly recommend tax-code changes subject to an up-or-down vote in Congress. This would ensure tax reform is more than a once-in-a-generation undertaking.
Neither the Senate nor the House bill is guaranteed to reach the president’s desk. With a slim majority in the Senate and Republicans generally terrified of the 2018 elections, don’t underestimate the GOP’s ability to fail.
