The New Republican Tax Plan Still Isn't a Plan
With the release of their new "framework" for tax reform, President Donald Trump and congressional Republicans have once again succeeded in avoiding an actual plan. At best, it's the start of a process that might conceivably lead somewhere.
The framework has some commendable principles -- calling for simpler, lower taxes for businesses and the middle class; a broader tax base with fewer "special interest tax breaks and loopholes"; and measures to deal with the stockpile of foreign earnings that U.S. multinationals have parked abroad. But so many essential details are left blank that the economic effects -- who gains, who loses, and the implications for economic growth and overall revenue -- are impossible to judge.
The framework proposes to roughly double the standard personal-income deduction to $24,000 (for couples), while eliminating "most" itemized deductions except for mortgage interest and charitable contributions. The current seven tax brackets would be reduced to three -- 12 percent, 25 percent and 35 percent -- though "an additional top rate may apply to the highest-income taxpayers." The framework proposes to reform child tax credits in mostly unspecified ways and calls on the tax-writing committees to "work on additional measures to meaningfully reduce the tax burden on the middle class."
Increasing the standard deduction and paring back itemized deductions is a good idea in theory: It would make the tax system simpler and fairer. But any loss of revenue needs to be accounted for and made good. And the distributional consequences need to be considered with care.
On the face of it, a bigger standard deduction combined with eliminating the deduction for state and local taxes would leave a lot of upper-middle-class taxpayers worse off. But who knows, really? The answer depends on the endless list of details that the framework leaves blank.
The same goes for the rest of the proposal. The framework aims to cut the corporate tax rate from 35 percent to 20 percent, allow new investments to be expensed ("for at least five years"), "partially" limit the deduction for interest, and repeal or restrict "numerous other special exclusions and deductions." In the future, U.S. firms could bring home dividends from foreign subsidiaries tax-free; past earnings accumulated abroad would be treated as repatriated and taxed as such.
Again, bits and pieces of this make sense -- but what matters in tax reform is how all the pieces fit together. By itself, cutting the corporate rate from 35 percent to 20 percent would cost a lot of revenue, far more than broadening the corporate-tax base could plausibly provide. How is that gap to be filled, if at all? The framework doesn't say.
One more thing. The avowed commitment to simplicity is welcome, as far as it goes -- but it wavers at key points. Consider the proposal to cap the tax rate applied to so-called pass-through corporations. This widens an existing loophole that lets high-income individuals pay less tax. Will it be closed by other means? "The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income." Problem solved.
Perhaps the tax-writing committees of Congress can take this basically empty framework and give it substance. U.S. taxpayers deserve no less. As it stands, the document isn't much help, and you'd have to be generous to even call it a good start.
--Editors: Clive Crook, Michael Newman
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