Taxes

Republicans, It's Way Past Time for a Real Tax Plan

The way to keep critics from assuming the worst about your intentions is to say exactly what you want to do.

Sketchy.

Photographer: Andrew Harrer/Bloomberg

The budget impact of the tax reform framework released last month by Republican congressional leaders and the administration of President Donald Trump has been the subject of intense debate. The Tax Policy Center — an influential organization that models the impact of tax policy — found that the proposed changes to the tax code would add $2.4 trillion to the national debt over the first 10 years, increase taxes for some middle-class households, and bestow the biggest benefits upon the highest-income households.

Senior members of the Trump administration and some congressional Republicans have slammed these conclusions, arguing that the framework intentionally leaves key tax changes unspecified so that Congress can choose the best course as the legislative process unfolds. With so much left to decide, they claim, it is misleading to score the plan without at least offering a range of estimates reflecting different assumptions.

Maybe so. But the real lesson is that Congress needs to fill in those missing details, making sure the final plan doesn’t add to the national debt over the long term.

It will be tempting to try to do that by using budget gimmicks. For example, the GOP leaders’ framework allows businesses to write off the cost of new investments (other than for structures), but only for five years. By making this provision temporary, its budget costs — which for legislative purposes are estimated over a 10-year period — are limited. But there’s a good chance that this provision will be extended when its expiration date arrives.

Sometimes good policy looks like a budget gimmick. Phasing in a reduction in the corporate tax rate would decrease the cost of the reduction within the 10-year window. But it would also limit the windfall gains for investments that have already been made, while providing an incentive for new investment. So the rate reduction should be phased in rather than applied entirely in the first year of the plan.

The framework takes a step in the right direction by repealing the deductibility of state and local taxes. Other deductions and exclusions should be repealed as well, both to pay for tax rate reductions, and because they are bad policy. The deduction for mortgage interest payments, for example, which is explicitly kept in the framework, is a subsidy that encourages the purchase of large and expensive homes. The exclusion from taxation of employer-provided health insurance payments encourages firms to compensate workers by providing them with insurance, and drives up health-care costs. Getting rid of both would generate more than enough combined revenue to cut the corporate rate in half while reducing other rates as well.

These deductions are protected by politically powerful groups. Indeed, we are already seeing the GOP succumb to pressure and back away from full repeal of the state and local tax deduction. An (inferior) alternative with less political risk might be for Congress to leave all the deductions in place while capping the benefits any individual can receive from them. For example, under current law you enjoy these deductions at your top income tax rate, nearly 40 percent for many households. Congress could change this by allowing households to take the deductions at, say, 15 percent, rather than at their top rate.

Alternatively, Congress could leave all the current deductions and exclusions in place, but limit the total value of the tax reduction any individual could receive from them. Limiting the value of all itemized deductions, the exclusion for employer-provided health insurance and the child tax credit to 2 percent of adjusted gross income would finance a $350 billion tax cut in 2017 — more than enough revenue to cut the corporate rate in half while reducing other tax rates as well.

If expanding the tax base by limiting deductions and exclusions is a political non-starter, Congress could always look to other sources of revenue. I’m on the fence about a tax on carbon emissions, but it could finance a reduction in business taxes that would increase the U.S.’s global competitiveness. It’s worth a discussion.

Another option is to limit the size of the overall tax cut.

Let’s simplify the debate. Republicans want to reduce tax rates for corporations, pass-through businesses and individuals. Pursing individual cuts less aggressively — perhaps by keeping the top individual rate at its current 39.6 percent and leaving the estate tax in place — would reduce the cost of the plan, increase the likelihood of bipartisan reform and focus the plan on growing the economy over the long term.

If the GOP went this route, it would give Washington a lot more to talk about than the Tax Policy Center.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Michael R. Strain at mstrain4@bloomberg.net

    To contact the editor responsible for this story:
    Jonathan Landman at jlandman4@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE
    Comments