As mentioned, there are glitches in both the Senate and House tax plans, but most of them can be corrected. And the differences between the two plans should narrow in conference.
The all-important business tax rate will come down to 20 percent from 35 percent. That’s the key to economic growth, and the biggest beneficiaries will be middle-class wage earners.
The issue of small-business pass-throughs is not completely resolved. It seems the Senate has a better take on this than the House. But there’s a small-business tax cut coming.
The Senate’s idea to phase in the new corporate tax rate in 2019 is a bad idea, and President Donald Trump agrees. To be sure, the GOP senators want full cash expensing for capital expenditures projects for 2018. Good. But as Art Laffer warns, if you hold back the actual rate reduction, you’ll see a lot of tax avoidance and sheltering next year.
That will include offshoring. A delay will deter foreign companies from coming to the United States. You may wind up losing revenues — perhaps as much as $ 100 billion.
On the House side, the so-called “bubble rate” of 45.6 percent is also not a good idea. It’s being done to claw back the 12 percent rate high-end earners move through on the way to 40 percent. But why punish success?
Those upper-end folks are largely investment-oriented. As FedEx CEO Fred Smith said, it’s time to stop punishing investment: That includes businesses and individuals.
I assume this will be fixed in conference. Let the Democrats be the class warriors who tax the rich. GOP stands for growth.
There are other issues. The personal side is a mishmash of credits and deductions. This is no Ronald Reagan tax bill of 1986. Good tax reform slashes individual rates so that reductions and loopholes are no longer necessary.
But there’s no slashing on the personal side, and it will be a fight over deductions. And frankly, I’m underwhelmed by the deduction part.
I keep thinking: Why didn’t the House and Senate simply agree on a 3 percent growth rate? And why haven’t they embraced the Trump administration’s argument that the business tax cuts will pay for themselves and generate 3 percent growth over the next decade?
House and Senate negotiators agreed on a 2.6 percent growth baseline. It’s better than the CBO’s 1.9 percent. But with 3 percent, they would have picked up $ 500 billion to $ 700 billion in additional revenues from faster growth.
Unfortunately, no model captures the significant pro-growth effects of international flows, such as repatriation and the possible capital inflow from foreign companies. Is it possible this could be changed in conference? Just a thought.