The Republican party politicians finally finished their maths problem and presented an actual tax bill. While it will no doubt go through a lot of shape-shifting before it comes close to passing, how should we judge the current plan on merit. Let's distinguish between the good, the bad and the downright ugly.
There are positive things to say about the two principal characteristics of the plan. It adds $1.5tn to the deficit over 10 years — less than some early proposals had suggested, and by less than 1 per cent of US gross domestic product, not an irresponsible amount. Certainly those of us who think that the US economy can do with more macroeconomic stimulus should not complain about this (but we should complain about what this deficit increase funds, on which more below).
Then there is the flagship policy of a 20 per cent corporate tax rate. This will not increase wages or growth by much, and nowhere near the wild claims made by its proponents. But a lower rate combined with a broader tax base is not a terrible idea. And at least the cuts are permanent, whereas for a while there was talk of making them temporary, which would have nullified whatever little growth effect it is legitimate to hope for. To pay for the cuts, the tax law writers have gone after corporate deductions, which have earned them the ire of lobbies benefiting from current loopholes. (The New York Times has a nice chart showing the savings made from eliminating corporate tax loopholes.)
For example, interest deductibility has been limited for corporations (but not — surprise, surprise — for real estate developers) and for households on new, large mortgages. Those are welcome steps, but they also make the tax code more complex. A full elimination would both have broadened the tax bases more (and allowed for greater cuts in rates) and fulfilled promises of a much simpler tax system. Still, any move towards rationality is welcome.
So much for the good; now for the bad. This is a missed opportunity to simplify the tax system much more. It is also a missed opportunity as regards fiscal stimulus. For those who think a greater deficit can be a good thing, the tax writers have botched their job by choosing largely to benefit the rich, thereby blunting any demand impact that could have been hoped for. Redistributing downwards would have given more bang for the buck.
The proposed law also buys into the myth that corporations’ foreign earnings are trapped offshore. It imposes a 12 per cent tax on these earnings — more than some had proposed, but less than the full statutory tax rate of 35 per cent that should have been imposed (and in some cases is at low as 5 per cent). This is bad in lots of ways. It teaches corporations that if they keep foreign earnings off their balance sheet long enough, they will be given a tax holiday. The gap between 12 (or 5) per cent and the full rate on an estimated $2.6tn accumulated offshore earnings is an entirely unnecessary giveaway of at least $500bn-$600bn, enough to pay for a full one-third of the increase in the deficit.
As for future earnings, the correct reform would be simple: keep in place the worldwide tax liability rule (with credits for foreign taxes actually paid) and end the ability to defer the corporate tax. Instead, the GOP tax writers have moved towards a territorial system, then clumsily tried to undo that move with a levy on intra-company payments.
And finally, the ugly. The plan reduces and aims to eliminate the inheritance tax, along with the alternative minimum tax (which makes sure high-income taxpayers don't benefit too much from deductions). The greatest beneficiaries of these changes will be people such as Donald Trump and his family. The plan also silently drops Trump’s promise to end the “carried interest” loophole in which some financiers' salary is, unconscionably, taxed as if it were income from risk-taking investments. At the other end of the spectrum, income tax breaks will be removed for those with large medical expenses and disabled retirees.
In sum, the plan could have been worse. But it is still a tax proposal that could make the Sheriff of Nottingham blush.
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