Republicans’ framework for tax reform is chock-full of good ideas about modernizing the taxation of business. Its provisions for the individual tax code are more of a work in progress.
The corporate tax rate, now higher than those of other advanced countries, would drop to below the average. Non-corporate businesses would see their tax rates drop, too. Businesses of both kinds would have less ability to deduct interest payments and could write off their investments more quickly. Business taxation would be done on a territorial basis — which means, in combination with the other changes, that the U.S. would be a more attractive location for capital. Over time that ought to mean faster wage growth.
Most people will want to know how the reform would affect their own tax bills, and there the framework is harder to read. People now pay 10 percent on their first $9,300 in taxable income. That will rise to 12 percent under the plan. The personal and dependent exemptions will disappear, as will the deduction for state-and-local tax payments. In return for those hits, taxpayers will get a larger standard deduction and, if they’re in higher brackets, lower rates on a lot of their income. The framework also says the child credit should be expanded “significantly.”
The net effect will depend on where the brackets are set and how large that child-credit increase is. Senators Mike Lee and Marco Rubio say that the child credit has to be doubled: Anything much less than that will be a tax increase on a lot of middle-class families. And since we don’t know these details, we also don’t know the fiscal impact of the plan: How much will it increase the deficit, especially if it does not quickly yield higher economic growth? As they translate the framework into legislation, Republicans should both take Lee’s and Rubio’s advice and avoid a large increase in the deficit — even if it means scaling back some of their other tax cuts.
Republicans have an opportunity to pass a reform of the tax code that makes it more pro-growth and pro-family while also simplifying it. They should take it.