Taxes on business badly need reform, and Republicans have devoted some thoughtful attention to how to do it. Their new tax-reform bill reduces corporate tax rates, lets businesses write off the cost of investments more rapidly, and changes the way we tax multinational businesses to comport better with how the vast majority of other countries do it. All of these changes should make the U.S. a more attractive location for capital, and in the long run more capital should mean higher wages. (The White House’s logic on this point is sound even if the magnitudes are open to dispute.)
It’s these provisions of the bill that offer the most hope for higher economic growth. The rest of the bill — the changes it makes to the individual tax code — looks like it was subordinated to the corporate provisions. Some of the individual-code provisions are there to placate Republican interest groups, some to provide enough middle-class relief to make the bill politically viable, and some to reflect half-remembered bits of party dogma. Many of these provisions are commendable, such as limiting the deductions for state and local taxes and large mortgages. But as a whole they don’t reflect a coherent and well-grounded view of what the tax code should look like, in the way the corporate changes do.
Some tax rates go up, and some go down, without much rhyme or reason. Couples making between $470,000 and $1 million a year get a cut in their tax rates. Those making between $1 million and $1.2 million keep their existing rate. Those making $1.2 million to $1.6 million pay a higher rate than today. And those making even more than that keep the existing rate. It’s a ramshackle tax structure that may make sense in terms of coalition management but is not easy to defend on any other terms.
A particular disappointment is the bill’s treatment of families. The bill eliminates the dependent exemptions, expands the child credit from $1,000 to $1,600 per child, and allows more upper-middle-class families to claim it. The net effect is to reduce per-child tax relief for some families, increase it for others, and leave it unchanged for most, again without any particular rationale for the pattern of changes.
We would recommend a simpler set of changes to the individual tax code. From the current bill, keep the limits on deductions and exemptions and the abolition of the estate tax. Keep its expansion of the standard deduction, too, but scale it back. Expand the child credit to $2,000 per child. And leave the existing structure of rates alone. This simpler bill would be pro-growth, like the current bill. Unlike the current bill, it would also be pro-family — and relatively comprehensible.
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