I know what many of you want, because I want it too. We want the entire tax code thrown out, and we want Congress to just start over and create a very simple method of raising revenue. Maybe a flat tax with one low rate for everyone and no deductions. Maybe 9-9-9, which I continue to believe was a brilliant proposal, even if the anti-intellectual media thought it was merely a slogan.
(Not the so-called FairTax, at least not for me. Sorry cultists.)
Anyway, what the Trump Administration and the GOP Congress unveiled last night is not that, and that puts is in the familiar position of debating whether we should oppose something that doesn't go as far as it could have - and is thus a missed opportunity - or if we support something that represents a substantial improvement over the status quo.
To me that's an easy choice. If it promotes more growth and prosperity, you support it. You don't run around like a little # screaming that it should have been more and it should have been better, because that's how you end up still stuck with ObamaCare and still stuck a far worse tax code. You get what you can get now, make your case for more, try to gain more political power and come back later and get even more.
That's what the Democrats do, and that's how they've built a federal behemoth that no one seems to be able to get under control, in part because Republican purists insist on everything or nothing at all when we have opportunities to take real steps in the right direction.
And this proposal is very much that:
The most important news is that the plan would make U.S. businesses more competitive around the globe. The corporate rate will fall to 20% from 35%, which is the highest in the developed world. This is not as low as President Trump’s floated 15% or Ireland’s 12.5% but would bring the U.S. below the industrialized-world’s 22.5% average. This would improve U.S. corporate tax competitiveness from a depressing 35th out of 35 nations in the Tax Foundation’s annual index, which is below even France. (See nearby.)
The framework also moves to a territorial model that allows companies to pay taxes where income is earned, which is the global norm. The punishing U.S. system has left $2.5 trillion parked overseas, and that money will be invited back at a discount with illiquid assets paying a lower rate than cash. The changes will be permanent, which is important as corporations invest with a long tail, and they will be immediate, which means investors won’t have to wait to see the benefit of lower rates.
Small businesses with owners who “pass through” income to personal returns would see a top rate reduction to 25% from 39.6%. This will require some finesse, as tax writers must develop guardrails that prevent lawyers or hedge-fund operators from dumping wages into pass-throughs and paying less than salary folks. Such businesses will pay a slightly higher top rate than corporations, but the latter are taxed twice: once on income, again on dividends or capital gains.
There are other pro-growth elements, such as full expensing for five years, which Congress will likely renew. The alternative-minimum tax is zeroed out, as is the death tax. The left will say that ending the government’s undertaker fee is a payout for the children of Bill Gates, but anyone with real money knows to hide wealth in trusts or foundations. The death tax hits people who have amassed some money over a lifetime but not enough to form the Buffett Foundation.
The big disappointment is in individual tax rates. The good news is the blueprint would fold seven brackets into three—12%, 25%, 35%—and double the standard deduction to $12,000 for individuals and $24,000 for married couples. The increased deduction reduces the need for carve-outs that muck up the code, and millions will be able to file on a postcard.
But the outline threatens an undefined additional rate on high earners to ensure the new code is “as least as progressive” as the current system, which sounds like a talking point from Nancy Pelosi. The top 1% paid almost 40% of all federal income taxes in 2014, according to the Tax Foundation, and these individuals are the most sensitive to tax rates in deploying their assets. Separating the personal rate from the small business rate all but guarantees that the top rate will never return to the Reagan low of 28% that has since climbed to about 44% with the ObamaCare surtax on investment income.
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A lot of people will freak out about the elimination of the deduction for state and local taxes, but if you want to simplify the code then you have to start getting rid of things like this. And it's a good place to start because it basically uses the federal tax code to subsidize the treasuries of high-tax states and cities, while those in lower-tax states and cities don't get as much of a benefit from the deduction.
Folding seven tax brackets into three is what I'd call a good start. It's a step in the right direction, but if you ask me the rates are still too high, and it's not encouraging that Beltway Republicans feel the need to keep the code progressive. Also, it's worth remembering that the 35 percent rate is merely going back to what we had before Bill Clinton imposed his so-called "surtax on the rich." The Reagan top rate of 28 percent crept back up after George Mitchell and Thomas Foley put the screws to George H.W. Bush, and when Clinton took over he raised it even more.
Get this through your head: Almost everything rich people do with their capital is more beneficial to you, and to the country in general, than handing it over to the government. No matter where they spend it or invest it, it spurs more prosperity than what politicians will do with it after they collect the "fair share" of the rich (i.e. the people who actually earned it).
The biggest things here, though, are the reduction of the corporate tax rate from 35 percent to 20 percent and the complete elimination of the tax on repatriated profits. That last item will likely cause as much as $3 trillion to flow back to the United States from overseas.
Now, with all that said, why should we think the Republican senators who sunk ObamaCare repeal will vote for this? Susan Collins and Lisa Murkowski are every bit as liberal as Chuck Schumer. John McCain lives to sabotage his own party and win media praise. Rand Paul will probably oppose it on the grounds that it doesn't repeal the taxing power of the federal government completely.
And if it has to be watered down to get to 50 votes, will we have enough pro-growth elements left to make it worth passing?
I'd love to be confident. This Congress has given me zero reasons to think I should be.
