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House Republicans have unveiled their much-anticipated tax plan.

Is this something to celebrate? Well, that depends on whether you’re grading on a curve. Compared to a pure, simple, and fair flat tax, it’s timid and disappointing.

But compared to today’s wretched and unfair tax code, there are some very positive changes.

At the end of 2015, I reviewed the major tax plans put forth by the various presidential candidates, grading them on issues such as tax rates, double taxation, and simplicity.

Trump’s plan got the lowest score, though “B-” nonetheless represented a non-trivial improvement over the status quo.

And since he wound up in the White House, nobody should be surprised to see that many of his priorities are reflected in the House plan.

So let’s grade the major provisions of this new proposal (with the caveat that grades may change as more details emerge).

Lower corporate rate: A

America’s high corporate tax rate is probably the most self-destructive feature of the current system. If the rate is permanently reduced from 35 percent to 20 percent, that will be a huge boost to competitiveness.

Lower individual rates: C+

The proposal is relatively timid on rate reductions for households. This is disappointing, but not unexpected since lower individual tax rates mean considerable revenue loss.

Ending deduction for state and local income taxes: A-

Next to the lower corporate tax rate, this is the most encouraging part of the proposal. It generates revenue to use for pro-growth provisions while also eliminating a subsidy for bad policy on the part of state and local governments.

Curtailing mortgage interest deduction: B-

Instead of allowing mortgage interest deduction on homes up to $1 million, the cap is reduced to $500,000. A modest but positive improvement that will reduce the distortion that creates a bias for residential real estate compared to business investment.

Death tax repeal: A-

Don’t die for six years, because that’s how long it will take before the death tax is repealed. But if we actually get to that point, this will represent a very positive change to the tax system.

Change to consumer price index: C

It is quite likely that the consumer price index overstates inflation because it doesn’t properly capture increases in the quality of goods and service. Shifting to a different price index will lead to higher revenues because tax brackets and other provisions of the tax code won’t adjust at the same rate. That’s fine, but I’m dissatisfied with this provision since it should apply to spending programs as well as the tax code.

Reduced business interest deduction: C+

The business interest deduction is partially undone, which is a step toward equal treatment of debt and equity. It’s not the right way of achieving that goal, but it does generate revenue to finance other pro-growth changes in the legislation.

Here’s a useful summary from the Wall Street Journal of changes to business taxation.

Now let’s zoom out and grade the overall plan in terms of major fiscal and economic goals.

Restraining the growth of government: F

In my fantasy world, I want a return to the very small federal government created and envisioned by the Founding Fathers. In the real world, I simply hope for a modest bit of spending restraint. This legislation doesn’t even pretend to curtail the growth of government, which is unfortunate since some fiscal prudence (federal budget growing about 2 percent per year) would have allowed a very large tax cut while also balancing the budget within 10 years.

Collecting revenue in a less-destructive manner: B

This is a positive proposal. It will mean more jobs, increased competitiveness, and higher incomes. The wonks in Washington doubtlessly will debate whether these positive effects are small or large, but I’m not overly fixated on that issue. Yes, I think the growth effects will be significant, but I also realize that many other policies also determine economic performance. The most important thing to understand, thought is that even small increases in growth make a big difference over time.

The bottom line is that half a loaf (or, in this case, a fourth of a loaf) is better than nothing. House Republicans have a good plan. Now the question is whether the Senate makes it better or worse (hint: don’t be optimistic).

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I’ve been arguing all year that a substantially lower corporate tax rate is the most vital goal of tax reform for reasons of competitiveness.

And I continued to beat that drum in an interview last week with Fox Business.

The Wall Street Journal agrees that the time has come for a lower corporate rate. Unless, of course, one would prefer the United States to fall even further behind other countries.

President Emmanuel Macron last week pushed a budget featuring substantial tax relief through the National Assembly. The top rate on corporate profits will fall to 28% by 2020 from 33.33% today, and Mr. Macron has promised 25% by 2022. …Critics branded Mr. Macron “the President for the rich” for these overhauls, but the main effect will be to stimulate investment and job creation… The Netherlands also is jumping on the bandwagon. Prime Minister Mark Rutte promises to cut the top corporate rate to 21% from 25% by 2021… Do American politicians really want to have to explain to voters why they let the U.S. trail even France?

For the most part, opponents of tax reform in the United States understand that they have lost the competitiveness argument. So they will pay lip service to the notion that a lower corporate rate is desirable (heck, even Obama notionally agreed), but they will fret about the loss of tax revenue and a supposed windfall for the “rich.”

I agree that tax revenues will decrease, at least in the short run. But there’s some very good research showing the long-run revenue-maximizing corporate rate is somewhere between 15 percent and 25 percent.

And Chris Edwards of the Cato Institute reviewed fifty years of data for industrialized nations and ascertained that lower tax rates are associated with rising revenue.

There’s also good evidence from Canada and the United Kingdom if you want country-specific examples of the relationship between corporate tax rates and corporate tax revenue.

By the way, even left-leaning multilateral bureaucracies such as the International Monetary Fund and the Organization for Economic Cooperation and Development have published research showing the same thing.

And what about the debate over whether the “rich” benefit?

That issue is a red herring. Yes, shareholders of companies, on average, have higher incomes, and they will benefit if the rate is reduced, but I’ve never been motivated by animosity against those with more money (assuming they earned their money rather than mooching off the government).

What does get my juices flowing, however, is growth. And if we can get more dynamism in the economy, that translates into more jobs and higher income.

A new report from the Council of Economic Advisers estimates the potential benefit for ordinary people.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. …Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s some good cross-country data showing nations with lower corporate tax rates do better.

Between 2012 and 2016, the 10 lowest corporate tax countries of the OECD had corporate tax rates 13.9 percentage points lower than the 10 highest corporate tax countries, about the same scale as the reduction currently under consideration in the U.S. The average wage growth in the low tax countries has been dramatically higher.

Here’s the accompanying chart.

As you can see, there’s a clear divergence between higher-tax and lower-tax nations. Though, given the limited time period in the chart and the fact that many other factors can impact wage growth, I’m actually more persuaded by some of the other empirical research cited in the CEA report.

Arulpalapam et al (2012) find that workers pay nearly 50 percent of the tax, while Desai et al (2007) estimate a worker share of 45 to 75 percent. Gravelle and Smetters (2006) generate a rate of 21 percent when the rate of capital mobility across countries is moderate and 73 percent when capital can flow freely, evidence that the labor incidence is likely both dynamic and positively correlated with the rate of international capital transfers. A Congressional Budget Office (CBO) study (Randolph, 2006) finds that workers bear 70 percent of the corporate income tax burden in the baseline and 59 to 91 percent in alternative specifications. In a summary study, Jensen and Mathur (2011) argue for an assumption of greater than 50 percent. …A cross-country study by Hassett and Mathur (2006) based on 65 countries and 25 years of data finds that the elasticity of worker wages in manufacturing after five years with respect to the highest marginal tax rate in a country is as low as -1.0 in some specifications, although other sets of control variables increase the elasticity to -0.3. Expanded analysis by Felix (2007) follows the Hassett and Mathur strategy, but incorporates additional control variables, including worker education levels. Felix settles on an elasticity of worker wages with respect to corporate income taxes of -0.4, at the high end of the Hassett and Mathur range. …Felix (2009) estimates an elasticity of worker wages with respect to corporate income tax rates based on variation in the marginal tax rate across U.S. states. In this case, the elasticity is substantially lower; a 1 percentage point increase in the top marginal state corporate rate reduces gross wages by 0.14 to 0.36 percent over the entire period (1977-2005) and by up to 0.45 percent for the most recent period in her data (2000-2005). …Desai et al (2007)…measure both the changes in worker wages and changes in capital income associated with corporate income tax changes. The estimated labor burden of the corporate tax rate varies from 45 to 75 percent under various specifications in the paper.

That’s a lot of jargon, so I suspect that many readers will find data from Germany and Australia to be more useful when considering how workers benefit from lower corporate rates.

P.S. While I think a lower corporate tax rate may result in more revenue over time, that’s definitely not my goal.

P.P.S. The biggest obstacle to good tax policy is the unwillingness of Republicans to impose even a modest amount of spending restraint.

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In my ideal world, we’re having a substantive debate about corporate tax policy, double taxation, marginal tax rates, and fundamental tax reform (plus spending restraint so big tax cuts are feasible).

Sadly, we don’t live in my ideal world (other than my Georgia Bulldogs being undefeated). So instead of a serious discussion about things that matter, there’s a big fight in Washington about the meaning of Donald Trump’s words.

Politico has a report on this silly controversy. Here are some of highlights.

“We are the highest taxed nation in the world,” President Donald Trump has repeated over and over again. …He said it at a White House event last Friday. He’s tweeted it, repeated it in television interviews and declared it at countless rallies. It is his go-to talking point, his favorite line… It is also false — something fact checkers have been pointing out since 2015.

This fight revolves around the fact that Trump is referring to corporate taxes, but generally does not make that explicit. So you have exchanges like this.

White House press secretary Sarah Huckabee Sanders sought for the second time in less than a week to defend the comment… “We are the highest taxed corporate tax [sic] in the developed economy. That’s a fact,” Sanders said when pressed on the comment during a briefing. “But that’s not what the president said,” a reporter retorted. “That’s what he’s talking about,” Sanders responded. “We are the highest taxed corporate nation.” “But that’s not what he said. He said we’re the highest taxed nation in the world,” said the reporter, Trey Yingst.

Sigh. What a silly exchange. It reminds me of the absurd debate about “what the definition of is is” during the Clinton years.

I start with the assumption that all politicians aggressively manipulate words, either deliberately or instinctively. Or maybe just out of sloppiness.

So let’s look at three bits of data, starting with the numbers that are least favorable to Trump. Here’s a chart from the Organization for Economic Cooperation and Development. It’s definitely not my favorite international bureaucracy, but it has good apples-to-apples figures for developed nations. And you can see that the United States (highlighted in red) definitely does not have the highest overall tax burden.

For what it’s worth, we should be happy about these numbers. Indeed, I think they help to explain why Americans are much more prosperous than our European friends. And it’s also worth noting that Trump – at best – is being sloppy when he asserts that America is the “highest taxed nation.”

The President’s defenders can argue, with some legitimacy, that he often makes that claim while talking about business taxation. In those cases, it’s presumably obvious that “highest taxed” is a reference to corporate rates.

And if that’s the case, looking at a second set of numbers, the President is spot on. The United States unambiguously has the highest corporate tax rate among developed nations. And the U.S. may even have the highest corporate rate in the entire world depending on how certain severance taxes in developing nations are categorized.

Moreover, the United States has a very onerous system of worldwide taxation, accompanied by rules that rank very near the bottom.

In other words, Trump has a very strong case, but he undermines his argument when he doesn’t explicitly state that he’s talking about corporate taxation.

There’s even a third set of numbers that Trump could cite when discussing the “highest taxed nation.” As I’ve noted before, the United States actually has the most “progressive” tax system in the developed world.

But the President shouldn’t cite me when he can easily use quotes and data from the Washington Post on September 19, 2012.

The United States has by far the most progressive income, payroll, wealth and property taxes of any developed country.

Or the same newspaper on April 4, 2013.

…the American system remains the most progressive tax system in the developed world.

Or the Washington Post on April 5, 2013.

A few readers were surprised by my mention Thursday that the U.S. tax code…is actually the most progressive in the developed world. But it’s true! …Our top 10 percent…pays a much higher share of the tax burden than the upper classes in other countries do.

Here’s the most relevant chart.

These numbers may not be terribly relevant for the current controversy since Trump’s tax plan is focused more on business taxpayers rather than individual taxpayers.

But our friends on the left are very anxious to impose more class-warfare taxation, so we should file this data for future reference.

P.S. The April 4, 2013, story in the Washington Post includes this very important passage.

…social democracies like France, Germany and Sweden have actively regressive systems heavily reliant on value-added taxes.

This reinforces what I’ve repeatedly noted, which is that Europe’s costly welfare states are financed by lower-income and middle-class taxpayers (in large part because of punitive value-added taxes). The bottom line is that we should listen to Bernie Sanders and become more like Europe. But only if we want ordinary citizens to pay much higher taxes and to accept much lower living standards.

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The Republican tax plan is based on some very attractive principles.

Unfortunately, the GOP isn’t planning to completely fix these policies, largely because there’s no commitment to control government spending. But any shift toward better tax policy will be good for the nation.

Another goal to add to the above list is that Republicans want to create a level playing field for American-based firms by replacing “worldwide taxation” of business income with “territorial taxation” of business income.

For those who have wisely avoided the topic of international business taxation, here’s all you need to know: Worldwide taxation means a company that earns income in another country is taxed both by the government where the income is earned and by the government back home. Territorial taxation, by contrast, is simply the common-sense notion that income is taxed only by the government where the income is earned.

In a column for the Wall Street Journal, two authors explain how America’s anti-competitive system of worldwide taxation undermines U.S.-domiciled companies.

…earlier this month Iconix , the U.S.-based company that owns the rights to Charles Schulz’s comic characters, announced it will sell them to Canada’s DHX Media. That makes Charlie Brown America’s latest expatriate. It’s a clear signal that U.S. corporate taxes are nudging business elsewhere. …why? In part because the U.S. corporate tax system hampers U.S.-based businesses by subjecting them to world-wide taxation. Canada’s aggregate corporate taxes are about 10 percentage points lower. …America’s high corporate tax rate and its practice of taxing international income is out of step with the rest of the world. The solution is so clear even a cartoon character should grasp it: Cut tax rates and adopt a system for taxing international income that more closely resembles those used by the country’s international competitors.

Indeed, it’s worth noting that the entire “inversion” controversy only exists because of America’s worldwide tax regime.

Simply stated, American-domiciled multinationals have a big competitive disadvantage compared to their foreign rivals. So it’s understandable that many of them try to protect shareholders, workers, and consumers by arranging (usually through a merger) to become foreign companies.

That’s the bad news.

The good news is that the Republican tax reform plan ostensibly will shift America to a territorial tax system. As explained above, this is the sensible notion of letting other nations tax income earned inside their borders while the IRS would tax the income earned by companies in the United States.

This would be good for competitiveness, particularly since the United States is one of only a handful of nations that impose a worldwide tax burden on domestic firms.

But not everybody likes the idea of territorial taxation.

One reason for opposition is that some people see corporations primarily as sources of tax revenue. So when there are discussions of international tax, their mindset is nations should compete on grabbing the most money. I’m not joking.

European Union regulators’ tax crackdown on Amazon.com Inc. — like the EU’s case against Apple Inc. — should spur U.S. policy makers to address companies’ aggressive offshore tax-avoidance strategies before it’s too late, experts said. …“Really, what we are seeing is a race by the different taxing jurisdictions to claim a share of the tax prize represented by the largely untaxed streams of income that U.S. multinationals have engineered for themselves,’’ said Ed Kleinbard, a professor at the University of Southern California and the former chief of staff for Congress’s Joint Committee on Taxation. “If the United States doesn’t join the race, it will just lose tax revenue to more aggressive host countries around the world.’’ The EU rulings “do make it clear that if we are not interested in protecting our corporate tax base, other countries will be more than happy to tax the income,’’ said Kimberly Clausing, a professor of economics at Reed College in Portland, Oregon.

Call me crazy, but I think American policymakers should be in a race to create jobs, boost investment, and increase wages. And that means doing the opposite of what these supposed experts want.

Unsurprisingly, left-wing groups also are opposed to territorial taxation. Here are some passages from a report published by the Hill.

One hundred organizations, including a number of progressive groups and labor unions, are urging Congress to reject a major international tax change proposed in Republicans’ framework for a tax overhaul. In a letter dated Monday, the groups speak out against the framework’s move toward a “territorial” tax system that would largely exempt American companies’ foreign profits from U.S. tax. …”Ending taxation of offshore profits would give multinational corporations an incentive to send jobs offshore, thereby lowering U.S. wages,” they wrote.

Both assertions in that excerpt are wrong and/or misleading.

First, territorial taxation doesn’t mean that profits are exempt from tax. It simply means that the IRS doesn’t impose an additional layer of tax on income that already has been subject to the tax system of another country.

And other countries impose plenty of tax on American firms operating overseas.

Second, the incentive to shift job overseas is caused by America’s high corporate tax rate. That’s what makes it attractive for firms to operate in other nations.

Worldwide taxation is not the way to fix that bias since foreign-domiciled companies wouldn’t be impacted and they easily can sell into the American market.

By the way, the Republican tax plan doesn’t even create a real territorial tax system. Returning to the Bloomberg story cited above, the GOP proposal basically copies a very bad idea that was being pushed a few years ago by the Obama Administration.

…the GOP tax framework contemplates a so-called “minimum foreign tax’’ on multinationals’ future earnings that would apply in cases where a company’s effective tax rate fell below a pre-determined threshold.

To be fair, the Republican approach is less punitive that what Obama wanted.

Nonetheless, I worry that if Republicans adopt some sort of global minimum tax, it will just be a matter of time before that rate increases. In which case a shift toward territoriality actually plants a seed for a more onerous worldwide system!

Without knowing what will happen in the future, there’s no right or wrong answer, but I’m wondering whether the smart approach is to simply leave the current system in place. Yet, it’s based on worldwide taxation, but at least companies have deferral, which creates de facto territoriality for firms that manage their affairs astutely.

Such a shame that the GOP isn’t capable of simply doing the right thing.

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For months, I’ve been arguing that the big reduction in the corporate tax rate is the most important part of Trump’s tax agenda.

But not because of politics or anything like that. Instead, my goal is to enable additional growth by shifting to a system that doesn’t do as much damage to investment and job creation. A lower rate is consistent with good theory, and there’s also recent research from Australia and Germany to support my position.

Especially since the United States is falling behind the rest of the world. America now has the highest corporate tax rate in the developed world and arguably may have the highest rate in the entire world.

Needless to say, this is a self-inflicted wound on U.S. competitiveness.

But since the numbers I’ve been sharing are now a few year’s old, let’s now update some of this data.

Check out these four charts from a new OECD annual report on tax policy changes (the some one that I cited a few days ago when explaining that European-sized government means a suffocating tax burden on the poor and middle class).

Here’s the grim data on the corporate income tax rate (the vertical blue bars). As you can see, the United wins the booby prize for having the highest rate.

But here’s some “good news.” When you add in the second layer of tax on corporate income, the United States is “only” in third place, about where we were back in 2011.

France imposes the highest combined rate on corporate and dividend income (no surprise since the nation’s national sport is taxation), while Ireland is in second place (the corporate rate is very low, but personal rates are high and dividends receive no protection from double taxation).

For what it’s worth, I think it’s incredibly bad policy when governments are skimming 30 percent, 40 percent, 50 percent, and even 60 percent of the income being generated by business investment.

Particularly since high rates don’t translate into high revenue. Check out this third chart. You’ll notice that revenues are relatively low in the United States even though (or perhaps because) the tax rate is very high.

But our final chart provides the strongest evidence. Just like the IMF, the OECD is admitting that tax revenues have remained constant over time, even though (or because) corporate tax rates have plunged.

In other words, the Laffer Curve is alive and well.

Incidentally, the global shift to lower tax rates hasn’t stopped. I wrote back in May about plans for lower corporate tax burdens in Hungary and the United Kingdom and I noted last November that Croatia was lowering its corporate rate.

And, thanks to liberalizing effect of tax competition, more and more nations are hopping on the tax cut bandwagon.

Consider what’s happening in Sweden.

Sweden’s center-left minority government is proposing a corporate tax cut to 20 percent from 22 percent, Finance Minister Magdalena Andersson and Financial Markets Minister Per Bolund said on Monday… “With the proposals we want to strengthen competitiveness and create a more dynamic business climate,” they said… The proposed corporate tax cut would be…implemented on July 1, 2018.

Or what’s taking place in Belgium.

…government ministers finally reached agreement on a number of reforms to the Belgian tax and employment systems. …Belgium is to slash corporation tax from 34% to 29% next year. By 2020 corporation tax will have been cut to 25%. …Capital gains tax on the first 627 euros of dividends from shares disappears, a measure intended to encourage share ownership.

Or what’s looming in Germany.

Germany will likely need to make changes to its corporation tax system in coming years in response to growing tax competition from other countries, Finance Minister Wolfgang Schaeuble said on Wednesday… “I expect there will be a need to take action on corporation tax in coming years because in some countries, from the U.S. to Britain, but also on other continents, there are many considerations where we can’t simply say we’ll ignore them,” Schaeuble told a real estate conference.

This bring a smile to my face. Greedy politicians are being pressured to cut tax rates, even though they would prefer to do the opposite. Let’s hope the United States joins this “race to the bottom” before it’s too late.

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The most common arguments for reducing the 35 percent federal tax on corporate income usually revolve around the fact that having the developed world’s highest tax rate on business undermines competitiveness and reduces investment in America.

And all of that is true. But we should never lose sight of the fact that the corporate income tax is merely a collection device. Businesses may pay the tax, but the real burden is borne by people.

  • Shareholders (investors) receive lower dividends.
  • Consumers pay more for goods and services.
  • Workers receive lower levels of compensation.

Politicians don’t really care about investors since some shareholders are rich, but they definitely pay lip service to the notion that they are on the side of consumers and workers.

So I think this new study from German scholars is worth sharing because it measures the effect of corporate taxation on wages. Here are some of the highlights.

In this paper, we revisit the question of the incidence of corporate taxes on wages both theoretically and empirically. …we exploit the specific institutional setting of the German local business tax (LBT) to identify the corporate tax incidence on wages. …we test the theoretical predictions using administrative panel data on German municipalities from 1993 to 2012. Germany is well suited to test our theoretical model for several reasons. First, we have substantial tax variation at the local level. From 1993 to 2012, on average 12.4% of municipalities adjusted their LBT rates per year. Eventually, we exploit 17,999 tax changes in 10,001 municipalities between 1993 to 2012 for identification. …Moreover, the municipal autonomy in setting tax rates allows us to treat municipalities as many small open economies within the highly integrated German national economy – with substantial mobility of capital, labor and goods across municipal borders.

And here are the key results. There’s a good bit of economic jargon, so the main takeaway is that 43 percent of the corporate tax is borne by workers.

For our baseline estimate, we focus on firms that are liable to the LBT. Figure 2 depicts the results. Pre-reform trends are flat and not statistically different from zero. After a change in the municipal business tax rate in period 0 (indicated by the vertical red line), real wages start to decline and are 0.047 log points below the pre-reform year five years after the reform. The coefficient corresponds to a wage elasticity with respect to the LBT rate of 0.14. …this central estimate implies that a 1-euro increase in the tax bill leads to a 0.56-euro decrease in the wage bill. …we have to rely on estimates from the literature to quantify the total incidence on labor. If we assume a marginal deadweight loss of corporate taxation of 29% as suggested by Devereux et al. (2014), 43% of the total tax burden is borne by workers. This finding is comparable to other studies analyzing the corporate tax incidence on wages (Arulampalam et al., 2012; Liu and Altshuler, 2013; Su´arez Serrato and Zidar, 2014). …We find that part of the tax burden is borne by low-skilled workers. …the view that the corporate income tax primarily falls on firm owners is rejected by our analysis.

For what it’s worth, I use a different approach when trying to explain the impact of the corporate income tax.

I state that shareholders pay 100 percent of the corporate income tax when looking at the direct (or first-order) effect.

However, since shareholders respond to this tax by investing less money in businesses, that means productivity won’t grow as fast, and this translates into lower wages for workers (compared to how fast they would have grown if the tax was lower or didn’t exist). This is the indirect (or second-order) effect of corporate taxation, and it’s akin to the “deadweight loss” discussed in the aforementioned study.

And this is also the approach that can be used to calculate the damage to consumers.

For today, though, the moral of the story is very simple. A high corporate tax rate is bad for growth and competitiveness, but one of the main effects is that workers wind up earning less income. So when the class-warfare crowd takes aim at “rich corporations,” there’s a lot of collateral damage on ordinary people.

P.S. For more information, here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. There’s lots of evidence – including some from leftist international bureaucracies – that a lower corporate tax rate won’t mean less tax revenue.

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While I realize there’s zero hope of ripping up America’s awful tax code and getting a simple and fair flat tax, I’m nonetheless hopeful that there will be some meaningful incremental changes as part of the current effort to achieve some sort of tax reform.

A package that lowers the corporate rate, replaces depreciation with expensing, and ends the death tax would be very good for growth, and those good reforms could be at least partially financed by eliminating the state and local tax deduction and curtailing business interest deductions so that debt and equity are on a level playing field.

All that sounds good, and a package like this should be feasible since Republicans control both Congress and the White House (especially now that the BAT is off the table), but I warn in this interview that there are lots of big obstacles that could cause tax reform to become a disaster akin to the Obamacare repeal effort.

Here’s my list of conflicts that need to be solved in order to get some sort of plan through Congress and on to the President’s desk.

  • Carried interest – Trump wants to impose a higher capital gains tax on a specific type of investment, but this irks many congressional GOPers who have long understood that any capital gains tax is a form of double taxation and should be abolished. The issue apparently has some symbolic importance to the President and it could become a major stumbling block if he digs in his heels.
  • Tax cut or revenue neutrality – Budget rules basically require that tax cuts expire after 10 years. To avoid this outcome (which would undermine the pro-growth impact of any reforms), many lawmakers want a revenue-neutral package that could be permanent. But that means coming up with tax increases to offset tax cuts. That’s okay if undesirable tax preferences are being eliminated to produce more revenue, but defenders of those loopholes will then lobby against the plan.
  • Big business vs small business – Everyone agrees that America’s high corporate tax rate is bad news for competitiveness and should be reduced. The vast majority of small businesses, however, pay taxes through “Schedule C” of the individual income tax, so they want lower personal rates to match lower corporate rates. That’s a good idea, of course, but would have major revenue implications and complicate the effort to achieve revenue neutrality.
  • Budget balance – Republicans have long claimed that a major goal is balancing the budget within 10 years. That’s certainly achievable with a modest amount of spending restraint. And it’s even relatively simple to have a big tax cut and still achieve balance in 10 years with a bit of extra spending discipline. That’s the good news. The bad news is that there’s very little appetite for spending restraint in the White House or Capitol Hill, and this may hinder passage of a tax plan.
  • Middle class tax relief – The main focus of the tax plan is boosting growth and competitiveness by reducing the burden on businesses and investment. That’s laudable, but critics will say “the rich” will get most of the tax relief. And even though the rich already pay most of the taxes and even though the rest of us will benefit from faster growth, Republicans are sensitive to that line of attack. So they will want to include some sort of provision designed for the middle class, but that will have major revenue implications and complicate the effort to achieve revenue neutrality.

There’s another complicating factor. At the risk of understatement, President Trump generates controversy. And this means he doesn’t have much power to use the bully pulpit.

Though I point out in this interview that this doesn’t necessarily cripple tax reform since the President’s most important role is to simply sign the legislation.

Before the 2016 election, I was somewhat optimistic about tax reform.

A few months ago, I was very pessimistic.

I now think something will happen, if for no other reason than Republicans desperately want to achieve something after botching Obamacare repeal.

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