The New York Analysis of Policy and Government concludes its two-part examination of the tax reform debate.
President Trump’s tax reform proposals may include elements of the Republican tax proposal issued in June 2016. An Americans for Tax Reform analysis of the GOP tax reform concept, proposed last June, provides this summary:
- According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to 9.1 percent higher GDP over the long term, 7.7 percent higher wages, and an additional 1.7 million full-time equivalent jobs.
- The plan would reduce federal revenue by $2.4 trillion over the first decade on a static basis. However, due to the larger economy and the broader tax base, the plan would reduce revenue by $191 billion over the first decade.
- Although the plan would reduce federal revenue by $2.4 trillion on a static basis in the first decade, much of the revenue loss is one-time. As a result, the plan will cost much less in subsequent decades.
- On a static basis, the plan would lead to 0.7 percent higher after-tax income for all taxpayers and 5.3 percent higher after-tax income for the top 1 percent. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by at least 8.4 percent.”
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- Increases the standard deduction from $6,300 to $12,000 for singles, from $12,600 to $24,000 for married couples filing jointly, and from $9,300 to $18,000 for heads of household.
- Eliminates the personal exemption and creates a $500 non-refundable credit for dependents who are not children.
- Increases the Child Tax Credit to $1,500 per child, limits the refundability of the credit to $1,000, and raises the phaseout threshold for the Child Tax Credit for married households from $110,000 to $150,000.
- Eliminates all itemized deductions besides the mortgage interest deduction and the charitable contribution deduction.
- Eliminates the individual alternative minimum tax.
- Eliminates federal estate and gift taxes.
Changes to Business Income Taxes
- Reduces the corporate income tax rate from 35 percent to 20 percent.
- Eliminates the corporate alternative minimum tax.
- Taxes income derived from pass-through businesses at a maximum rate of 25 percent.
- Allows the cost of capital investment to be fully and immediately deductible.
- Eliminates the deductibility of net interest expenses on future loans.
- Restricts the deduction for net operating losses to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflation and the real return to capital. Does not allow net operating losses to be carried back.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.
- Modifies all business income taxes to be border-adjustable, disallowing the deduction for purchases from nonresidents and exempting export profits and foreign-derived profits from taxation.
Impact on the Economy
According to the Tax Foundation’s Taxes and Growth Model, the House Republican tax plan would increase the long-run size of the economy by 9.1 percent (Table 3). The larger economy would result in 7.7 percent higher wages and a 28.3 percent larger capital stock. The plan would also result in 1.7 million more full-time equivalent jobs. The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which is due to the lower corporate income tax rate and the full expensing of capital investment.”
A December, 2016 analysis by Mark Bloomfield, writing for The Hill maintained that all the ingredients necessary for tax reform exist, including the desire of major U.S. corporations to repatriate funds orphaned abroad due to current tax law, the need for those funds to be brought stateside to pay for infrastructure, and the desire of the GOP leadership to get it done.
That doesn’t necessarily indicate that the task is certain or easy. Bloomfield notes that “The Republican majority in the House can pass tax reform without any problem. It’s a different story, however, in the Senate, where 60 votes are required to advance even the slightest controversial legislation. However, there is a way around the Senate’s filibuster rules. McConnell confirmed on Dec. 12 that the Senate would pass tax reform using the budget reconciliation process, which is a privileged motion that needs only a simple majority to pass…There are also a number of Red State Democratic senators up for reelection in 2018, who could make tax reform bipartisan. I reckon that there’s a 63 percent chance of tax reform succeeding in 2017. Why? Because it has been that many years since the Internal Revenue Act of 1954, the first comprehensive reform of the federal income tax since its origin in 1913.”
Because tax reform is central to almost every other aspect of governance, fighting will be fierce. However, the impact of a reduced tax on the American economy, particularly for jobs creation and economic revitalization, would be exceptionally significant, and the political gains from a simplified tax code would be substantial. With a majority in both houses of Congress, and with the precedent set by the Gorsuch nomination rules change, expect the GOP to move forcefully on the issue.