Tale of two tax reform plans must end with passed bill

Tale of two tax reform plans must end with passed bill
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Now that House and Senate tax writers have unveiled their respective reform bills, the pieces are falling into place to pass legislation before year-end and deliver on a major campaign promise.

Where do their respective visions converge? Fortunately, they embrace key principles of lower rates, simplification, fewer loopholes and relief for middle-class families and small businesses. But there are some items to be resolved before getting to the president’s desk. 

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Both plans are heavily focused on making the U.S. a great place for business, and at their centers are a permanent cut in the corporate tax rate from 35 percent to 20 percent. To comply with budgetary rules, the Senate proposal takes a page from the 1986 tax reform with a 2019 phase-in.

 

The House bill implements the cut in 2018. While earlier is generally better, the Senate’s one-year delay could still provide an economic boost. That’s because companies would likely accelerate capital investments into 2018 due to the plan’s immediate expensing write-off.

Although both plans repeal the Alternative Minimum Tax, they differ on the death tax: The House would fully phase it out after six years, but the Senate retains it and doubles the exemption limit.

While the latter is a positive step, keeping it on the books means retaining much of the 2.1 million hours that Americans spend complying with the tax. A recent study found that full repeal of the death tax could create 139,000 jobs. 

These bills make numerous improvements to the individual tax code. Doubling the standard deduction (equivalent to $24,400 for joint filers), combined with ending many distortionary provisions, will prompt millions more Americans to simplify their tax filing and no longer itemize.

The House proposal consolidates tax brackets from seven down to four, with the updated rates ranging from 12 to 39.6 percent. Those making between $20,000 and $30,000 a year will see a 13.6 percent reduction in total federal tax liabilities, and those making $50,000 to $75,000 will see a 7.9 percent reduction (counting only income taxes, the cut would be much larger).

However, the Senate plan maintains the current number of brackets, and the rates would be set at 10-38.5 percent. Either way, the income bracket amounts to which these rates eventually apply are the most important detail.

A tax code that is tens of thousands of pages long obviously isn’t simple, and National Taxpayers Union Foundation estimates that out of pocket expenses and lost productivity just complying with the current tax law add up to nearly $263 billion.

Streamlining deductions and credits — along with their associated complex rules and clawbacks — in favor of lower rates can help to alleviate the problem.

The Senate bill retains the current mortgage interest deduction cap of $1 million whereas the House bill would wisely lower it to $500,000.

As NTU has previously noted, this deduction can artificially inflate prices for homes beyond what buyers would normally be willing to pay. Modifying or repealing it, as long as resulting revenues go toward broader-based tax relief, ought to be on the table.

The Senate bill totally eliminates the state and local tax (SALT) deduction, as opposed to the House bill, which permits up to $10,000 in property tax to be deducted. SALT overwhelmingly benefits the better-off.

Further, it encourages bad fiscal policy at the state and local level (see: Illinois and California) by masking the financial pain caused by irresponsibly hiking taxes.

Overall, besides repealing SALT, the Senate’s bill tends to preserve more deductions (such as medical expenses) than the House’s does.

Small business relief provisions vary significantly. The House’s final markup contains a special low 9-percent rate and a 25-percent cap, with new rules defining wages versus business earnings. The Senate attempts a cleaner approach with a 17.4 percent “pass-through” income deduction, with restrictions that depart somewhat from the House’s.

Despite a litany of eye-glazing differences, the bottom line is: These pieces of legislation have more in common than just the name, “Tax Cuts and Jobs Act.” If enacted, they will be the most pro-growth reforms in a generation.

After decades of a tax system in decline, clinging to the status quo because it’s too difficult to reach a reform consensus is indefensible. Waiting for perfect circumstances likewise ignores the reality that our economy at home and our competitiveness abroad will only further underperform. Tax reform is not about chasing unicorns. It is instead about seizing the bull by the horns. 

Pete Sepp is president of the National Taxpayers Union (ntu.org), a group founded in 1969 to work for less burdensome taxes, limited government and economic opportunity for all Americans.