The much-hyped, and long-delayed, House Republican bill to overhaul the federal tax code is not entirely without redeeming qualities.
The measure's cut in the corporate income tax rate from 35% to 20%, for example, could boost the economy. And its limit on the interest deduction for new mortgages has angered the powerful homebuilding and Realtor lobbies, which suggests that its drafters might be doing something right.
But by the standards of President Reagan’s landmark 1986 tax reform, this plan is a major disappointment. It lacks fiscal discipline, is needlessly indulgent of the wealthy, and is purposely punitive to universities, college students and people who live in high-tax states. Taken as a whole, this plan is partisan, even petty.
REP. PETER ROSKAM: We’re helping middle-income Americans
Its shortcomings start with the fact that it is not revenue-neutral, something that Reagan insisted on. Preliminary estimates are that it would increase deficits by $1.5 trillion over 10 years. To put that in perspective, an only slightly different cast of GOP lawmakers screamed bloody murder in 2009 over an Obama economic stimulus plan half that size. Republicans were deficit hawks then. Now, not so much.
Also disappointing is the general lack of simplification to the absurdly complex tax code. Sure, individual filers would be spared the chore of computing the hated alternative minimum tax but otherwise would find a tax code that is different, not simpler. Some business owners, meanwhile, would even see a substantial increase in their filing headaches (more on that in a moment).
The biggest flaw in the GOP plan is that, for all the rhetoric about helping the middle class, it is tilted toward the wealthy. Benefits for the rich include:
- Termination of the tax on inherited wealth, a priority of wealthy GOP donors but not many other Americans. Immediately upon passage, estates of up to $22 million could be passed on to heirs tax-free. After six years, estates of any size could be passed on tax-free. Over a decade, this change alone would drain $172 billion from the Treasury.
- Continuation of a special top income tax rate of 23.8% for managers of certain private equity funds and other select firms, an indefensible loophole that even President Trump had called for ending.
- A bizarre, unfair and mind-numbingly complex provision that cuts the rate on income derived from “pass through” businesses. Though 95% of all business are pass-through entities, this provision would concentrate its benefits on a tiny sliver of them: medium and large businesses with concentrated ownership. It would also mean that some business owners would pay a lower tax rate than their highly skilled, highly compensated employees. This would cost the Treasury $448 billion.
To help offset some of the tax cuts that benefit the well-to-do, as well as rate cuts, the proposal targets a number of deductions and credits used by taxpayers of lesser means.
Medical expenses, for example, would no longer be deductible, a gut punch to seniors in nursing care and people paying for costly treatments. The adoption tax credit would disappear. So would the deduction for student loan interest.
People in high-income, high-tax, left-leaning states such as New York and California would be clobbered with the end of the deduction for state and local income taxes. And universities would pay a 1.4% annual tax on their endowments.
Victory-hungry Republicans hope to fast-track this major rewrite of the tax code, ramming it through the House before Thanksgiving and getting it to President Trump's desk by Christmas. If Democrats were trying to pull this off, Republicans would be crying out for regular order, multiple committee hearings, extensive analysis and outreach to the other party.
All told, this plan looks less like tax reform in the mold of Reagan’s bipartisan act of 1986 than an effort to reward Republican constituencies and punish Democratic ones.
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