GOP debuts bold tax cut plan

  • 4 November 2017
  • NormanL

The GOP finally pulled the wraps off its tax cut proposal this week and it contains a number of surprises. The "Tax Cuts and Jobs Act"would lower the corporate tax rate, expand the standard deduction, and close or reduce a number of tax breaks -- including deductions for state and local taxes.

The Wall Street Journal has a piece outlining what the bill would do for individual taxpayers. The highlights:

Standard Deduction

• Current law for 2017: $12,700 (married); $9,350 (head of household); $6,350 (single)

• Proposed for 2018: $24,400 (married); $18,300 (head of household); $12,200 (single)

Personal Exemption

• Current law for 2017: $4,050

• Proposed: Repealed

Child Tax Credit

• Current law: $1,000

• Proposed: $1,600 plus $300 each for the taxpayer, a spouse and any non-child dependents

State and Local Taxes

• Current law: Itemized deduction

• Proposed: Deduction capped at $10,000 for property tax only

Charitable Donations

• Current law: Itemized deduction

• Proposed: Unchanged

Mortgage Interest Deduction

• Current law: Itemized deduction on loans up to $1 million

• Proposed: Itemized deduction for loans up to $500,000 on new home purchases

Alternative Minimum Tax

• Current law: Parallel tax that disallows personal exemptions and state deductions

• Proposed: Repealed

Retirement Accounts

• Current law: 401(k) plans allow pretax deferral of up to $18,000

• Proposed: Minor changes

The Cato Institute's Dan Mitchell -- a confirmed believer in tax cuts and fiscal restraint -- looked at the major proposals, and grades them like so:

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.

Mitchell also looks at the broader fiscal and economic goals of the proposal:

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 lack of fiscal restraint is very troubling. 

There's little doubt the proposed tax cut bill will undergo significant changes as it makes its way through the House. And what the Senate does (or fails to do) is anyone's guess.  On balance, and our reservation about spending temporarily put aside, the tax bill is a good start. Now let's see what the worthies do with it.

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