Thoughts on the GOP’s Tax Bill

Heberto Limas-Villers, The Millennial Republican

Just recently, congressional Republicans just delivered their tax reform proposal after months of intense debate and consolidation. This bill was and remains crucial for the Republicans after embarrassing defeats in Alabama and November. It was also met with extreme controversy as Republicans reduced top income taxes and corporate taxes to extreme disapproval. While there are some commendable parts within the bill, there are significant flaws that prevents this author from endorsing it.

The tax bill will reduce the corporate tax rate from 35% to 20%, rendering the US competitive with other developed countries in regards to taxation. It also cuts the top marginal tax rate at 39.6% for top earners, though there are significant changes. It reduces the seven tax brackets to four, and the rates for the new brackets are 12%, 25%, 35%, and 37%. The impact on families is still ambiguous and needs to be analyzed further, but it appears that the middle class will be paying more while the top 20% are paying less.

The main reason people are mad that well-off citizens do not pay the full tax rate is that there are significant tax deductions that give the top 20% of Americans a smaller tax rate. But under the Republican proposal, some of these deductions are reduced, if not outright eliminated. The proposal caps the deductions for real estate, state and local taxes, and health expenses, and eliminates the personal deduction while increasing the child tax credit by $600. All in all, the benefits will be largely reaped by heirs and corporations. Residents of high-tax states, the housing industry, and the deficit will suffer.

There are parts of the bill that should remain. The first is that the corporate tax rate is lowered from one of the highest in the OECD to the lower end of the international average. Yes, corporate tax deduction will anger quite a few people, but the reasoning is very simple. Corporations are essentially entities with a significant amount of capital, and they need to invest it to generate a return for shareholders. Capital is very mobile, especially in an age with lowered investment barriers between countries. It is easier to move $10 million to another country than it is to move a family between neighboring cities. Having a lower tax rate on revenues would incentivize investors to hold their capital in the United States. Of course, there is an argument that a lower tax bill will not incentivize R&D investment and while that is a valid retort, it should be noted that the root cause is due to the financialization of American industry which cannot be solved by tax reform alone.

Another important feature of the bill is the elimination or diminishment of tax deductions that hold up special interests and wealthy families. One of these infamous deductions is the mortgage deduction, which is meant to encourage homeownership, but is used by the wealthy to purchase vacation houses without the tax burden. While the tax burden isn’t eliminated, it is reduced with a preference for families with a mortgage less than $500,000. Unfortunately, this bill doesn’t go far enough in this regard, as elimination of popular deductions will be met with backlash. Nevertheless, this is a welcome step towards a more equitable tax system.

Of course, there are some large flaws that need to be fixed before the bill is put to a vote. The largest issue is that this bill strongly increases the deficit by $1.5 trillion over a decade. Unfortunately, the Republican party doesn’t seem preoccupied by the budget or the deficit, despite haranguing President Obama over the issue. While the deficit can also be solved by reducing spending, the Republican have so far proposed no plans that would address the deficit created by the new tax bill. Another issue is the tax benefits that would still go to the top 20%. While some of these families will lose some deductions, their tax bill may be lowered as the brackets are simplified and the income taxed under 39.6% is raised to a million for joint filers. Meanwhile, families that are barely able to get by obtain a measly $600 increase in the child tax credit that doesn’t even come close to helping parents care for their child financially. It should also be noted that there are policies that could help families, from universal child care to improved maternity leave, yet there is no plan even to consider these policies in the near future.

Overall, this bill is a mixed bag and shouldn’t be passed without serious amendments that would at least ensure budget neutrality. Congress should also work to ensure that families with incomes more than $250,000 do not obtain a significant tax break at the expense of the bottom 40% of Americans, who are being left behind in this highly technological world. There are some strong parts of the bill that should be built upon, such as the reduced corporate tax rate, but there is little to show that corporations will even pay that amount, given the recent tax avoidance scandal. A great tax bill will not only reduce corporate taxation while balancing the budget, but will also eliminate loopholes that turn our system into a sieve. Tax reform is needed and Congress should work towards that end but this bill is not a tax bill but a pair of scissors turning the sieve into an indecipherable budgetary mess.

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