In their rush to pass something, anything, that they can call “tax reform,” congressional Republicans have achieved the impossible.
They have made an awful plan even worse.
The first thing to note about the bill the Senate passed in last Saturday’s wee hours is that it is not — by any reasonable definition of the term — tax reform.
The elements of a smart reform are no secret. It would lower rates, broaden the base by closing loopholes, eliminate distorting provisions and seek to distribute the tax burden as fairly as possible.
Done well, it could improve the country’s longer-term growth prospects by offering greater simplicity and certainty, and it need not unduly increase the federal deficit or count on added growth alone to pay for cuts.
Last month, House Republicans passed a bill that violates pretty much all those principles of smart reform. The House version would compensate for lower rates by scrapping some deductions. However, it would still add more than $1 trillion to the federal deficit — a number it reached only with the help of thinly veiled gimmicks, such as making a key corporate-tax provision (full and immediate expensing of equipment purchases) expire after five years.
In regards to financial fairness, the whole package would primarily benefit the rich.
To win the requisite votes in a closely divided Senate, however, Republicans were forced to make further tweaks. In a stark recognition of their failure to limit deductions, they have reinstated the alternative minimum tax, a sort of backstop (with its own separate set of rules) designed to ensure that people and corporations can’t claim so many deductions that they avoid paying taxes altogether. They have set individual income tax cuts — among the few elements that benefit the middle class — to expire in 2026. And they would gut Obamacare by eliminating the requirement that all Americans have health-care coverage, potentially leaving millions uninsured.
Some elements of the hastily constructed legislation, part of which was handwritten into the margins, will inevitably have unexpected consequences. Consider the timing of corporate-tax changes. The equipment-expensing provision takes effect immediately, but under the Senate bill the corporate tax rate falls to 20 percent (from 35 percent) only in 2019. This will allow businesses to take deductions on investments while rates are high, then pay a lower rate on the resulting income, creating a perverse incentive to pursue otherwise unprofitable projects.
The end result is sheer absurdity: a reform that actually complicates the tax code further, and that must contradict itself and partially self-destruct to attain some semblance of the fiscal discipline Republicans claim to value. It’s hard to imagine a more egregious waste of time and energy, or a worse outcome for taxpayers and the broader economy.
— Bloomberg News