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Other Voices: Tax-reform plan in Congress is not an improvement

Nov. 21, 2017 at 11:54 p.m.


Republicans in Congress appear to have reached agreement on several crucial points about tax reform. First, it should add to the budget deficit. Second, it should contain countless gimmicks to disguise its true fiscal impact. And third, it should make an insanely complicated tax code even more so.

As both houses moved closer last week to passing a comprehensive new tax law, Speaker Paul Ryan heralded it as "a generation-defining moment." He may well be right. It could take at least that long for his party to recover from this debacle.

The best hope — for Republicans and the country — is that the outcome remains uncertain. The House passed a measure last week and a Senate committee approved a different version hours later. If the full Senate passes a bill, the two will need to be reconciled. As the differences get hammered out, almost anything is possible.

Right now, though, Senate and House Republicans have converged on a reform that cuts the corporate tax rate to 20 percent from 35 percent; increases the standard personal-income deduction while limiting the scope of itemized deductions; readjusts the personal-income tax brackets; abolishes the alternative minimum tax; and much, much more.

It's not that their plans are timid: They would amend almost every aspect of the tax code. It's that they lack any coherent theory of reform.

Taken in isolation, the lower corporate tax is a good idea. The current rate is a lot higher than most other countries', which discourages investment and directs too much of managers' attention to tax planning. But a reform that favors the richest taxpayers (which this would) calls for offsetting changes elsewhere. A higher personal rate for those at the very top, together with closing the loopholes for carried interest and capital gains at death, would have helped to balance the books while maintaining or improving the system's overall fairness.

Instead, loopholes for the rich seem about to get bigger. The rules on carried interest might be tightened, though to no great effect. Income paid to the owners of pass-through corporations, on the other hand, would be taxed at a rate much lower than normal — a gaping new loophole.

Overall, the emerging plan would add between $1.5 trillion and $2 trillion to the budget deficit over the next 10 years. Fiscal stimulus is the last thing an economy at full employment needs.

Moreover, the plans are riddled with phase-ins, phase-outs and assorted other gimmicks meant to disguise the real fiscal impact. By design, this supposedly historic reform is a shape-shifting mirage. To comply with the principles of fiscal conservatism Republicans say they uphold, their own reform would have to be scrapped almost as soon as it is passed — a fact they've recognized, in their own way, by making it partly self-scrapping.

Republicans are right about one thing: The U.S. tax code needs radical improvement. Unfortunately, the plan they're working on isn't it.

— Bloomberg View

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