The Tax Bills Are Worth It

There are, in essence, three things wrong with the federal tax code. They are, in descending order of importance, that corporations pay an absurdly high rate; that the code is a labyrinthine mess that turns the work of paying one’s taxes into a nightmare; and that marginal individual rates have in recent years become punitive, with higher-income payers bearing most of the punishment.

The tax reform bills currently in the House and Senate don’t eliminate any of these problems. But both bills address all three problems—and particularly the corporate tax rate—in ways that will encourage growth and investment.

The most significant provision would spur growth in the medium- and long-term: Both bills would lower the corporate income tax to 20 percent from 35 percent—now among the highest in the world—and allows business to immediately take capital investments as an expense, rather than depreciate them over time (as is now the case). This provision alone would make the bills worth passing. A few progressive economists have tried to argue that lowering the corporate rate wouldn’t accomplish the advertised goals—job and wage growth—but their arguments hardly deserve countering: When companies have more money, they very often expand and increase wages.

The fate of individual taxes is more muddied, with both bills cutting rates while eliminating some deductions and credits but increasing others (the child tax credit, for instance, would be increased). Most people come out ahead: 76 percent of Americans would pay lower taxes under the House bill, while just 7 percent would pay more, according to an analysis by the Tax Policy Center, a joint venture between the Brookings Institution and the Urban Institute.

Both bills, moreover, would eliminate a large collection of market-distorting deductions and credits. Lawmakers could have cut far more than they have, but the longer tax reform bills sit in committee, the more time lobbyists have to dissuade members from cutting some allegedly vital break for the favored group or industry they represent. Both House and Senate proposals erase dozens of carve-outs for expenses that sound benign but have no real justification: Rehabbing historic properties, buying vacation homes, driving electric cars, and borrowing money for college are all worthy endeavors, but they’re not more virtuous or important than other taxable activities and shouldn’t be treated as such by the tax code. Our elected leaders may wish to encourage or discourage certain forms of behavior, but the tax code is for collecting revenue, not for effecting desirable social behavior.