The House is scheduled to vote Tuesday on the final version of tax reform , and the bill seems all but certain to land on President Trump's desk by the end of the week. So it's time to take stock of what this bill has become .
Let's start with the corporate side, which is the only part of this bill that we might reasonably expect to create some economic growth. The lowering and flattening of the corporate income tax rate, combined with the elimination of many deductions, is a win for both tax-code efficiency and real-world incentives. Critics have argued the average effective tax rate for corporations was already much lower than the top statutory rate of 35 percent, but they never explained why it made good economic sense to keep a convoluted structure that allowed some companies to get away with paying much less while others paid much more. The new, flat rate of 21 percent improves simplicity and fairness in the tax code. Starting the rate in 2018, as opposed to 2019 as in an earlier version of the bill, is also good policy. The provisions allowing for full tax-expensing of capital expenditures (albeit for just five years, with a five-year phase-out) and repatriation of earnings from overseas should also give a boost to corporate spending and hence job growth.
The individual side of the bill is much more of a mixed bag. It's not the seismic simplification that was promised. Many popular deductions remain intact, as do the seven income brackets in the code. Those are the biggest reasons the rates fall only slightly. It seems unlikely anyone will be filing their taxes on a postcard anytime soon.
But it clearly is not, as Democrats have eagerly proclaimed, a giveaway to "the rich" at the expense of the middle class. Not only are rates falling across the board while a larger chunk of income is shielded from taxation for the vast majority of Americans who don't itemize on their tax returns, both of which obviously benefit workers regardless of their income level. But the changes to deductions to offset part of these gains are, if anything, skewed against higher earners. The amount of mortgage debt for which interest is deductible falls from $1 million to $750,000, and the deductions for state and local taxes paid were not eliminated but capped at $10,000 per year. To the extent those changes claw back anything from anyone in exchange for lower rates, it's those at the top of the income scale who will pay. Also, the medical-expenses deduction not only was kept, but the threshold to qualify was lowered to expenses totaling 7.5 percent of income, which is most beneficial to those at the bottom of the income scale. What's more, the child tax credit was doubled to $2,000, easily offsetting the loss of personal exemptions for lower-income workers, and the amount that is refundable (that is, paid to tax filers even if they don't owe income tax) has gone up. The idea that lower- and middle-income workers won't benefit from this bill, but "the rich" will, is preposterous.
All that said, it's not clear to me that the individual changes will really boost the economy. Consumption will probably rise a bit, but we've been trying to prod the economy with marginally higher personal consumption for years with little real effect. What we need is a return to the ethic of saving, which provides pools of capital for investment in more productive uses -- getting more out of our scarce resources, which is how the economy really grows. The corporate side of this bill encourages companies to make such investments, but it seems much less likely that the individual side encourages personal savings in the way that's needed. Perhaps in the short run the piles of corporate cash sitting overseas and theoretically brought back under the lower repatriation rate (another good aspect of the bill) will make up for the difference. But in the longer run, I'm skeptical.
Bottom line: Is it worth it? The corporate part certainly is, and the individual part is probably politically necessary to get the corporate part done. The elimination of the Obamacare individual mandate also guarantees Congress will have to come back and do something about that flailing (and failing) law, which is useful. So overall, I'd say it's worth doing.
Yes, it falls just short of the revolutionary reform we've seen in the past, and which the GOP had promised. But incrementalism isn't all bad: If anyone needs to prove they understand that half a loaf is better than no loaf, it's congressional Republicans. And it may be that Americans simply prefer a distorted tax code on the individual side, because they enjoy the distortions that benefit them and are blissfully unaware of the ones that don't. So look on the bright side: If it isn't all that it was promised to be, at least it proves that Congress can still get a job done every now and then. That isn't nothing, you know.
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