A Solid Accomplishment on Taxes

National Review Online

Monday, December 18, 2017

As we hoped, the Republican tax legislation improved as it moved through Congress. Harmful ideas such as eliminating the adoption tax credit were abandoned. Some tax relief for the working poor was added. The final bill should increase investment, reduce the distortionary effect of tax breaks, and lighten the especially excessive burden that the federal government puts on parents. While the bill is nobody’s idea of perfection, it is nonetheless a solid accomplishment and we are glad that Congress is moving quickly to pass it.

Our 35 percent corporate tax rate has stayed in place for decades as our major trading partners cut their rates. The new tax rate of 21 percent should help us compete better for capital. Allowing businesses to write off the cost of investments more rapidly is another pro-growth win in the bill.

The legislation rightly pares back two major deductions: the ones for mortgage interest, which will be capped at mortgages of $750,000 rather than the current $1 million, and for state and local taxes, which will be capped at $10,000 rather than being unlimited. In both cases we would have preferred more aggressive action, but the more moderate course chosen has the virtue of reducing the number of people who will face tax increases thanks to the bill. If some high-income households react to this change by leaving high-tax states, perhaps those states will in turn be moved to rethink their policies.

The bill’s major contribution to tax simplification is the expansion of the standard deduction. That expansion will make tax deductions less important: Only a small percentage of taxpayers will find it worthwhile to itemize. The bill also reduces the number of people who will have to calculate their taxes twice, by limiting the reach of the alternative minimum tax.

Thanks largely to the interventions of Senators Marco Rubio and Mike Lee, the legislation expands the child tax credit. We have long favored a large tax credit for children as the most practical way to remedy a disparity in our old-age entitlements: They overtax parents, who pay the same tax rates and get the same benefits as childless adults no matter how much they have contributed to those programs by raising children.

The House bill eliminated the dependent exemption and expanded the child credit by roughly enough to make up for it. Very roughly: A lot of families would have paid higher taxes. The Senate bill included a real expansion, worth about $400 per child for families in the middle of the middle class. Senators Lee and Rubio argued that the credit should apply against payroll taxes as well as income taxes. Most Republicans in Congress, unfortunately, remain wedded to the peculiar belief that relief from income taxes is wonderful but relief from payroll taxes is welfare. Senator Rubio had to threaten to vote against the bill to secure a little payroll-tax relief for families with earnings too low to pay much income tax.

Republicans added a repeal of the individual mandate — the fines Obamacare puts on people who refuse to buy health insurance that complies with its regulations. That step will be a boon for people who have been priced out of the market by regulations and then fined on top of it. Ending the mandate is unlikely to lead to as many people going uninsured as the Congressional Budget Office says. By the same token, it won’t save the federal government nearly as much money in insurance subsidies.

Which brings us to the main drawback to the bill: its likely tendency to raise the national debt. Most Republicans say that the tax cut will generate so much extra growth that it will increase revenues. No economic model of the tax cut, not even any of the models produced by conservative economists, backs this claim. It is convenient, though, in letting Republicans offer tax cuts to various constituencies without having to impose any restraint on spending.

Better legislation would have held off on some tax cuts pending that restraint. The corporate tax cut could have been smaller while still marking a vast improvement. Pass-through businesses got, in general, a sweetheart deal in the legislation. The bill cuts tax rates on households making more than $500,000. Not even the editors of the Wall Street Journal, who crusaded for these tax-rate reductions, pretend that they will do anything significant to promote economic growth; and these households will benefit from many of the bill’s other provisions. (If they own stock, for example, they benefit from the corporate tax cut.) Without these excesses, the legislation could have promoted growth while providing more tax relief to parents and doing less to raise the deficit.

But while the tax cut is likely to increase the national debt over the next ten years, it is nearly a rounding error in comparison to the growth of entitlements. A tax code that places less of a burden on investment, by businesses and by parents, could be had without any increase in the debt; but it is worth having even in return for a modest increase.

Republicans are therefore justified in voting for this legislation and celebrating their victory. But only briefly. Many of the tax cuts in the bill are temporary, and Republicans will have to find the votes for future legislation to extend them or make them permanent. And their victory will not hold if they do not reform the entitlements. Perhaps someone could mention that fact to President Trump at the signing ceremony.