House, Senate need to find compromises on tax reform

My column for the Washington County Daily News is online. Here you go:

After a heated debate in the U.S. Senate where Wisconsin’s Senator Ron Johnson mounted a spirited effort to make the final bill more conservative, all but one Republican senator passed the most comprehensive and significant tax reform bill in decades. Now begins the process of reconciliation where the legislators will attempt to merge the tax reform bill already passed by the House of Representatives with that of the Senate to create a final bill. This will prove to be an arduous task as the House and Senate versions are considerably different.

Before delving into some of the details of the tax bills, two things must be remembered. First, there is a reason that our federal tax code is as large, complicated, and incomprehensible as it is. Behind every deduction, provision, exemption, rate, bracket, and classification is a person or group who benefits. Because of that, any attempt to change any of the tax code’s complexity will be met with passionate opposition by the person or group impacted by the change. Americans like to say that they want a simple tax code, but line up in opposition whenever their special interest is touched.

Second, as the next few weeks are filled with detailed debates over arcane tax policy items and the opponents engage in the predictable histrionics, we must not lose sight of the goal. The purpose of tax reform is to stimulate economic growth by allowing Americans and their businesses to keep more of their money to spend as they see fit. It is a fundamental faith in the fact that hundreds of millions of Americans will make better decisions about how to use their money than a few hundred politicians in Washington.

The one major thing that both the House and Senate bills have in common is reducing the corporate tax rate from 35 percent to 20 percent. If that was all the Congress did, it would be a tremendous boon to the American economy. Right now, the U.S. has the fourth highest corporate income tax rate among 202 jurisdictions surveyed by the Tax Foundation in 2017. Only the UAE, Comoros, and Puerto Rico have higher rates.

But rates are misleading. The actual tax rates that U.S. corporations pay are much lower because they have armies of lawyers and accountants who know how to exploit all of those loopholes baked into the complicated code. Large multinational corporations also avoid America taxes by keeping all of the profits they can overseas outside the reach of the IRS.

By lowering the corporate tax rate and repealing many of the loopholes, American corporations find it more advantageous to bring their profits back to the U.S. and invest. Whether they spend their tax savings on dividendsto owners, employee compensation, capital investments, innovation, or all of the above, it is more money pumping into the American economy.

The rest of the two tax bills have less in common and will have to be reconciled. The self-imposed convoluted rules in the Senate forced some unnatural items into their bill. For example, the House bill sets a straight 25 percent tax rate for business profits that are passed through to individuals in LLCs, sole proprietorships, and other pass through business entities. The Senate tried to cut this tax, after Senator Johnson forced the issue, by slightly reducing the rate, but allowing the business owners to exempt the first 23 percent of business profits.

On individual taxes, the House bill reduces the current seven tax brackets to four and cuts the rates. The Senate bill reduces some individual tax rates, but keeps all seven brackets and the rates will return to their current levels in 2025. In exchange for reducing the rates, the House bill reduces the amount of mortgage interest that individuals can deduct while the Senate bill leaves this unchanged. Both the House and Senate bills increase the Child Tax Credit, but to different amounts.

On the death tax, the House bill repeals it. The Senate bill merely increases the threshold at which it is applied. I have never understood how it is good public policy or moral for the government to confiscate the lifetime earnings of Americans just because they had the temerity to die.

Perhaps the starkest difference between the two bills is that the Senate repealed Obamacare’s mandate that levies a tax penalty if Americans do not buy health insurance. The House bill does not address this at all. Many House Republicans will surely agree to revisit part of the Obamacare repeal debate.

Overall, the House bill does a better job of simplifying the tax code and reducing taxes than the Senate bill, but the Senate bill is tolerable as it is written. Neither bill is as clean and cohesive as it could have been. Such is the art of compromise. I hope the final compromise bill can be agreed upon and passed into law soon so that all Americans can benefit.

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