Republicans took their first step last week toward reforming the tax code when the House passed its tax reform bill. Now it is up to the Senate GOP to pass its own version. Assuming the Senate can do so, the two tax reform bills will move to conference committee and (hopefully for the GOP) be reconciled into a final bill.
While both the House and Senate tax reform bills are steps in the right direction, the truth is that they suck. Both bills fail to enact the kind of simplicity, permanence, and economic growth we need from a tax reform.
Both the House and Senate GOP bills lack the simplicity I’d like to see from tax reform, especially as it pertains to capital gains taxes. Personally, I am in favor of either taxing long-term capital gains as ordinary income or taxing gains as ordinary income but excluding 40-50% from being taxed.
The House GOP’s 2016 “A Better Way” Plan did just that. Essentially, the Better Way plan taxed only half of a taxpayer’s capital gain income.
Neither the House nor Senate tax bills change the treatment of capital gains under current law. So, we still have a 0%, 15%, and 20% system. Oh, and we can’t forget that Obamacare’s 3.8% tax on long-term capital gains will be sticking around as well.
And don’t even get me started on the House’s “bubble rate” for high net-worth taxpayers, which essentially throws an additional wrench into the need for simplicity on the individual side of the ledger.
Perhaps the most grievous sin of the current House GOP tax bills is the failure to make permanent one of its most important reforms.
For the past few years, conservative tax wonks have been advocating that businesses be allowed to fully and immediately expense capital investments in the year they are made. This would essentially do away with depreciation schedules.
And guess what? The current bill does just that (minus structures). The catch? Businesses can only fully expense capital investments for five years, essentially turning this into a sort of “trial run” for the idea.
Without permanence for full expensing, I doubt it will have the desired benefit on economic growth the GOP expects.
According to the nonpartisan Tax Foundation, the recently-passed House GOP bill would lead to 3.5% higher GDP over the long term and an additional 890,000 full-time equivalent jobs. When taking into account economic growth, the after-tax income of all taxpayers would increase by 3.8%. An analysis of the Senate GOP plan produces similar results.
That the House GOP bill will result in some economic growth is good. What is not good is that the House’s Better Way plan from 2016 would have produced nearly twice the benefits of the House’s current plan. Even Democratic Senator Ben Cardin’s Progressive Consumption Tax plan produced more growth!
A Compromise Bill
The reality is that the House and Senate’s tax bills are the result of backroom compromises among taxwriters. In order to come up with bills capable of being passed, both the Senate and House GOP had to compromise.
For example, the House GOP couldn’t completely get rid of the state and local tax deduction. Instead, it had to create an exemption for the first $10,000 of property taxes in order to appease members from higher-taxed blue states.
The congressional GOP has also had to grapple with the Senate’s reconciliation rules, which results in an automatic expiration after ten years for any bill that adds to the deficit. Even with some of the temporary provisions in the current bills, both bills are slated to add to the deficit in the long run.
So, yeah, the House GOP bill passed last week sucks. But, it is a step in the right direction, albeit a smaller step than I’d like. Now we just have to see if congressional Republicans can actually get a bill to President Trump’s desk.
The way the GOP’s legislative victories have gone this year, that is going to be easier said than done.