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Senate tax reform unveiled

Economic growth may stall if Trump’s demand to cut corporate taxes is ignored

Matthew Vadum author image /

Senate Republicans unveiled their tax reform bill yesterday, cutting taxes while keeping the Obamacare penalty for not carrying health insurance intact and rebuffing President Trump’s demand for an immediate reduction in the nation’s sky-high corporate income tax rates.

Tax-writers on Capitol Hill seem keenly aware of legendary columnist Robert Novak’s words: “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function.”

So far this year Republican office-holders have failed to deliver on major campaign promises. Despite controlling the White House and both houses of Congress for almost 10 months, Republicans have been unable to reduce spending or even its rate of growth, but now they must either begin to deliver or start looking for new jobs.

In other words, tax reform is a “must-pass” item on the congressional calendar, especially after Republican setbacks this week in off-year elections. Not too many political handicappers thought Republican Ed Gillespie would receive the brutal thrashing he received at the hands of Democrat Ralph Northam in the Virginia governor’s race, especially after Northam allies ran a widely-condemned TV ad characterizing Gillespie supporters as bigoted yahoos who want to run over minority children with their pickup trucks.

It’s dirty pool but the Left appears reinvigorated. Will the Right follow suit? That is up to Republicans.

The Senate measure previewed yesterday would cut taxes across-the-board while eliminating a host of tax deductions. While much of the Senate plan is similar to the House Republicans’ plan, the House version would raise taxes on high earners.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) argued the merits of the Senate tax reform plan in a Washington Post op-ed.

The “nation’s broken tax code, which has become too big, too complex and too antiquated to satisfy the needs of 21st-century Americans … is a self-inflicted wound on our economy.”

The Senate proposal “vastly simplifies the tax code by clearing away numerous special deductions, credits and the like, while preserving important deductions for things such as mortgage interest, charitable contributions and medical expenses,” Hatch said.

The plan “provides tax relief to the middle class, as promised,” he said. A family of four with income around $73,000 — roughly the median in 2016, “could see their federal income tax bill reduced by nearly $1,500, a decrease of nearly 40 percent, and a corresponding boost in take-home pay.”

The text of the draft legislation had not been released at time of writing, but the Senate Finance Committee, which is scheduled to take up the yet-to-introduced bill Monday, released a summary of its major provisions. Some details have been reported by the media.

The current seven individual income tax brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent.

The Senate measure would change the brackets to 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent. The House bill would collapse the seven brackets into just four – 12, 25, 35, and 39.6 percent, but high earners would be subject to an extra “bubble tax” raising their tax rate to 45.6 percent. The 6 percent surcharge or bubble kicks in after the first million dollars in taxable income but then disappears at about $1.2 million in taxable income, according to a Politico analysis. The Senate bill does not include the bubble tax.

In both the Senate and House plans, the standard deduction for single personal income tax filers will rise from the current $6,350 to $12,000, and for married couples, it will climb from $12,700 to $24,000. The alternative minimum tax (AMT) on both individuals and corporations is eliminated in the House bill, but it is unclear if the Senate measure eliminates the corporate AMT. Both the Senate and House measures preserve the tax-deductibility of charitable donations.

The Senate bill eliminates the state and local tax deduction that allows homeowners to deduct their property taxes, along with state and local income or sales taxes. The House bill initially did the same but lawmakers from high-tax states protested and the measure was changed to allow an itemized deduction for property taxes up to $10,000.

Taking away the deductibility of state and local taxes is a good move, according to Veronique de Rugy of George Mason University’s Mercatus Center, because it eliminates the “federal distortion that enables punitive tax policy in states such as California, Illinois, New York, and New Jersey.” Although getting rid of the deduction is unpopular in some circles, the reform would put pressure on states to reduce state-level taxes.

Both the Senate and House bills would reduce the corporate income tax rate to 20 percent from the current 35 percent, though the Senate measure would delay the rate change until 2019, CNBC reports. On the campaign trail, Trump had pushed a 15 percent rate.

Lowering the corporate rate is “the most pro-growth reform in the whole plan,” and would benefit all Americans, de Rugy says.

Currently that rate is the highest of all Organisation for Economic Co-operation and Development (OECD) countries. Contrary to left-wing talking points, the rate reduction won’t benefit only big corporations and “will boost the economy and grow wages.”

A significant share of the corporate tax (scholars have argued anywhere between 25 percent and a 100 percent) falls on workers. Outside of some political circles that are immune to facts, it has become uncontroversial to say that a cut to the corporate tax will boost the economy and grow wages.

The Senate measure would leave the mortgage interest deduction for homeowners alone, allowing them to continue to deduct interest paid on mortgage debt up to $1 million. The House plan caps the deduction at interest paid on up to $500,000 of mortgage debt for new home purchases.

Although Obamacare is collapsing as insurance premiums skyrocket and insurers pull out of markets, both the Senate and House bills would not eliminate the tax penalty established under Obamacare for failure to have health insurance, as some had hoped.

Some Republican lawmakers are expected to push to include the repeal as part of tax reform.

Sen. Tom Cotton (R-Ark.) tweeted recently that there is no reason to “repeal popular tax deductions when [$300 billion is] available from mandate repeal[.]”

A December 2016 analysis by the Congressional Budget Office found that killing the Obamacare tax penalty would raise $416 billion over a decade.

The Senate version of tax reform would retain the health care expense deduction, first instituted during World War II. Only taxpayers whose medical expenses exceed 10 percent of their adjusted gross income may currently take advantage of it. The House bill would do away with the deduction.

In the Senate bill, the widely hated tax on dying after a lifetime of paying taxes will remain intact, but the estate tax exemption will double. The House bill would raise the estate tax exemption for individuals from the current $5.49 million to $10 million, and then eliminate the tax altogether after six years.

Like the House bill, the Senate plan also drives a stake through the heart of the extraterritorial enforcement of U.S. tax laws, under which dividends from abroad and profits of U.S. businesses are taxed upon arrival in the U.S. after already being taxed where they were earned. The move to a territorial tax system will lead to the repatriation of trillions of dollars from outside the country, backers say. Extraterritoriality in tax law is destructive, eliminating the possibility of countries competing to be tax havens, and used to be considered fundamentally unfair in this nation of ours that was founded on limited government principles. Extraterritoriality is an odious doctrine that smacks of one world government, albeit an American one.

Until now Republicans have been gambling that a hoped-for economic boom that seems to be getting underway will make people forget their promises and allow them to remain in power. They forget at their peril that Republican President George H.W. Bush was defeated by Bill Clinton in 1992 in part because he reneged on his promise not to raise taxes. Republicans have to cut taxes or they’re in big trouble.

It is not hard to find conservatives who think that the tax cuts now being discussed don’t go far enough.

“You don’t need a crystal ball to predict that whether the GOP tax reform bill passes or not, these policies will doom many Republican candidates in the 2018 elections and perhaps beyond,” opined Jake Novak of CNBC.com. “Ignoring a conservative base that has for decades demanded lower taxes and spending cuts is disastrous.”

Congressional Republicans need to come together and honor their promises or Americans will be in for a rough ride over the next few years.

This article first appeared at FrontPageMag.

The Author

Matthew Vadum

The author of Subversion Inc.: How Obama’s ACORN Red Shirts are Still Terrorizing and Ripping Off American Taxpayers (WND Books, 2011), Vadum writes and speaks widely on ACORN and other…

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