September 27, 2017

Cutting Taxes Is Great, but Reforming the Tax Code Is Better

Veronique de Rugy

George Gibbs Chair in Political Economy

I want to make it clear that I would take this tax reform plan over the old one any day of week and twice on Sunday. But there are still things that I feel are problematic.

The tax plan, as expected, lacks in details. As it stands right now, it has a lot of trappings of a fairly traditional and conservative tax reform plan. It lowers taxes (great!) without paying for the cuts enough (not good), while continuing to engage in social engineering through the tax code with measures like an expansion of the Child Tax Credit and other family handouts. Social policy priorities aimed at caring for children — or health or higher education, for that matter — are not best achieved through these tax preferences. They add to the budget deficit and add complexity to the tax code.

Doubling the standard deduction is another aspect of the plan that I'm not crazy about. If exemptions that the plan promises to eliminate don't come through, it would push more people off the tax rolls. In addition, this is not a tax reform that will grow the economy. But it does simplify the tax code.

The corporate side of the plan makes important changes to a currently punishing system. It lowers the rate from 35 percent to 20 percent and moves to a territorial system. These are very important policy moves which I absolutely support. That being said, considering that this is the starting point of the negotiation with Democrats and some big government Republicans, they should have started with a lower rate than 20 percent. The president wanted 15 percent, which would require finding $28 billion a year to cover that cost, which wasn't hard to do. The corporate income tax is an outdated and inefficient way to raise revenue and is economically a destructive tax. Most economists agree that its rate should be zero. In other words, by starting with a 20 percent rate, the Republican leadership is risking ending up with a much higher rate.

Cutting taxes is great. Reforming the tax code is even better. And this plan goes a long way to do both. However, it doesn’t go far enough to end tax deductions that are flagrant handouts to special interests (especially on the individual side), which would have gotten us closer to a better tax code without as much growth in the deficit.