6 ways to make the Trump tax cuts better

Columnist
Yahoo Finance

Tax cuts are coming.

There’s now a Senate bill and a House bill that would slash taxes by roughly $150 billion per year over the next decade, with GOP leaders in Congress determined to speed up the usual tedious process for merging House and Senate legislation into a single bill for both chambers to vote on. Barring surprises, it’s likely President Donald Trump will have a final tax-cut bill to sign by the end of the year.

That doesn’t mean the GOP tax cuts are popular. They’re not. Both the House and Senate bills are heavily weighted toward business tax cuts, with working- and middle-class voters likely to see just a fraction of the total tax savings Republicans are doling out. Various provisions would harm graduate students, people with high medical expenses and other groups that don’t typically have high-priced lobbyists fighting for their cause in Washington. But Congress can change the bill during the final few weeks of haggling, to make it less damaging and more politically defensible.

Here are six improvements they can make:

Cut the corporate tax rate to 22%, rather than 20%. The current corporate tax rate is 35%, and Trump initially said he’d accept nothing higher than a new rate of 20%. But he softened recently, saying maybe he could live with a 22% rate instead. Congress should grab the opportunity and change the target rate to 22%. Doing so would reduce the overall cost of the legislation, which, in turn, would allow Congress to back off other controversial measures that are there simply to raise the extra revenue needed to get the corporate rate down to 20%.

Phase in the corporate rate cut instead of ushering it in all at once. If the corporate rate fell to 22% in phases over, say, three years, the incentive for firms to relocate business to the United States would stay more or less the same. Companies don’t make big decisions on where to locate their business overnight, and many would probably change their decisions gradually, if at all. Phasing in the cuts would save additional money, allowing other changes that would help people who aren’t wealthy and won’t benefit from the business tax cuts.

Make all individual tax cuts permanent, just like the business cuts. In the Senate’s tax-cut legislation, tax cuts for individuals expire in 2025, which is necessary to limit the loss of federal revenue to a maximum amount allowable under Senate rules. Business tax cuts are permanent, however. That’s insane. Yeah, we all know the idea is that Congress will come up with some new law in 2025 that will extend the individual cuts. But if it’s so important, do it now, even if it means giving up something else to make the budget numbers work.

Keep the current tax breaks for graduate students and taxpayers with high medical costs. Come on. The House plan would kill a tax break for graduate students who take out loans to pay tuition, along with a tax deduction used by patients with high medical expenses. The Senate bill leaves those breaks intact — and the Senate approach should win. It’s crazy to slash business taxes while punishing grad students and people struggling with high medical costs.

Keep the estate tax intact. The House wants to kill it completely, while the Senate wants to push the floor for paying this tax so high that it would affect hardly anybody. Doesn’t the whole package of tax cuts already benefit rich people enough? As is, only about 5,500 rich families pay the estate tax every year, and it doesn’t kick in until the value of the estate hits $5.49 million. It’s already hard to claim the GOP tax cuts help the middle class, and killing the estate tax would make it harder. And by the way, Republicans should stop the farce of insisting they have to kill the estate tax to save family farms. Rich farmers are rich, period.

Make sure reducing the SALT deduction won’t wreck city and state budgets. Both bills would cap the existing deduction for state and local taxes to $10,000 in property taxes alone, which means they’d both kill the deduction for state and local income and sales taxes. There’s justification for doing this, since the SALT deduction is a weird distortion in the tax code that allows some states and municipalities to impose higher taxes than they otherwise would, since Washington in effect rebates some of that money to taxpayers. But curtailing the SALT deduction could still put some states and cities — and the schools they fund — in a bind, since some residents will have a new incentive to move and other people who might move in suddenly won’t. Tax revenue will inevitably take a hit.

The right way to pass sweeping legislation is to hold months of hearings to explore the risk of such unintended consequences. But Republicans are moving their tax-cut legislation so fast that there’s no time for such circumspection. There will undoubtedly be some counterproductive provisions of the GOP tax bill that cause problems that need to be fixed later. It would be nice if that weren’t the case for the entire bill.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

 

 

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