On dueling tax cuts

U.S. Sen. Ron Johnson (R–Wisconsin) was the first Republican to come out against the House of Representatives-approved tax cut bill last week.

Johnson’s reasoning was that the tax bill reduces taxes for subchapter-C corporations (including publicly traded corporations, which comprise all of 0.1 percent of U.S. businesses) but not for any other business, including subchapter-S corporations, limited liability companies, partnerships or sole proprietors.

Three Republican economists give their take on tax cuts:

Last week was a surprisingly good one for Republicans on their signature tax bill. First, they smartly added the repeal of the ObamaCare individual mandate tax, a move that cuts taxes for lower income Americans and reduces the deficit to make room for even more tax cuts. It doesn’t get better than that. Then they passed the bill out of the House by a bigger margin than most of the vote counters expected. Republicans rightly are rallying together to get this done by Christmas.

Let us be clear, this is not a great bill. It sure could be improved, as we describe below. But it is a good bill, and it will create a more prosperous economy that we believe will benefit all income groups. We have advised Donald Trump that 3 percent growth can be expanded to 3.5 percent to 4 percent, due to more businesses relocating back in America, more capital investment as the return of investment rises, and more higher paying jobs as the economy grows.

By the way, 3.5 percent growth would feel like an adrenaline rush after the sluggish 1.6 percent growth in President Obama’s final year in office. ‎This also translates into at least $2 trillion more revenue to the federal government over the next decade and a declining national debt burden as a share of gross domestic product.

We hope Republicans stick with the repeal of the ObamaCare tax cut because this would deliver an enormous double policy victory. With the individual mandate gone, expect to see a mass rush for the exits as Americans freely choose new insurance plans that are affordable and tailored to the specific needs of their families.

We are especially pleased that the 20 percent corporate rate, the heart and soul of the bill, remains intact. Talk of raising the rate to 22 percent would only water down the growth and jobs impact. We also believe the immediate business expensing will encourage businesses to start spending more of the cash they are sitting on. Thank God the un-American death tax is repealed. A lifetime of taxes is enough.

Repeal of the state income tax deduction will force states and cities to start spending more judiciously and help weed out waste in city hall and state capitals. New York and Connecticut spend almost twice per person on state and local government what New Hampshire spends, and yet services are better in the “live free or die” state. No longer will Uncle Sam underwrite one-third of municipal services. We hope this leads to more privatization of services and tax cuts all over the nation.

The tax bill can and should be improved in the Senate with these fixes. The bill should cut the highest income tax rate from 39.6 percent to 35 percent as in the original Trump plan. Everyone should get a tax rate reduction, and the most harmful rate is the highest one. The tax bill should add more relief for small business. Sen. Ron Johnson (R-Wis.) is right. Small businesses should see their rates cut closer to 25 percent, not 35 percent. They create half the jobs. To pay for this tax cut, close more corporate loopholes and cap more deductions.

There should be no backdoor capital gains tax hike. There are reports that the Republican plan would raise capital gains taxes on some long held stock. This is a bad idea. The rate should be cut, not raised on investment capital put at risk. Lawmakers should use the JFK and Reagan models of the 1960s and 1980s as the historical evidence for even bolder tax cuts. We believe that with modest revisions in the Senate, this could be the biggest pro-growth reform since the Reagan years, and it’s about time.

The end of the state and local tax deduction would be opposed in Wisconsin except that only one-third itemize deductions on their federal taxes. The House bill keeps the property tax deduction up to $10,000. A property tax bill beyond $10,000 would require, on average, a house valued beyond $500,000, which, perhaps ironically, would probably affect supposedly rich Republican voters the most.

The issue, of course, is that if you live in a low-tax state, your federal taxes are higher than they would be without the state and local tax deduction. This might be one way to finally enforce reducing state and local taxes, which remain too high.

Johnson is correct that tax breaks for business need to be broader than just C-corporations. Whatever a business spends its after-tax profits on — pay for employees, dividends for owners, or back into the business — is preferable than paying taxes, which as you know are paid by business customers, not the business.

 

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