Warts and All, I'd Vote For the GOP Tax Plan

Warts and all, if I were a voting member of Congress, I would certainly cast a “yea” vote for the tax-cut plan passed by the Senate and House and headed for conference (to work out minor differences) in the weeks ahead.

These bills are not perfect, especially on the individual side. But the business tax cuts will generate an investment boom in the years ahead. And those cuts will bring economic growth back to its historical norm of 3 to 4 percent.

Incredibly, the Joint Tax Committee (JTC) scored growth for the Senate plan at less than 1 percent. So much for their “dynamic” model. The Tax Foundation estimates 3 to 5 percent growth over the next ten years. That’s more like it, but it’s still too low.

Look, the central cause of the 2 percent real-GDP growth slump over the past 17 years has been a lack of capital formation, with virtually no real business investment, flattened productivity, and barely any increase in real workforce wages.

Yet the tax plans under discussion -- which go back to the work of Steve Moore, Steven Mnuchin, Stephen Miller, Art Laffer, Steve Forbes, and myself -- are remarkably similar to the Trump campaign draft on the business side.

So I can say with confidence that the current tax package isdirectly aimed at reducing the current high tax cost of capital and increasing after-tax returns from investment.

Incentives matter. If it pays more after tax to build new capital stock and generate more business-equipment investment, people will do so. This is standard economics.

There may be disagreements on the numerical effects, but the principle has worked in the past (JFK and Reagan) and will work in the future.

A 20 percent corporate tax rate, immediate full expensing, repatriation of U.S. corporate cash overseas, and a 23 percent discount for sub-chapter S pass-throughs (much credit to Senator Ron Johnson for this) will generate way more growth and investment than mainstream forecasters suggest.

At various times, President Trump has talked about 3 percent, 4 percent, and even 5 percent growth. Despite the dreary mainstream models, I believe the president will turn out to be correct.

What’s more, faster economic growth will generate much higher tax revenues. From businesses to investors to entrepreneurial startups, less tax avoidance and sheltering will raise revenues far beyond the standard consensus estimate.

Supply-siders like myself always buck the trend on pricing out lower tax rates. But again, we were right in the ’60s, ’80s, and ’90s, running against the tide. So I suggest history will repeat itself.

By the way, in terms of the revenue hunt going on in Congress, I wish somebody would look at the lowball estimates compiled by the JTC with respect to repatriation. The JTC estimates $25 billion in 2018, $21 billion in 2019, and $6 billion to $7 billion in the three years following. This is nuts.

Assuming about $3 trillion coming back home at an average tax rate of 10 percent, that’s $300 billion in new revenues -- way beyond the JTC estimate. And that’s conservative. It could be $350 billion in the first year or two -- substantially more revenue and a way bigger pay-for than the JTC predicts.

And there’s more on the dynamic side. Booming stock market gains of roughly $6 trillion of late could generate another $600 billion or $700 billion in revenues from capital gains, and hundreds of billions of dollars more in dividends, which generate massive revenue increases.

None of this is scored. The government forecasters don’t understand international flows and the interactions of stocks, capital gains, and dividends. Their estimates are probably several trillion revenue dollars short.

Sure, there are things on the individual side that should be changed. Personal tax rates should be much lower. A backdoor capital-gains tax hike on individual investors must be erased. And the proliferation of tax credits is inefficient and complex, with no marginal incentives to promote growth.

Yes, everybody likes kids. But not everyone has them. And a lot of people like dogs and cats. Shouldn’t they get tax credits, too? No. If you’re looking for more money in your pocket -- more take-home pay -- the best prescription is to slashpersonal tax rates for everyone.

(By the way, why didn’t Congress end the carried-interest loophole for private-equity firms?)

But here’s the crux of the matter: An investment boom generating much faster growth will benefit everyone. Small businesses, new businesses, investors, and wage earners willall prosper from a tax-cut-led investment boom.

Yes, a rising tide will lift all boats. The great news is that President Trump, the Senate, and the House are absolutely moving in the right direction, and gathering momentum on the way.

ZERO HEDGE GIVES A RUN DOWN OF THE SENATE BILL

Among the major overhauls, both the House and Senate measures would cut the corporate tax rate to 20% from 35% - though the Senate version would set that lower rate in 2019, a year later than the House bill would. Also, the Senate bill, unlike the House version, would provide only temporary tax relief to individuals, ending tax cuts for them in 2026. Both bills are expected to add more than $1.4 trillion to the federal deficit over 10 years, before accounting for any economic growth. Bloomberg reported that last minute revisions to help shore up GOP support added about $32.5bn to the measure’s 10-year cost, according to a one-page analysis from the Congressional Budget Office.

The House and Senate bills also align on the contentious issue of individual deductions for state and local taxes: They’d eliminate all but a deduction for property taxes, which would be capped at $10,000. They differ on the home mortgage-interest deduction; the House bill would restrict that break to loans of $500,000 or less with regard to new purchases of homes. The Senate legislation would leave the current $1 million cap in place.

According to Bloomberg, the bills also differ on the tax rates they’d apply to multinational companies’ accumulated offshore earnings. The House bill would tax those profits at 14 percent for earnings held as cash and 7 percent for less-liquid assets. The revised Senate bill contains a lengthy section that has no direct mention of the rates, but a person familiar with the Senate plan said they’d be 14.5 percent for cash and 7.5 percent for less-liquid assets.

The Senate also approved a 23% tax deduction on business income earned from partnerships, limited liabilities and other so-called pass-through businesses. The House version would create a 25% tax rate for such business income, with restrictions on which businesses could qualify. Small businesses would get extra relief under the House legislation as well.

The House bill would also eliminate the estate tax, while the Senate version would limit the tax to fewer multimillion-dollar estates, but leave it in place. And after 2025, the limits would lift. Under current law, the estate tax applies a 40% levy to estates worth more than $5.49 million for individuals and $10.98 million for married couples. The Senate bill would temporarily double the exemption thresholds. The House bill would double the exemption thresholds, and then repeal the tax entirely in 2025.

As discussed previously, the House bill would consolidate the current seven individual tax brackets to four, leaving the top tax rate at 39.6%. The Senate bill would have seven brackets - with lower rates, and a top rate of 38.5 percent. As Bloomberg notes, "studies have shown that many of the tax bill’s benefits would go to the highest earners - and some middle-class taxpayers might actually pay more - a finding that could impact the House-Senate talks."

Most importantly, perhaps, the Senate bill includes a repeal of Obamacare’s mandate that most Americans have health insurance or pay a penalty. The House bill does not.

While we have yet to get confirmation, below is a list of last minute changes and revisions that made it into the final bill per Reuters:

PASS-THROUGHS: Senators Ron Johnson and Steve Daines announced their support for the tax bill after securing agreement on a bigger tax break for the owners of pass-through enterprises, including small businesses, S-corporations, partnerships and sole-proprietorships. An original 17.4 percent deduction would rise to 23 percent.
FULL EXPENSING: Senator Jeff Flake, who was a holdout over deficit concerns, agreed to vote "yes" after Republican leaders agreed to change a provision allowing the full expensing of business capital investments to sunset after five years. Flake worried that Congress would be unable to eliminate the benefit cold turkey, allowing it to bleed red ink for years to come. But the Arizona Republican says the change would instead phase out full expensing over three years beginning in year six.
RETIREMENT SAVINGS: Senator Susan Collins said she persuaded Republican leaders to retain catch-up contributions to retirement accounts for church, charity, school and public employees.
MEDICAL EXPENSES: Collins also said she was able to include language to reduce the threshold for deducting unreimbursed medical expenses for two years to 7.5 percent of household income from 10 percent.
STATE AND LOCAL PROPERTY TAXES: Collins has proposed an amendment that would retain a federal deduction for up to $10,000 in state and local property taxes.
INDIVIDUAL ALTERNATIVE MINIMUM TAX: Rescinding a proposed repeal of the AMT and instead increase exemption levels and phase-out thresholds is also on the table.
CORPORATE ALTERNATIVE MINIMUM TAX: So is rescinding a proposed repeal of the corporate AMT.
REPATRIATION: Another change could be to increase tax rates on U.S. corporate profits held overseas to 14 percent for liquid assets and 7 percent for illiquid holdings, up from 10 percent and 5 percent, respectively

Attention now shifts to a House-Senate conference committee - a specially appointed, temporary panel that will be charged with hashing out the differences in the bills and preparing a final version for both chambers to consider. Party leaders will select a small group of lawmakers, likely from the House and Senate tax-writing panels in each chamber, who would then be approved by each chamber. That work could start as early as Monday, with many high-stakes issues to be worked through. The deadline of Dec. 31 is an artificial one, though - aimed partly at securing a victory well in advance of the 2018 congressional elections. Republicans would have until the end of 2018 before they lose their ability to clear final passage in the Senate without a filibuster.

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