House Ways & Means Committee Chairman Kevin Brady says he plans to release his detailed tax reform legislation on November 1.
It’s not fair to judge a tax reform plan that hasn’t been released yet, but our overall excitement is tempered by a number of concerns.
What could possibly temper our enthusiasm for a 20 percent corporate income tax rate? Yes, it’s true that a rate that low covers a multitude of sins. But it’s very easy to lose track of the core intent of tax reform when negotiating with various interested parties and trying to minimize revenue losses with “pay fors.”
And what should be the core intent of tax reform? Increasing private sector investment, because that’s what drives economic growth, as we have argued for decades.
A lower corporate rate should, in itself, encourage higher levels of investment. But it’s possible that other provisions in the tax reform could actually work to oppose investment and reduce the impact of the lower corporate rate.
So what happens when a tax reform plan ends up containing elements that actually discourage investment? It tells you that the people writing the plan have lost the plot. And how will we know if they have lost the plot?
If the plan discourages retirement savings for workers, such as restrictions or added complications for 401ks, that will discourage rather than encourage investment.
If the plan restricts a business’s ability to deduct interest expenses, that will discourage rather than encourage investment. We’ve previously written that if a business can’t finance investment, it doesn’t do much good to allow them to deduct investment.
If the plan contains some sort of global minimum tax for U.S. corporations, that will be something much less than a true territorial tax system, and will still at the margin encourage corporations to keep profits overseas rather than repatriate them. That will work against maximizing domestic investment.
If the plan adds on an “optional” high, fourth tax bracket for high income earners, such as a “millionaire’s tax,” that will discourage investment, since it is precisely the wealthy and high income earners who have the most to invest. Such a tax also has the distinct disadvantage of being subject to increased rates and lower thresholds when, say, a party with a different view of taxation comes to power.
Unfortunately, all of these elements are reportedly in discussion as part of the soon-to-be-released plan. Hopefully, the tax writers haven’t lost the plot on tax reform.