- - Sunday, November 12, 2017

ANALYSIS/OPINION:

The House Republican tax bill faces a tough climb to passage because it simply won’t deliver the kind of growth the administration claims and it distributes benefits unfairly.

It cuts the corporate rate from 35 to 20 percent but fewer than half of business profits are taxed through corporate returns. The balance is reported on personal returns through LLCs and proprietorships. Smaller firms would pay a special lower rate of only 9 percent rate but many larger professional service firms would pay a lot more.

After sorting through the exemptions and deductions that would no longer be allowed, corporations would effectively pay a marginal tax rate — the rate paid on additional profits as businesses invest to expand and create new jobs — of 20 percent, but many architects, physicians and other professional services firms would face substantially higher marginal rates — some higher than 35 percent.

This is terribly arbitrary and distorting — why corporations, which may never pay out profits to shareholders, or passive investors in real estate should pay lower marginal rates than professional service firms bears no justification in economics.

An architect that designs and manages commercial building projects is every bit as much a jobs creator as a firm that invests in apartment buildings, but the Republican tax bill affords the latter much stronger incentives to invest than many of the former.

Similar arguments apply for lawyers — who employ subcontractors for title searches, IT support and other services — financial planners, civil engineers and others.

Barring another recession, economic growth will pick up even if Congress does nothing — household balance sheets, stock market and conditions for U.S. sales abroad have recovered from the financial crisis.

Overall, White House Chief Economist Hassett estimates these business tax cuts would boost family incomes $4,000 to $9,000. Econometric research — including those published by Mr. Hassett before joining the administration — does not indicate these business tax cuts are large enough to further boost investment and growth enough to generate such gains.

The tax plan would cut personal income taxes by only about $300 billion. Although many families would get a tax reduction, much would be accomplished by robbing Peter to pay Paul. Higher tax bills would be imposed on other households by eliminating deductions for extraordinarily large medical expenses, slashing deductions for state and local taxes and mortgage interest, and eliminating deductions for student debt interest and some college tuition.

Some of that makes sense. Why should a waitress earning $35,000 in a low-income, low-tax state like Mississippi send money to Washington to subsidize the preferences of wealthy New York bankers for bloated city payrolls and richer public employee pensions than she can ever hope to enjoy.

A lot of it makes no sense at all. Why should young physicians, professors and other professionals — who incur huge debts to finance 7 to 10 years of training and low paid internships — not be given the kind of tax incentives as corporate training, executive retreats and client programs, which are often held at golf resorts for the veiled purposes of getting in 36 holes.

Higher education — like health care — is too costly and puts unconscionable financial burdens on students but taxing the victims more heavily is an awfully callous avenue to reform.

The real problem is the lack of presidential and congressional courage. As originally conceived, corporate tax reform was to eliminate business interest deductions completely. That would have permitted applying the corporate tax to imports and generated more than $1 trillion to also reduce marginal rates on all small businesses and slash personal rates enough to give virtually everyone meaningful tax cuts.

Similarly, the president has repeatedly mentioned the need to repeal the carried interest loophole. That provision permits partners and employees in private equity firms, others on Wall Street and many corporate executives to disguise wage income as an equity investment and pay the lower 23.8 percent capital gains rate when the higher 35 or 39.6 rates should apply.

As with health care, the White House and members of the Republican majority bowed to special interests like big retailers and health insurers and came up with a defective bill. Don’t be surprised if the House tax plan ends up on the same scrap heap of history’s flawed ideas.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide