- - Wednesday, November 28, 2018

In the waning days of the 2018 campaign, President Trump made a curious declaration about his intent to pursue a new tax reform, which neither he nor anyone else bothered to spell out. The reference quickly became derided as a mere campaign ruse and no one paid it much mind after that, except to use it as further evidence of the president’s calumny.

However, it does beg a question: If we were to do another tax reform — a genuine, bipartisan piece of legislation this time, by necessity — what might it look like?

It is possible to do a reform building off the 2017 legislation that would reduce inequality, boost economic growth, further simplify the tax code and lessen the deficit — three things that both parties ought to be able to agree to. And accomplishing such a feat would entail just three substantive changes:

Completely eliminate the deduction for state and local taxes.

The $10,000 cap imposed by the 2018 reform was the most controversial change of the reform and one that angered blue state governors and their congressmen. However, allowing people to deduct state and local taxes on their federal tax returns is merely a gift to wealthy homeowners that accomplishes nothing for the economy, except to encourage people to take bigger mortgages. With the expanded standard deduction, we expect that 90 percent to 95 percent of all households will find themselves better off not itemizing. The 5 percent to 10 percent who are not itemizing are, by and large, the wealthiest 5 percent, and most of them will be better off from tax reform because of the reduction in tax rates.



If liberals are serious about reducing income inequality via the tax code, then getting rid of this deduction is more equitable than raising tax rates and comes without any impact on economic growth.

Completely eliminate the mortgage interest deduction.

This is another economically useless tax break that does nothing to increase home ownership, since people on the cusp of affording to purchase a house rarely have enough deductions to eschew the standard deduction. As a result, this tax break is even more regressive than the break for state and local taxes, since it goes up with the size of the mortgage debt and a household’s income. The 2017 reform reduced the amount of mortgage debt for which interest could be deducted from $1 million to $750,000. Taking it to zero would be even better.

Make permanent the lower tax rates on individuals.

In order to meet the budget strictures imposed by reconciliation rules, the tax cuts on individuals go away in 2024; however, getting rid of the two deductions above would generate almost $700 billion in revenue in the next decade.

These three changes, taken together, would make the tax code more progressive, boost economic growth and result in a net gain in revenue — which would give us room to pursue other reforms. It would leave us with a tax code where the only remaining deduction for most people would be for charitable contributions, and that would effectively apply only for total contributions over $24,000 for a married couple. That is as simple and sensible a tax code as we can ask for on the personal side.

To these changes on the personal tax code, I would add one change on the corporate side:

Eliminate the full expensing of capital investment. While it has long been a credo of supply-side economists (which I include myself amongst its numbers) that allowing firms to immediately deduct all capital investment is vital for economic growth, the data suggests that this does not appear to be the case. The problem is that while allowing firms to accelerate investment deductions may reduce the cost of investment, which ought to boost investment and — with it — economic growth — the data supporting this is sparse. The problem is that while it might boost economic profit it does nothing for accounting profit — that is, what companies report to their shareholders, and which is a key determinant of executive compensation. As a result, companies discount it when making long-term investment decisions.

Expensing does turn out to be an effective fiscal stimulus: Successive governments have used bonus depreciation to accelerate future investment into a recessionary economy, and there is evidence that it has mitigated the decline in the last two recessions. Eliminating it after 2019 — it’s currently scheduled to end in 2025 — would preserve this stimulus tool for policymakers in the next recession.

Proposing such a tax reform would force Democrats to choose between a reform that boosts progressivity, raises revenue, simplifies the tax code, and boosts economic growth (and that increases the tax burdens for corporations) or insisting on the status quo so as to avoid further upsetting wealthy blue state homeowners who are still smarting from seeing their tax deductions slashed last year and were crucial in helping them retake the House. Not a few Republicans no doubt would share their reticence over such a change.

• Ike Brannon is a senior fellow at the Jack Kemp Foundation.

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