Road Map for Tax Reform
House and Senate Republicans are racing to hammer out a tax cut agreement that blends the House bill passed on Nov. 16 with the Senate version that squeaked through at 2 a.m. Saturday morning with one vote to spare. Failure to compromise is not an option. They must deliver a final bill to the president for signing before Christmas.
The stakes are high economically and politically. For too long, America's uncompetitive corporate tax rates have suppressed growth and wages, and driven companies to leave the U.S.
If Republicans fail on tax reform, they could lose their grip on Congress in the midterm elections. That would leave President Trump without a legislative partner to push through his pro-growth agenda.
Here's the road map for success: The House should adopt the Senate's repeal of the Obamacare penalty, and the Senate should agree to slash corporate taxes as of Jan. 1, 2018, not a year later as the Senate bill currently says.
Senators postponed the corporate tax cut until 2019 in order to pare $127 billion from the cost of tax reform and stay within Senate rules. But economist Arthur Laffer warns that delaying the cut will encourage companies to defer production and income for a year until their profits are taxed at the lower rate. That could tank the economy in 2018, and take the GOP majority in Congress down with it.
A safer bet to keep the cost of the bill within Senate rules is for GOP Senators to embrace the House's proposal for a $1,600 child tax credit, instead of raising it to $2,000. That compromise would cut $150 billion off the cost.
Doubling the child tax credit to $2,000 as the Senate bill does, and paying for it by delaying corporate tax cuts is a whopping mistake.
"Yes, everybody likes kids. But not everyone has them. Only a small segment of the population benefits from that credit," explains economist Larry Kudlow, a chief architect of the Trump tax plan. "Everyone will benefit" from reducing corporate tax rates immediately. It will "create an investment boom. There will be no losers."
What should the House take from the Senate's version? According to House Majority Leader Kevin McCarthy, his members are ready to adopt key Senate provisions, including continuing to allow homebuyers to deduct interest on up to a $1 million mortgage. The House plan caps it at $500,000 mortgages.
Most important, House members are eager to include the Senate's repeal of the Obamacare penalty. Bravo.
Democrats, meanwhile, are claiming that eliminating the penalty -- in effect, making Obamacare voluntary -- will spell disaster for millions of people with Obamacare plans. That's demagoguery. People who want to stay in Obamacare won't lose their subsidy or their eligibility.
But abolishing the penalty will be a big tax break for the 6.7 million filers currently getting whacked for not buying Obamacare-compliant insurance.
Removing the penalty may cause Obamacare premiums to rise slightly -- the Congressional Budget Office speculates about 10 percent -- but most buyers get subsidies that insulate them from premium hikes. Those who don't will finally have the freedom to buy plans without Obamacare's costly requirements and save a bundle on insurance.
As the calendar runs out, House and Senate Republicans will have to compromise on a dozen other differences between their tax bills, including the treatment of medical expenses, interest on student loans, the alternative minimum tax and gains on selling stock.
There will be winners and losers with each decision. But on balance, Americans will get to keep more of what they earn. And businesses will be encouraged to invest, grow and hire.
Tell the prima donnas and fence-sitters in Congress who failed to repeal Obamacare that it can't happen again. The nation needs tax cuts now.
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