The Republicans' tax reform law is a mix of sound policies — lowering the corporate tax rate — and some real failures — not addressing the growing federal deficit.
First, the good. The law, which the president signed on Friday, will permanently reduce the corporate federal tax rate from 35 percent to 21 percent. Critics are assailing this portion of the Tax Cuts and Jobs Act, perhaps forgetting that even President Barack Obama wanted to reduce the corporate rate, proposing a cut to 28 percent.
The current marginal rate is among the highest in the world and, although loopholes tend to lower the actual rate paid considerably, the tax system is seen as a disincentive to do business in the United States.
Republican lawmakers hope businesses will use the extra money to expand, make capital investments or increase workers’ salaries. If all goes well, it should have some impact. But the United States is already in a strange period today where many corporations are flush with cash (an estimated $1.63 trillion of it among the nonfinancial companies on the S&P 500 index), yet they aren’t paying workers significantly more or expanding as one might expect.
Analysts have many theories about why this is, ranging from concerns about weathering another recession to possibly wanting to intimidate rivals in future acquisition negotiations. But the truth is no one is certain why some companies are stockpiling money. It's not clear that allowing companies more of it will necessarily cause them to shift strategies.
Still, the reduction is almost certain to lead to more business activity, especially from corporations currently operating abroad. That would expand the economy. In a study for the The National Bureau of Economic Research, economists Robert J. Barro and Charles J. Redlick estimate, based on data starting in 1950, that "a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year." Summarizing their findings for the Wall Street Journal, they write, "There is empirical support for the proposition that tax rate reductions will increase real GDP." But how an expected increase to the deficit might affect GDP is yet to be seen.
Washington tends to hyperventilate over bills that represent substantial changes in the structure of government.
But the new tax regime would also increase the take-home pay next year for most Americans — something the GOP hopes will change the generally negative impression of the law among independents. The wealthiest Americans get the biggest benefit, and the personal tax gains are temporary. Yet if lawmakers can learn to work together to improve upon the bill before the gains expire in 2025, it may yet be seen as a positive move. Sadly, that was part of the strategy with the Affordable Care Act pushed through by Democrats. But that seismic change was not followed up by maintaining the good of the act while improving on its weaknesses.
On the negative side, the new plan fails as sound policy on two major fronts. First, it would not simplify the tax code or fulfill promises to allow many Americans to file on a postcard. Tax preparers have little reason to worry about any loss of business, as many Americans still will need to hire professionals to file returns.
Second, it would do nothing to reduce the national debt or balance the annual federal budget, long a vaunted plank in the Republican Party’s platform. Data from the Joint Committee on Taxation shows that, even with projected economic growth from the bill’s tax cuts, debt is projected to reach nearly 100 percent of gross domestic product by 2027.
Taxes won’t get any easier to file. Americans will see a little more money in their wallets, at least until the nation’s debt becomes so high it becomes impossible to ignore. Sound reform requires a sincere, bipartisan effort. So it remains to be seen if Congress actually gave Americans a Christmas gift or something that they ultimately will have to stand in line to return.